I would like some input about keeping or selling some rental property I have. I have three duplexes which I bought starting in 2008. My mortgages are more than the properties are worth in two cases with 7 1/4% and 6 3/8 % mortgages. I have a small positive cash flow on these properties. My concern is that if we have a collapse and my tenants can't pay their rent, I may not be able to keep them. What are your thoughts about selling if I can and taking my losses instead of potentially losing everything? I am retired and bought the properties to try to provide an alternate cash flow to my pension and SS. If at all possible I would like Chris to weigh in. I realize that I must make my own decision but would appreciate some intelligent input to help me make that decision.
Where are these properties located? Location matters. If they are in an area of the country/world where folks will do well--and in my opinion a place with natural resources and a lower population will do bettter-- it's one thing, but if the rental units are in a depressed and/or overpopulated area I'd be more wary.
I've considered incme from rental properties to fund my husband's and my retirement and had the same concerns. For what it's worth, I believe that we have NOT seen the bottom of the housing market. Not by a long shot.
You should be able to transfer the properties so that they are each owned by a separate LLC. This way, a default would not jeopardize any personal assets. With this in mind, I'd say keep them. Or better yet, foreclose and continue to collect rent for two years like everyone else seems to be doing. I recognize that you probably have a higher moral standard than that, but it's worth suggesting.
Location means a lot, of course. But I also believe we have not seen the bottom yet,either. Maybe 2014 or 2016. Although it may drag on longer - it seems the Federal Reserve and the Federal government is determined to go down the path of Japan's Lost Decades to keep the banks solvent. And we're not even an export powerhouse nor starting out as a nation of savers.
It is unfortunate that you cannot refinance to a lower rate, since you have negative equity and these are investment properties. But for now, since the cash flow is still positive and you have tenants, you can still sit.
Another consideration: The state that the rental properties are in: is it a recourse state or a non-recourse state? In other words, can the banks go after you for to recover full damages even after foreclosing and taking possession of the rental units if you stop paying on them?
You may want to read up on Charles Hugh Smiths' articles (subscription required), if you haven't seen them yet:
Key Insights for Those Buying Real Estate as an Income-Generating Investment (February 27, 2012)http://www.peakprosperity.com/martensonreport/key-insights-buying-real-estate-income-generating-investment
Determining the Housing Bottom for Your Local Market (January 23, 2012)http://www.peakprosperity.com/martensonreport/determining-housing-bottom-local-market
How Low Will Housing Prices Go? (December 12, 2011)http://www.peakprosperity.com/martensonreport/how-low-housing-prices-go
Safewrite- Thank you for your input. In answer to your question, They are located in a town called Deer Park, Wa. It is a blue collar town of about 3500 people. It is located about 20 miles North of Spokane. I did some number crunching and if I sell for what they have recently been appraised for after commissions I may net about $5000. After doing that It pretty much made my decision. As it is I have a small positive cash flow plus my mortgages are being reduced by about $150 each per month, and my primary home is paid for.
macro- You are correct that I would not do what you mentioned. Even though the bankers are mostly corrupt and immoral two wrongs still do not make a right. Thanks for your input. I will look into the LLC aspect.
Poet- Thanks for your input and the links. I will look into the type of state I live in ( recourse or non). I was not even aware of that aspect. The three comments I have received so far have been very helpful. Thanks again all.
you said you had pretty much made your decision. What was it !
I have a friend here (NZ )in a similar position, small amount of equity in present markret (pushing new highs...) but a 5% fall in the market will wipe that equity out. On top of that, the morgage payments, inurance, property taxes, are well more than he could rent for.
He is of the mind that a financial crisis is coming, but had not paid attention to what the consequences would be to his equity for even a small drop in porperty values.
When I went through it for him I could seee he had a light bulb moment.
He has started down the path of selling.......
I made the decision to keep the properties. When I considered what I would net after a sale, it was about $5000. I have about $65K invested in only two of the properties with down payments and upgrades. If I sell, assuming I can, about $60K wil be a sure loss. The properties net a small positive cash flow plus the mortgage payment pays about $150 per month toward the principle each month, so my debt is being paid of by my tenants, albeit slowly. Looking at the numbers that way, I decided for the lesser of two evils (similar to voting for a politician), hoping that things unwind slowly and as I build up equity, maybe I'll be in a better position in the future. I don't know what your friends position is but that is how I figured it. I hope this helps him. Thanks for your question. I will be happy to answer any more you may have.
I reread your post and was focused on the answer to your question. If I was in your friends position I would probably sell too if I didn't have enough rents to cover my expenses. He will have to do some thinking near and far term to do what is best for him. If he can't sell he might just consider defaultng on the loans and let the bank have them and be out from under. His credit will repair in time.
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