I’m in great need of advice and I’m hoping the experienced investors and experts here can please help me figure what to do about my Predicament.
I am that completely inexperienced and ignorant “Investor” (“Rookie Speculator” is more like it) from California who back in June 2005 got caught up in the RE Frenzy, and after feeling like I was being left behind I jumped on the RE bandwagon and bought TWO ranch style homes in the Western Suburbs of Phoenix, AZ. (Litchfield Park and Avondale)
Of course, EACH house was supposed to go up $100,000 in a year but we all know how things turned out. Now, each house is worth $20,000 LESS than what I bought them for, and for the last 2.5 years my wife and I have been carrying these Two houses with a Negative Cashflow. The “Combined” Negative for both houses started at $1,000 per month, but about a year ago I paid off one $44,000 HELOC and the Negative Cashflow is now about $700 per month. We’ve also spent over $40,000 on the two homes due to Lost Rents, Negative Cashflows, Legal Fees, Maintenance, Utilities, Management Fees, Closing Costs, etc.
In addition, our W-2 AGI is over $150,000 and the CPA told us that there is a “Phase-Out” for Investor’s and that at $150,000 AGI we CANNOT take ANY Real Estate Investment Losses on our Tax Returns. He said we CAN carry the losses from year to year and when/if we eventually sell at a loss, then we can take the accumulated losses, but only something like $3,000 per year. So, there doesn’t seem to be any Tax Advantages for us. Neither of us are RE Professionals and with our jobs it’s not feasible for us to become one and get Tax advantages that way.
We put down $15,000 on one house and $25,000 on the other. EACH house started with TWO “Interest Only” Mortgages. EACH started with a 3 - 5 year Fixed ARM “Primary” Mortage, AND a HELOC, but again, we paid off ONE of those HELOC’s last year.
After the market turned down I initially thought that maybe I just had to change my strategy and outlook, and hold on to these two houses for the LONG-TERM, but now I’m starting to feel like we are just Hemmoraging Money, and who knows how long these prices will stay low. I’m thinking that any Profit we MAY make down the road will just be eaten up by the Negative Cashflow. Again, who knows how long it will take for prices to come back…5 years? 10 years? 20 years? maybe never? We’re also not paying down the mortgages with Interest Only, and of course, these loans are going to convert to higher interest rates.
Here are the Specific Details:
*4 Bed/2.5 Bath/2 car garage, 1975 sq. ft. waterfront on a small lake
*Purchase Price = $295,000
*Current Market Value = $275,000
*Downpayment = $15,000
*Primary Loan is 5.625% “Interest Only” 3-year Fixed ARM that converts July 2008, Balance= $236,000
*Monthly Payment = $1,300
*HELOC = PAID OFF (was $44,000 @ 11%)
*30-Day Tenant at Will Lease
*Rental Income = $1,150 per month
*HOA Dues Monthly = $36
*Town “Business License” Monthly = $28
*4 Bed/2 Bath/2 car garage, 1600 sq. ft.
*Purchase Price = $244,000
*Current Market Value = $224,000
*Downpayment = $25,000 Total ($15,000 was CASH to Seller)
*Primary Loan is 6% “Interest Only” 5-year Fixed ARM that converts 2010, Balance = $185,000
*Monthly Loan Payment = $1,030
*HELOC @ 10.25%, Balance = $35,000
*Monthly HELOC Payment = $350
*3 Months into 12 Month LEASE
*Rental Income = $950 per month
*HOA Dues Monthly = $36
*Town Private Fire Department Monthly Fee = $29
A) Do we try to SELL Both Houses in this market (if we even can) and take a $100,000 LOSS? (From Commissions, Lost Market Value, Lost Rents, Negative Cashflows, Maintenance, Utilities, Management Fees, Closing Costs, etc.)
B) Do we try to SELL One House and take half of a LOSS, although still huge?
C) Do we HOLD onto both houses LONG-TERM and do nothing, just continuing the way we’ve been going, with the $700 per month Negative Cashflows?
D) Do we HOLD Long-Term, Refinance and ADD More Capital to boost our equity and try and make the monthly payments break even?
E) Anything Else?
I am really at a loss as to what to do.
Thank You so much for any advice you can give us.