Should I sell for loss, or Refinance rental
Investor · Concord, NC · Member since 2008 · 18 posts · 1 vote
Should I sell for loss, or Refinance rental
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Real Estate Investor · Flower Mound, TX · Member since 2014 · 59 posts · 31 votes
11yKeep it. Your annual net after HARP is -2500. At that rate, it will take eight more years to sink another $20,000 into the property, whereas a short sale would be $20,000 immediately. Over that eight years, you will pay down $27,809 in principle, too. What you consider an annual loss is actually increasing equity at a faster rate than it is incurring a loss. It's not ideal, but a $20,000 "loss" offset by a $27,809 "gain" is a lot better IMO than jumping off the cliff. Oh, and you skip a payment (or two) during the refinance, so cash flow will be "better" this calendar year. Rates are getting better each day (for now), so ask how much rates need to improve before you get 4.25%. That would obviously be even better to the tune of a couple hundred bucks a year.
45 Replies
- Investor · Concord, NC · Member since 2008 · 18 posts · 1 vote11y
@Michael Seeker - excellent points. Thanks for you thorough evaluation.
HARP refi costs = $3,000. Good point, as I had not mentioned that, and obviously that needs to be part of the conversation.
- Investor in Louisville KY! · Denver CO · Member since 2013 · 27 posts · 8 votes11y
Mike - I agree with everything you said, but want to add a couple points:
1) you mention that all it takes is one bad tenant to wipe out income. That is the case for any property, so if he exits this one and buys another, he likely has the same chance of this happening on either property so I don't think it should play into his decision (unless he doesn't plan on getting another property).
2) When you talk about investing that $3K in government bonds over the next 8 years with no headache...that isn't an option here. His option is to write a $20K check now (or even $40K as you correctly pointed out), or wait it out with a realistic chance of never having to write a check.
- Investor · Louisville, KY · Member since 2011 · 1k+ posts · 1k+ votes11y
All other things being equal, here's roughly what your position would look over the next 8 years with 3 different scenarios (all assume you HARP and hold and don't account for appreciation)
Bad (prices/rents decline 3%/year, expenses run at 50%)
Combined 8 year cashflow: -$39K
Property value gain/loss: -$25K
Total gain/loss including paydown: -$35K
Flat (prices/rents unchanged, expenses run at 45%)
Combined 8 year cashflow: -$28KProperty value gain/loss: $0
Total gain/loss including paydown: $0
Good (prices/rents rise 3%/year, expenses run at 40%)
Combined 8 year cashflow: -$16K
Property value gain/loss: $30K
Total gain/loss including paydown: $42K
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Jeff Blankenship probably need to look at your big picture tax wise a lose now if your allowed to take the full loss like us RE professionals may be good..
I have been punting the last 5 years LOL... And since we are in a very good earning environment the write off's are helping with my write on's and I get out of the rental business !
- Investor in Louisville KY! · Denver CO · Member since 2013 · 27 posts · 8 votes11y
Mike - this last post is an excellent one. Don't forget to add option 4, which is sell now, and take a $20K-$40K loss.
- Investor · Louisville, KY · Member since 2011 · 1k+ posts · 1k+ votes11y
I should have mentioned I'm assuming the property is worth $130K today and rent is $1100. This doesn't account for the $40-50K that you're already in the hole today with current negative equity.
- 11yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
@Michael Seeker I like your analysis. I particularly like the way you showed the Good:
Let me add my two cents one more time here.
"Good (prices/rents rise 3%/year, expenses run at 40%)
Combined 8 year cashflow: -$16K
Property value gain/loss: $30K
Total gain/loss including paydown: $42K"
Here's the big trouble with this, and why I don't think of this is actually being good. All the positive returns (Paydown & equity buildup) is in the form of "virtual money"...and this is supposed to be a "cash flow" property. The property is losing $16k over that same 8 year period. Your accountant is impressed, but when it comes time to pay for that next pizza delivery, unless you can pay for it with a brick from the part of the house you have paid off, ...? If you want a cash flow house, get a cash flow house.
This is like sitting at the poker table with 3 Jacks, but seeing face up in front of another player, they they have 3 Queens, and someone else has your 4th Jack, and you still keep adding to the pot.
- Investor in Louisville KY! · Denver CO · Member since 2013 · 27 posts · 8 votes11yJoe Villeneuve - you are correct that the property as laid out in that scenario loses $16K, but the alternative is to lose $20K to $40K now. To me the picture is pretty clear.
- Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes11y
Originally posted by @Joe Villeneuve:
This is like sitting at the poker table with 3 Jacks, but seeing face up in front of another player, they they have 3 Queens, and someone else has your 4th Jack, and you still keep adding to the pot.Stud reference??? You're showing your age, Joe! :-)
Kids these days need Hold'em or 2-7 Triple Draw references... ;-)
- Columbia, SC · Member since 2015 · 7 posts · 0 votes11y
Originally posted by @Jeff Blankenship:
Insurance - I spoke with existing insurance company and they can reduce by $100/yr. I'm going to get some more quotes.
Management - interesting thought. possibly, but I think i would first talk to mgmt company and see if they would take 7%-8% instead of 10. I live out of state, so have an in town reputable mgmt company makes sense. I'll look for opportunity to reduce this cost.
RE Taxes - the property is valued by Tax Assessor at $179,000. So, if it is really $120k, as these last 2 short sales, I may be able to get my taxes down. Not sure how successful that will be. On one hand I'm trying to justify a $165k value for selling, and $120k for taxes...seems like a conflict;)
I'm currently in a similar situation as you. We bought a house in 2007 for $124k, moved out in 2009, and have been renting it at a loss since. For the last 4 years, we've lost around $300 a month, when it was all said and done. I was out of state like you, so I just wrote off the losses as something that'd pay off if/when the market recovered.
I refinanced the house in May of this year, which reduced our losses to around $165 a month. A recent reassessment resulted in our house being appraised at $84k, which was disappointing, since the outstanding balance on our mortgage is $100k. The bright side is our taxes reduced by 25%, so that will reduce our losses to around $35 a month. I've moved back closer, so I'm going to take over managing the property myself, which will save us another $87.50 a month. I couldn't find a cheaper rate on the insurance (the house is close to the coast and is hard to find companies willing to write policies), so I'm stuck there. Rents for units identical to mine have ranged from $895 to $1075, so I'm going to raise the rent when the renewal comes in January 2016, which will hopefully result in this thing becoming cash flow positive.
The one thing I've done is thought about just walking away from the loan/house altogether. I was worried about keeping the payments up for years so our credit wasn't ruined which would've prevented us from buying a primary residence. Now that I've bought one, I'm not so much worried about my credit score for the short term. I don't have the $20k it would take to sell this house for what it's worth (other units identical to mine sold for $80-90k in last 6 months), probably because we've lost around $14k over the last 4 years on the place, but I'm not sure I'd spend it even if I did.
- 11yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @J Scott:
Originally posted by @Joe Villeneuve:
This is like sitting at the poker table with 3 Jacks, but seeing face up in front of another player, they they have 3 Queens, and someone else has your 4th Jack, and you still keep adding to the pot.Stud reference??? You're showing your age, Joe! :-)
Kids these days need Hold'em or 2-7 Triple Draw references... ;-)
LOL. You're right...and I'm a lousy Poker player too.
- Investor · Louisville, KY · Member since 2011 · 1k+ posts · 1k+ votes11y
Originally posted by @Account Closed:
Joe Villeneuve - you are correct that the property as laid out in that scenario loses $16K, but the alternative is to lose $20K to $40K now. To me the picture is pretty clear.
This makes me think of a fourth option...instead of taking a $40K actual cash loss today by selling the property...why not invest that $40K into another rental property that is actually a good investment. Assuming the investment is decent Jeff ought to be able to offset the negative cashflow from this property. This still doesn't put any cash in hand to pay the pizza guy, but neither does selling the property.
Jeff - do you have any capital gains you expect to take in the next 5 years or so? If so, you might want to save the $3K for refinancing and consider unloading this property around the same time to offset those gains.
- Wholesaler · Chesterfield, MO · Member since 2015 · 41 posts · 37 votes11y
HOW ABOUT TAKING A ZERO LOSS??
If you can refi it do that and then Sell it Owner financing for $180,000.00 with $10,000.00 down. You just do a wrap around loan.
You can sell a house for more than market value if you finance.
Don't worry about a due on sales clause. NO BANK WILL FORECLOSE ON A LOAN IF A LOAN IS CURRENT AND ESPESSIALLY IF THERE IS NO EQUITY. (some one will say they will on this site but really why would they?)
Heck have the buyer buy it in a trust name. Then you can tell the bank if they ask, you are doing it for asset protection purposes. (St. Germaine Act)
You will want to have the buyer sign a 2nd to you so you will have a vehicle to foreclose if they don't pay and you can get the house back.
You also need to set their payments up to include P.I.T.I. and PAY YOU NOT THE BANK!
Set the interest rate at 10% so you can cash flow!!!
Doing financing can fix many problems. I can sell your car for $1,000.000.00 if I structure the deal right.
- 11yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @J Scott:
Originally posted by @Joe Villeneuve:
This is like sitting at the poker table with 3 Jacks, but seeing face up in front of another player, they they have 3 Queens, and someone else has your 4th Jack, and you still keep adding to the pot.Stud reference??? You're showing your age, Joe! :-)
Kids these days need Hold'em or 2-7 Triple Draw references... ;-)
...and, if you think about it, another testament (the way poker is played now) to the age of entitlement.
- Herndon, VA · Member since 2014 · 1k+ posts · 324 votes11y
If you can get out for for only 20K, that is probably the best option.
If there are houses selling for 120K, I think the probability of getting a 180K rent/option is pretty low. The subject to option might be slightly more appealing, but again the payment of roughly 1300/month probably won't look too appealing.
If you can't sell in the 165K range, you might try doing a loan modification where you put in a cash and get a greater principal reduction. If you could get the balance down to 140K for a fractional cost, your options would likely look better.
- Investor · Concord, NC · Member since 2008 · 18 posts · 1 vote11y
@Jesse T. - interesting thought - OPTION # 5 - pay down mortgage and refi. I have considered this.
I can pull some equity out of other properties and use some cash to make a $50,000 payment on the mortgage, then refi. By doing that, I should be able to get the mortgage down to $630/month or $7,500/yr for a total expense of $11,800 instead of $17,000 (neither one accounting for capital expenses).
So this makes a much more attractive investment...well, attractive is relative..:)
Here would be rough number:
- Use $50,000 cash reserves and/or equity in existing properties to buy down mortgage
- Refi $127,500 @ 4.25%, 30yr fixed, $3k closing = $630 payment
$630 payment
$2000 annual tax
$1200 insurance
$1000 yr expenses (not sure if this is good number or not - HELP?)
$1320 yr prop mgmt
---------------------
$13080 Yearly Expenses
$13200 Rental Income
Net = -$120 per year (essentially a break even)
--------------------------------------------------------------
OPTION 1 - refi, spend $3,000 now, and loose $2500/yr
OPTION 2 - fire sell - spend $50,000, and sell
OPTION 3/4 - lease option / rent to own...my least favorite...
OPTION 5 - spend $50,000 and refi for break even cash flow
- Investor · Cedar Rapids, IA · Member since 2009 · 143 posts · 29 votes11y
Keep in mind with option 5, if you take a loan on another property to pay down the loan on this one it only really helps if the loan terms on the other loan are better. If it's the same, then it's little more than an accounting trick to make this property seem better at the expense of another.
- Investor · Louisville, KY · Member since 2011 · 296 posts · 248 votes11y
While I've never done one, I've heard many stories here and on the podcasts of folks doing owner financed deals at higher than market rates. It seems like it's one of the few escape hatches for something like this. I'd refi and get that pmt as low as possible and then look to owner finance the deal.
Best,
- C - Rental Property Investor · Holley, NY · Member since 2011 · 507 posts · 347 votes11y
@Jeff Blankenship Ok, I am taking a short cut here, I only read the first page worth of responses. My vote goes to unload the property as soon as you can. Looking back at the original post as well as your comment about the purchase being "speculative" in a later post, you have kind of already answered your question. You gambled, you lost. Know when to fold 'em. Know when to punt. You make your money when you buy...in this case, you didn't make your money, so cut your losses and start over somewhere else.
Picture it like this: you injured your arm seriously and are bleeding everywhere (life threatening). If you don't do something serious, you could die. Option 1 is basically to cut your arm off to save the rest of you, Option 2 is to simply apply pressure, keep bleeding (but maybe slow it down a little) and hope you don't die while you try to figure out what to do next. Option 2 leaves you trapped.
Personally, I don't care for the option of selling to another sucker and holding paper on it. There is a very good chance that sucker will either fail or catch on that he has been suckered, at which point, it becomes your problem again.
I appreciate the position you are in, I have been there. I, too, have done pretty well with many investments, but I will never forget the one that I gambled on and lost big time. Punt and learn from it.
Good luck.
- Investor · Concord, NC · Member since 2008 · 18 posts · 1 vote11y
Thanks to everyone for your feedback. I really appreciate the community and knowledge of everyone on the forums.
UPDATE: I've reduced my insurance and going to refinance and keep for now. The current tenants rental agreement is up in May, and I do not know if they will be moving or not. I have no reason to think they are, but I do not know.
I reduced my insurance premium by $15/month, and after refi my mortgage will go from $1050 to $880 (4.25% 30yr fixed). I talked to Prop Mgmt to see if can get them to go from 10% to 8%, but not counting on that.
Overall savings = $185 month
NEW Net = - $1780 year (-$150/month)
The tenants have taken good care of the property, but there would be a $2000-$3000 to get the property ready to market. My real estate agent (after inspection of the property and market analysis) said the property would list for no more than $130k in the current market.
I'm with everyone on cutting losses and moving on. I'm a firm believer in trying to get rid of "negative energy." With the changes I've made to the insurance and payment, I'm not far away from being cash flow neutral on the property. Obviously this is speculation, but 3-4 years ago we were getting $1300 a month in rent, and it's not unreasonable to think we could get back there. It is also very possible that rent could deteriorate more, but that is not the consensus of the local market.
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