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Need some advice about a rental house
Old 04-23-2009, 10:21 AM   #1
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Need some advice about a rental house

Hi All,

This is my first post on this forum, but I've been a long-time lurker. I hope you guys can help me with an issue I've been wrestling with for a while. I'll start off with some basic info:

Age: me - 32, wife - 31
Kids: 1 (toddler)
Household income: About $90k
Retirement: $238k
Savings: $40k
Debt: Primary mortgage ($82k) on a 15-year fixed at 4.875% (10 years remaining). Second mortgage ($33k) on a 15-year fixed at 6.34% (14 years remaining with plans to pay off within 5 years). No other debt.

Now then, here's my dilemma. My wife and I bought a house in California back in 2001 for $115k. At its peak in 2007, it was worth about $285k, but with the glut of foreclosures in the area, we would be lucky to get around $100k for it right now. We had it on the market for 9 months last year with only one serious offer (for $200k), but the buyer backed out of the deal just one week prior to closing. Since then, the value has continued to plummet.

We moved from California to Texas last August when our first child was born, and decided to rent the house out for a "year or two" until the market recovers a bit. We're currently renting a house here in Texas with plans of buying a new home within 3 years (saving for a 20% down payment). We're getting $1100 a month for the California house, but we're still losing about $300/month after expenses, which includes a property manager. The negative cash flow hurts a bit, but we're doing OK all-in-all. I guess these are the options that I'm running through my mind and would like some feedback:

1. When the tenant's 1-year lease is up next year, put the house back on the market and just try to unload it for whatever we can get. This eliminates the negative cash flow and allows us to "move on" with our lives so-to-speak.

2. Hang on to the house as a long-term rental property. Part of me keeps going back to the age old philosophy of "buy low, sell high." I know that the housing prices in that area are rock bottom right now, so I don't know how much sense it makes to sell right now. What makes this a bit more tempting is the low interest rate and the fact that it would be paid off in only 10 more years, at which point any rental income would be at least 80% profit after expenses . And, of course, there would always be the option to sell later if the market really came back.

3. Take a "wait and see approach." Keep renting it for a few more years in hopes of a market recovery, but be prepared to hang on for the long haul if the recovery is slower than anticipated. My fear with this is that I would lose the capital gains (if I even have any!) exclusion if I sold after 2013.

Of course, there may be other options that I haven't thought about, so I'm open to any suggestions. I really just want to make a sound decision because I'm really kicking myself for not selling it back a few years ago when I knew in my gut that the bubble was about to burst. Oh well, live and learn I guess.

Thanks, guys.
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Old 04-23-2009, 10:39 AM   #2
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I'm looking - send me a message with property data - might work out for both of us if it's in an area we're interested in -
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Old 04-23-2009, 02:26 PM   #3
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Another option is to "walk away" from the house as the two mortgages exceed the equity. The issue might be whether the second mortgage holder has a right to get a judgment against you for their mortgage balance as they might not get anything out of a foreclosure. You should talk to a California licensed lawyer about this. I know California law limits deficiencies on mortgages, but it might only be for the first mortgage on your residence.

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Old 04-23-2009, 02:41 PM   #4
Confused about dryer sheets
 
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Originally Posted by Martha View Post
Another option is to "walk away" from the house as the two mortgages exceed the equity. The issue might be whether the second mortgage holder has a right to get a judgment against you for their mortgage balance as they might not get anything out of a foreclosure. You should talk to a California licensed lawyer about this. I know California law limits deficiencies on mortgages, but it might only be for the first mortgage on your residence.

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Thanks, but I'm not looking at such a drastic measure at this time. I'm able to afford the payments rather comfortably, so really it's a matter of hanging on to the house as a "long term" investment or selling it even if I have to come to the closing table with cash. Not looking to ruin my credit as I plan to buy another home within a few years...
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Old 04-23-2009, 04:00 PM   #5
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Quote:
Originally Posted by Martha View Post
Another option is to "walk away" from the house as the two mortgages exceed the equity. The issue might be whether the second mortgage holder has a right to get a judgment against you for their mortgage balance as they might not get anything out of a foreclosure. You should talk to a California licensed lawyer about this. I know California law limits deficiencies on mortgages, but it might only be for the first mortgage on your residence.

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In California, houses are financed with trust-deeds not mortgages. As I understand it The only recourse upon default for the original trust-deed is the property itself. For this situation there can be no deficiency judgement. Your credit will be raked over however.

This is not the case for 2nd trust deeds and for refinanced 1st trust deeds. For those situations there can (and are) deficiency judgements.

Anyway that is how I understand it. Please enlighten me if the details are incorrect.
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Old 04-23-2009, 06:02 PM   #6
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We've had a rental house in Texas (Plano) since 1998, for the last couple of years, when the tenants moved out or the lease was up, we put the house up for sale as well as for another 1 year rental- our property manager is a realtor so was able to handle both listings. We received a reasonable purchase offer about 3 weeks ago and are hoping to close on the house at the end of the month- we also had some rental interest but given we're ready to build our retirement home, we're hoping the sale goes through so we'll get some equity for the next place.

My suggestion is to do the same, price the house realistically and test the market between rentals, if it sells, good news but if you rent it for another year, then you continue to have some losses but may be able to recoup if/when the housing market rebounds. I think the key is pricing the house realistically in either situation, best of luck!
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Old 04-23-2009, 06:58 PM   #7
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$1100 seems cheap ... any chance of a rent increase? What % is the property manager taking?

I'ld say plan to sell before the tax exclusion is gone. "suck-it-up" until then and try squeezing the maintenance costs down.
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Old 04-23-2009, 07:14 PM   #8
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1) You could walk away, but that is unethical, especially since you can afford it. I applaud you for not doing so.
2) Buy low, sell high. Eventually the market will come back, and I would guess that the rental market is pretty strong right now with all of the foreclosures going on...people still need a place to live. You may be able to increase the rent to a certain extent.
3) You bought at $115, and still have $115 left on combined mortgages/trust deeds. Perhaps I am mistaken, but that seems to mean that the second was for other things, not for the house. Thus you are probably just about breaking even on the house and still paying off the second which (probably) represents some credit for other things (sorry if I am wrong...it may have been for home improvements on that house). If I am right, what is the gain/loss without considering the second mortgage/trust deed?
4) Even if I am wrong on #3 above, and moreso if I am right, you are most likely (didn't calculate it) $300 cash flow negative, but probably still building that much or more in equity each month, since you are 5 years into the 1st mortgage with 10 to go. If I get ambitious I may go off and calculate it.

Finally, where is the home. I would guess northern California. If so, I may also have an interest, if you did finally decide to sell (although that would not be my recommendation). Wanna share details?

R
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