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Should you rent your underwater property?

Should you rent your underwater property?
by Brian Turner

Underwater mortgages are mortgage arrangements that effectively leave the owner with more debt on the property than the current market value. The condition tends to arise when a second or third mortgage is taken out, or if factors within the area cause the property to DEPRECIATE in value.

In many cases, homeowners turned investors often think, something is better than nothing. You owe $2,100.00 on your mortgage and if you could just get $1,800.00, you can breathe a little easier. Yes you’ll lose $300.00 a month; $3,600.00 for the year, but it’s worth it to keep the house. You just love that home!!

Remember the # 1 goal of any investor is to make a positive cash flow on a monthly basis. No if and or buts about it. The goal of a successful real estate investor is to make money not lose it, and if there is no positive cash flow, you should not be investing in real estate. Keep in mind that if you own multiple properties you are automatically labeled a real estate investor. So if you bought your first home in 2001 and then second in 2004, while renting your first home to a friend you are officially a real estate investor. So are you cut out to be a landlord?

Now there are some exceptions to the rules. Sometimes the book of investing states that you can buy investment property and take a short-term loss for long-term success by banking on home price appreciation. For example, you buy a home, for $100,000.00 you know once you sale that you will make a nice return on investment. You plan to make $30,000 in repairs you can sell for $250,000.00 in another year or so. You decide to keep for a while and rent to give the investment time to develop and reach your investment goal. The problem is you can only get rental income of $800.00 where your total monthly expenses are $1,000.00. You lose $200.00 per month for a total of $2,400.00 per year, but you gain a great deal by being patient to meet your investment timeline. So the game plan is to either make a positive cash flow monthly, or you are betting on home price appreciation. Remember that banking on home appreciation is always a risky scenario.

So you evaluate your real estate portfolio which consists of your homes you brought in 2001 and 2004, and your current home which you just bought last year. Both of the investment properties are being rented by tenants and the leases are set to expire. Here is the breakdown:

  • Property 1 (built in 2001): You owe $200k and you owe $1500.00 total per month. The market value is $150k and the maximum rental income you can get at this time is $1100.00. (-$400 per month)
  • Property 2 (built in 2004): You owe $250k and you owe $1800.00 total per month. The market value is $200k and the maximum rental income you can get at the time is $1500.00. (-$300 per month)

You love the properties and want to keep them both. You put a lot of work into both homes by remodeling the kitchens, changing the flooring, and upgrading the appliances. You are determined to get back what you paid for the homes and you believe deep down that real estate values will make a comeback. In 2-3 years, home prices will rebound and everything will be back to normal. The total lost for the month will only be $700.00 per month which totals about $ 8,400.00 for the year. You sign up 2 year tenants and life is great. You have 6 months in the bank so you can cover the mortgages if something goes wrong for a while.

Did you really make the right decision? You own 2 properties that are upside down. You are losing money on both investments and you are operating on a hope and a wish that home prices will rebound. You violated rule #1 that you’re always suppose to be cash flow positive on a monthly basis. You believe that the homes will appreciate, but when the values are upside down that‘s a lot of ground to make up. Even if values make a comeback, it’s not worth it to take the losses which don’t even factor in repair costs and the risks of non-payment of renters.

Remember than even if you have the reserves in the bank to cover the losses, it will only be a matter of time before the payments start to become a burden b/w unpaid rents, repairs to the home, and /or the sheer fact you making payments on a depreciating asset.

Oh yeah home prices are still on the decline in certain areas. Before you decide to rent to a new tenant, think the whole process through and run. Try to modify the loan and if that don't work, consider doing a Short Sale! Just make sure you consult with your attorney and CPA before doing so!
I'm not a journalist, just a person with an opinion!
For more information about Short Sales, feel free to call 240-619-8326 or send your inquiries to

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