I got started in real estate investing back in summer of 2012. Since that time, there have been many highs and lows, which have been documented on this blog. But that’s just one person’s perspective… and there are millions of other stories out there.
At this time, I would like to welcome Jon from Money Smart Guides for a guest post today on his own rental property experience!
Growing up, I knew that one of the keys to wealth was through investing. As a result of this, I began to invest in the stock market before I was 18 years old. Since I couldn’t invest directly because of my age, my Mom opened a custodial account for me and placed the trades I wanted to make. In the 17 years since, my stock market investing has gone from being an active investor trading stocks to becoming a passive investor in mutual funds and ETFs while paying attention to costs and fees.
I have had great success investing in the stock market using my plan. But not all of my money will be in the stock market. When I was turning 18, I learned that my grandfather owned a house in town that he rented out. Up until this point, I was clueless to rental real estate. I can still remember the day, talking about his rental and realizing that real estate was another great egg to have in my investing basket.
As I write today, I have one rental property. But it is bleeding money. I enjoy reading FI Fighter and threw out the idea of writing about my rental property issue to get some feedback not only from FI Fighter, whose input I trust, but also the great people that read this blog. I feel that through all of you, I can get clarity to my rental property situation.
Rental Property Background And Goals
Before I get into the numbers, I want to make sure everything is understood from the start. My wife and my ultimate goal is to retire early. We plan to be in a position were our monthly expenses are funded by the income thrown off from our stock market investments as well as the income from a handful of rental properties. Ideally, we would like to own 10 properties. We have done a good job saving up until this point and our investments (mainly retirement) are worth close to $500,000.
Onto the rental, which I bought back in 2007 right at the height of the mortgage bubble. I could not afford it at the time (I’m still amazed I got the loan) and that is still hurting me as I rent it out. The house, which is a townhouse, but for insurance is classified as a condo was bought for $167,000 with 10% down. This left me with a 30 year fixed mortgage of $150,300 at 6.375%.
Currently, my mortgage balance is right around $135,000 and according to Zillow and recent home sales, is worth about $130,000. In 2012, I moved in with my wife and began to rent out my house. In a given month, without taking into account depreciation, I am losing close to $300. Here is a breakdown of my monthly costs and the monthly rent I earn:
A few notes about the monthly costs and income:
- The unit has gas heat and that charge is included in my HOA Fee. Because of this, I can’t have a bill for it sent to the tenant. I’ve called a few times about having one sent and they tell me it cannot be done.
- Because of the gas bill, my work-around is charging higher than standard rent. The current going rate for rent in my town is around $1,100 per month. I don’t think if I raise the rent anymore I’ll get many inquiries for renting the unit.
- The mortgage payment includes principal, interest and taxes.
- The insurance covers the dwelling as well an umbrella policy to cover us should anything happen to someone on the property.
What To Do?
I received a call from my current tenant that she will not be renewing the lease and thus will be moving out the end of October. I have the unit listed for rent as of this writing for $1,300 per month. The issue is that my wife and I don’t know what to do – keep renting it out or just cut our losses and sell. Here is a sampling of our thoughts:
- I looked into refinancing and I can get a lower rate and lower monthly payment by extending it back out to a 30 year loan. Doing so will cost around $3,000 for closing costs, which when rolled into the mortgage just puts us that much further underwater.The refinance would have us essentially break-even each month without taking into account depreciation.
- I cannot go the HARP route because my loan is not backed by Freddie or Fannie. In fact, the prices in the development dropped more than surrounding areas because it wasn’t even FHA approved. So after the housing bubble burst and you could still
buy with a low down payment by going through the FHA, no one could in my development. You needed the full 20% down. No one was buying because they didn’t have 20% to put down.
- There were a bunch of foreclosures in the development, which have been hurting comps. Prices have not really moved at all in the past 12 months. My thought is maybe the foreclosures are ending and the value of the homes will increase, taking us out of negative territory.
- If we do sell, assuming for $130,000 we have to come up with $5,000 to pay off the mortgage and then pay the real estate agent fees. At 6%, we would end up having to come up with close to $13,000 out of pocket. Neither one of us wants this, but it might be the least painful choice.
- The HOA fee goes up almost every year. When I bought in 2007, it was $235/month. Now it is $280/month. That just keeps cutting into any profit we could potentially make in the future. This is also why I am concerned about refinancing. I’ll break-even now, but next year when the HOA fee goes up, we’ll be in the red once more.
- We have a high income, so we cannot write off the losses. We realize that we can carry these forward until we are in a lower tax bracket, but as of right now, we aren’t benefiting from a tax write off.
As you can see, there doesn’t seem to be a non-painful solution. I have it listed for rent now because if I hold for a year or two and housing prices rise, I hope to not be underwater and make a clean break from the house (though I do realize I would be essentially paying the money in monthly installments as I am losing money each month).
Long term, we don’t see this as a good investment property. I mentioned our goals because we want to do what is in our best interest to get there. We would rather feel some pain today if it means getting us closer to our long-term goals than benefit over the short-term if it means sacrificing our long-term future.
I am hoping that I didn’t leave out any information that would be needed in helping find a solution. If you have questions, please put them in the comments below and I will respond. Thanks in advance for all your help!