Help re: home payment

[noppenbd]

Is it possible to convert the house to multiple apartments? You can usually rent 2 smaller apartments for more than one whole house.

You need to look at the numbers on this property and decide if it is possible to make money with it. Take a look at the next 7 years.

First option: Pay $12K a year towards principal for 7 years, raise rent 4-5% a year.
My calculation is even if you raise the rent 4-5% every year and pay $12K a year towards the principal, you will probably break even on the interest, taxes, and insurance. If you pay the principal down to $196K you are betting that the house will appreciate in that time frame to make this a good investment. My guess is house is worth $200K right now. With a return to normal appreciation in a few years it may be worth $250-260K by year 7. At that point you may be able to refi to fix the rate. However, fixed rates could be much higher at that point so there are no guarantees you will start to make much profit. Best case you've got $60-70K equity and a little cash flow.

Second option: Short sale/foreclosure
Cut your losses now and give the keys back. Bank the $12K for 7 years at 5% interest and you've got $105K in the bank. At 7 years the short sale should be far enough off to not affect your credit, so you could consider buying a property at that point.

[jIM_Ohio]

Steve,

What if I am willing to put more money towards the principle as I had suggested and plan a long term goal by making this a rental property in the future. Could the principal payment not help offset the loss I am taking each year? I thought that all I'm trying to do was just that I am bulding equity by paying more towards principle, and lower the interests in the meantime.

Think about the cost for you to gain the residual income.

If you make $1100/month when the house is paid off, but it cost you 360 months*$600 to get the house paid off=$216,000

so you get an annual profit of $1100*12=$13200
and that profit cost YOU $216,000

If you can have the tenants pay that $216,000 for you, then the $13200 is pure profit. But if you are the one paying the $216,000, you need a way to recover that for this to be a good investment.

You are looking only at a timeline (you want residual income of $X at y date). You are not looking at the cost of the residual income. $216,000 can generate $6480 in come at 3% yield. The $216k can appreciate over time, so maybe $532k generates 12k of residual income or $1064k generates 24k of residual income in same time it took you to get the house paid off on that timeline I just mentioned.

I have much better ways to get a profit on $600/month
lower risk than what you are doing
less work than what you are doing

Invest the $600/month in a mutual fund which pays about 2-4% in dividends and I think you will like that return better.

[jIM_Ohio]

Maybe we are overlooking something... OP said he got house from his mother- was this free? Gift or thru an estate?

If so, why is there a lien on the house?

I'm pretty new to the investment scene. I was actually just fortunate enough to have some savings, decent paying job and houses (from my mom). My goal is to actually acheive financial security by having rental properties.

What if the goal was "achieve financial security"?

If this is the case, then there are better ways to do it. If being a landlord were easy, everyone would do it.

In general being a landlord is profitable IF:
1) Each property is cash flow positive (pays for itself)
2) You manage multiple properties
3) you have enough cash in the bank to handle 6 months of no tenants

OP is not cash flow positive
OP has only 1 property
OP has cash flow to throw at problem, but not cash in the bank.

If OP has cash flow, consider the most common ways of using cash flow to achieve financial security:

1) set aside 3 months expenses in a cash account (which earns interest at a rate of around 3-6% per year)
2) invest 20% of gross pay for retirement or long term savings. OP suggests they have $2000/month to put towards problem (I think- the first post is difficult to comprehend in this regard).

So 2k/month invested into market in a 60/40 allocation which has a 3% yield and 7% annual return would generate same $1100/month residual income of rental in 12 years. (24k yearly deposits growing at 7% creates a portfolio of $450k in 12 years which can yield 3%=$13k; $1100*12=$13k).

It should be noted that the house would NOT be worth $450k in 12 years, but using basic investing in the stock market the $450k would be there if OP wanted to liquidate the whole thing.

You don't have the risk of the mortgage forclosing.
You do not have the risk of refinancing
You do not have the risk of finding or losing tenants.
You do have some market risk
You do have some interest rate risk and inflation risk too
market risk, insterest rate risk and inflation risk can be mitigated with further research into investing. Risks are never eliminated, risks are only managed.

Just find a 60-40 balanced fund with reasonable long term performance.

The mutual fund approach is what I do and what most of the people on this board do. The biggest difference is the mutual funds we choose and why we picked the funds we did.

[LivingAlmostLarge]

Ouch I'd dump the house. In 7 years you'll have to make back $100k more than the mortgage to break even with the $630/month loss during that time, selling fees, etc.

[maat55]

I think you should sell it now and take out a mortgage on the house you are living in to pay for your losses. You could take out a 10 year note on your house and stop loosing 600.00 in interest.

Your Vegas rental is a gaping wound that needs to be sold.

[atomicrc11]

I also agree you need to get out. Even if you pay the $630 loss and more to the principal, the reset of your mortgage is going to be a real shock and you will be losing more money than you currently are. Unfortunately when you have a losing position, sometimes you just have to sell and take the loss. It is better than staying with a sinking ship.

[savemachine]

Wow...thanks for all the responses guys. This seems to be more urgent that what I had imagined. In fact, I was not expecting this type of reaction at all.

Everybody seems to be in the same conclusion though. Another thing that I had not mentioned (sorry again, I didn't think it was pertinent), was the fact that 60K was put in towards the principle for this house initially. You can see why I'm going to be a bit reluctant in selling the house. 60K gone plus another 20-30 percents loss if I sell this house at the moment.

I had just thought of something. What if I pay down the principle enough (about 20K) to lower my principle to such that the amount of the loan owed is less than the value of the house (my house did fall that much). Would it be ideal to refinance?

Or is this "get out while you can", no matter which way I spin it.

[jIM_Ohio]

Wow...thanks for all the responses guys. This seems to be more urgent that what I had imagined. In fact, I was not expecting this type of reaction at all.

Everybody seems to be in the same conclusion though. Another thing that I had not mentioned (sorry again, I didn't think it was pertinent), was the fact that 60K was put in towards the principle for this house initially. You can see why I'm going to be a bit reluctant in selling the house. 60K gone plus another 20-30 percents loss if I sell this house at the moment.

I had just thought of something. What if I pay down the principle enough (about 20K) to lower my principle to such that the amount of the loan owed is less than the value of the house (my house did fall that much). Would it be ideal to refinance?

Or is this "get out while you can", no matter which way I spin it.

Your issue is your costs are greater than the income the rental provides you.

Paying down the principal is a COST to you- the problem is still there (you need the rental to recoup those costs).

You recoup the costs by raising the rent.

Your suggestion is based on you looking at the problem in terms of cash flow. That will improve your month to month situation, but it does not necessarily make the rental a better or worse investment.

You have already made the investment in the rental. Any money you put to problem to improve cash flow is a cost to you. As a business man it is important you do something to recoup the costs.

Raising rent is the obvious solution.
Consult with a tax accountant- he may have some ways to get the money back via taxes either short term or long term.

Putting 60k of your own money "in" was a mis timed/ mis informed decision.

Your goal was financial independance- you should do some research on the ways to accomplish that. If you want to be a landlord you need to learn how to recoup the costs you are incurring through income taxes, rent or other techniques. Find a good tax accountant and run your situation by him. It will be worth the $200 or $500 you pay him to get a second opinion.

Most of us on this board are not landlords, and have no experience being landlords (myself included). I have thought about it, but your situation is one more reason for me to avoid that line of business.

[LivingAlmostLarge]

Your investment is losing money hand over fist. Any landlord will tell you to dump it. It doesn't have a Return on Investment at all. You are negative. How and why to buy a property where rent doesn't cover the mortgage is always a bad idea.

[disneysteve]

You really need to look at the fact that the longer you hold onto the house, the MORE money you LOSE. Every month, you LOSE $630.

The only thing that would reverse that is if the value of the home started appreciating. Obviously, current market conditions are such that that is highly unlikely to bail you out here.

The home is currently worth about $200,000, correct? You are losing $7,500/year or 3.75% of current value. Even if the house gained 5% in value in the next year (which is unlikely), it would be worth $210,000 but you will still have lost the $7,500, meaning your actual gain would only be $2,500 or a 1.25% return on your money. And that assumes nothing changes to increase your costs, like taxes going up or some repair being needed to the house. Add in a 4% inflation rate and you are still losing ground even if the house starts appreciating.

Sorry, but I don't see any way that this becomes a money-making venture.

[savemachine]

*hangs head in shame*

Thanks all, I'm going to sort this out and will keep you posted.

[FoolFromAZ]

You really need to look at the fact that the longer you hold onto the house, the MORE money you LOSE. Every month, you LOSE $630.

The only thing that would reverse that is if the value of the home started appreciating. Obviously, current market conditions are such that that is highly unlikely to bail you out here.

The home is currently worth about $200,000, correct? You are losing $7,500/year or 3.75% of current value. Even if the house gained 5% in value in the next year (which is unlikely), it would be worth $210,000 but you will still have lost the $7,500, meaning your actual gain would only be $2,500 or a 1.25% return on your money. And that assumes nothing changes to increase your costs, like taxes going up or some repair being needed to the house. Add in a 4% inflation rate and you are still losing ground even if the house starts appreciating.

Sorry, but I don't see any way that this becomes a money-making venture.

Hi Steve,

My situation is pretty similar to OP. I am upside down on my house. I bought for about 330K now the similar house is being sold for around 240K. I still have 280K left in my loan. I am currently living in the house. I am paying around $2000 every month towards mortgage payment which include tax and insurance. If I had stayed in the apartment I wud have only paid around 1200 per month for rent. So I am losing nearly 800 every month. this house is on my name. my wife is working and she has good credit score. Should I consider short sale or foreclosure? Will I find any problem with finding a job when i look for it next time if my house is foreclosed?

[jIM_Ohio]

Hi Steve,

My situation is pretty similar to OP. I am upside down on my house. I bought for about 330K now the similar house is being sold for around 240K. I still have 280K left in my loan. I am currently living in the house. I am paying around $2000 every month towards mortgage payment which include tax and insurance. If I had stayed in the apartment I wud have only paid around 1200 per month for rent. So I am losing nearly 800 every month. this house is on my name. my wife is working and she has good credit score. Should I consider short sale or foreclosure? Will I find any problem with finding a job when i look for it next time if my house is foreclosed?

You are only losing money on paper.
$2000 month is house payment. What is income (gross and net), what other debts do you carry, and when do you see the need to move (retirement, kids move out, job change, other)?

Keep paying the $2000 each month. If your move out intention was 20 years from now when kids were graduated from college, more than likely you will recoup the 90k difference.

I am probably upside down on my mortgage (bought for 352k in 2005, house across the street just sold for about 275k I think). Granted our house is bigger by about 500 sq ft and our lot is better (originally the builder asked 325k for that same house which was finished in early 2006).

Wife and I do not plan to move until kids are grown (that will be 18-24 years from now). I think we can wait for market to rebound.

If you are employed and can make the payments, be patient- you only lose money if you sell now. If you don't need to move, don't.

[disneysteve]

Hi Steve,

My situation is pretty similar to OP. I am upside down on my house. I bought for about 330K now the similar house is being sold for around 240K. I still have 280K left in my loan. I am currently living in the house. I am paying around $2000 every month towards mortgage payment which include tax and insurance. If I had stayed in the apartment I wud have only paid around 1200 per month for rent. So I am losing nearly 800 every month. this house is on my name. my wife is working and she has good credit score. Should I consider short sale or foreclosure? Will I find any problem with finding a job when i look for it next time if my house is foreclosed?

Your situation isn't similar at all. OP is talking about an investment property, not his primary residence. His is a home that he purchased with the intent of making money but instead he is losing hundreds every month.

You are talking about your own residence. You aren't losing anything. You are building equity. The only way you would lose money is if you were forced to sell while you were still upside down on the loan.

[FoolFromAZ]

You are only losing money on paper.
$2000 month is house payment. What is income (gross and net), what other debts do you carry, and when do you see the need to move (retirement, kids move out, job change, other)?

Keep paying the $2000 each month. If your move out intention was 20 years from now when kids were graduated from college, more than likely you will recoup the 90k difference.

I am probably upside down on my mortgage (bought for 352k in 2005, house across the street just sold for about 275k I think). Granted our house is bigger by about 500 sq ft and our lot is better (originally the builder asked 325k for that same house which was finished in early 2006).

Wife and I do not plan to move until kids are grown (that will be 18-24 years from now). I think we can wait for market to rebound.

If you are employed and can make the payments, be patient- you only lose money if you sell now. If you don't need to move, don't.

I dont have plans to move out. I am a software engineer. Currently market is ok here in the phoenix area. but in the future we never know. But we dont have any plans to move out for atleast next 10 yrs. its really a terrible feeling when I see same size house as mine is being sold for nearly 100k less that what I paid for my house. some of my friends are suggesting me to walk away from this house and buy a cheaper home on my wife's name and keep the monthly payment around $1000 which is very much possible at this time. I thought this is the best time to buy for first time buyers.

We make over 150K but we have over 45K in CC debt, mortgage of $2000 and car payment of nearly $700 with insurance.