Ok so here’s the deal, I’ve been reading everyone’s posts for the last few weeks so I’m getting a small foundation on REI. I am a landlord by accident, divorced then deployed with the National Guard. I need advice first on what to do with my house now then some for the way ahead. My house was built in 2004 in real nice neighborhood.
VA loan 100% of $296,000. I still owe $284,000 - terms are 30 yr @ 5%. House has a MV of $283,000 I’ve been renting for 3 years, new tenant each year.
The monthly spread:
Rent – $1860
Tax - 240
Repairs -200
HOA -60
PM 10% - 186
INS - 90
Maint -50
Cash Flow Before Taxes -$6,143
Cash Flow After Taxes -$3,255
Is what I came up with
I believe these are all the numbers you need to do a good evaluation. Let me know if you need more because….
I plan on buying a duplex when I return to North Carolina to live in and rent one side. Then I want to increase cash flow up to $2000 a month from rentals. So I am trying to gain experience on how to use all the performance measurements.
Is there any advice on selling or continuing to rent this house?
Any advice on buying valuation software? I have built myself an excel spreadsheet with most performance measurements I have seen, though I don’t know what they all mean yet, or, what the goals should be for each. I’m still working through that learning curve. Ok let’s get this started.
Tom,
It’s hard to rent houses in that price range where it makes financial sense. Most of the rentals are like yours where people got stuck with the house and couldn’t sell. The rent amount you can get doesn’t go up as high as it should for that kind of purchase price. Your house is worth slightly more than mine and your rent is about what I would expect from my house. I think you have to make the decision of whether you want to pay to shed this house or not. You owe what it’s worth and you’re going to have to come out of pocket for Realtor fees and other closing costs. I think you have to weigh that vs. the ongoing costs of renting it out. I just don’t think the upside is there financially since you’re on a 30 yr loan and cash flow negative. Sure you could refi, but you’re at 100% LTV right now.
You’re plan for a duplex is a common recommendation for someone starting out.
If you plan on doing rentals, I suggest you weigh the pros & cons of renting different quality levels of houses. The general rule of thumb is that cash flow increases as you move down to lower income rentals. The BS you have to deal with also tends to increase as you get into low income rentals. My wife and I do low income rentals.
Do you need valuation software? I don’t know. There are plenty of examples of property valuation on here.
To sell or to rent. It’s a tricky question, especially in a down market. If you are relocating or just ready to move on from your ball and chain of a house, renting might make more sense than selling. Here is a quiz to help you decide whether you should sell or rent your home.
Depending on your immediate financial situation and long-term outlook, it can make more sense to rent rather than sell. In some cases, a short sale is the best remedy for escaping an underwater property and moving on with your life. Before you make any decision about renting or selling, be sure to consult a lawyer or accountant for customized consultation so that you fully understand the tax ramifications and benefits given your unique situation.
There are many people in your same position right now in that they are divorced or got a job in another city and they stuck with a home that they cannot live in right now. You will lose money if you sell it because of the costs to sell.
Your only choice may be to rent and hopefully take in more money. You can always try it and see if it works. If you sell, you might have to bring money to the table. You do not want that. A short sale could hurt you these days. Again, I would try renting first.
Thanks for the input guys, I’m going to continue to rent and research the possibility of an owner finance sell while looking for a real investment property.
Tom
I am going to go against the consensus here. Your negative cash flow is more than $6K every year. This property is costing you $500 a month every month it is rented. The negative will just get higher the longer you keep the house. Property taxes and insurance premiums go up every year and the increase will not keep pace with market rents.
You have a relatively new house, but you are close to the point where you will have major replacement expenses. A new refrigerator, new carpet, new water heater, just add to the negative cash flow.
Over the course of the next three years, this house will take another $20,000 out of your pocket plus whatever else a major repair and property tax/insurance increases will cost you. I suspect you are at or near the top of the rent range for your neighborhood and will be unable to increase rents to keep pace with your rising costs of owning and operating your rental.
Unless you plan to keep this property as a rental until you return to the area and convert it to your primary residence, I suggest you short sale as soon as you can .
Short sale? Which type? The kind where later you have to pay back the difference or pay the tax on the difference. Short sales are not as lucrative as they use to be. You should talk to the bank and make certain that short selling is not going to take more money out of your pocket than you expected.
Even if RaleighNC has to pay tax on some forgiven debt, I am sure the tax will be significantly less than his negative cash flow each year. Don’t forget all the prior years of suspended losses will also be recognized which may completely offset, perhaps exceed, the cancelled debt that will be taxed.
Don’t be shortsignted and refuse a short sale because the forgiven debt will be taxable.
His situation is unfortunate, but as a newbie it raises a question that I have: Does this situation create a possible investment opportunity for somebody else when hearing his story? Someone who wants to do a shortsale?
Surprisingly! It’s like you understand my mind! You seem to know a lot about this, like you wrote the book in it or something. I think that you could do with some images to drive the message home a bit, but other than that, this is wonderful forum. A good read. I’ll certainly be back.
I would say sell it… If you are that close to the MV you should be alright however if the MV is actually lower than that you could talk to your lender about a loan modification or possibly a short sale.
If you are considering a short sale, DO IT THIS YEAR. For short sale of primary residence, the forgiven debt is not taxable through the end of 2013. Next year, the tax moratorium expires and your cancelled debt on your primary residence will be taxable income.
