Reluctant landlord - now what?

Question

I'll try to be as brief as possible.
Cons:
Due to external forces I had to move.  I rented my house out for slightly above the going rate $700/mo. however; my mortgage is $750 every month.  I owe $90K on a house that at best would sell for $80K now, realistically I would expect to pay $20K after all realtor fees and what not.

Pros:
I always wanted to get into real estate, not necessarily like this though.
I can easily cover the mortgage if my renters bailed.
I have the world's best renters, no complaints there.
The house (2 years old) was built with renters in mind (swelless subfloor, non burstable pipes, etc)
I have a sizeable rainy day fund to deal with issues.

I want to start investing in a buy and hold strategy.

My question: Should I 
A: Save to refi my mortgage to obtain the 50% rule.
B: take the $20K hit and start fresh
C: Leave things as they are and invest else where.

D: none of the above.

Jason Hill · Answer

That sounds like a plan.  I appreciate your time.

Any further ideas from others would be appreciated as well, I'm always up for different opinions.

Bryan Hancock · Answer

If you are locked into a year lease you generally go month-to-month after that.  I would suggest you keep the tenant for a year and then market for an "owner finance buyer" on Craigslist after that.  You can be pickier for your buyer since you already have a tenant stomaching most of the mortgage payment so I would want a sizable down payment.

The trick will be how to work with the tenants while you are marketing the property.  I would suggest being honest with them, but you risk losing them during your marketing period for new tenant/buyers.  The alternative is to wait until they leave, stomach the mortgage yourself, and market it without them in the property.

Your state likely allows for lease/options, AITDs, etc. that you may look into as well.  Just make sure that your potential buyer is getting a fair deal.  If the property is upside down it will be hard to sell it for above market rates because the tenant/buyer will have to come up with extra funds for the loan because it will appraise low.  Who knows what will happen to values in the interim though.  A wrap note with a long time before the balloon payment seems like a good option.

Jason Hill · Answer

Yearly, The propery is in Georgia.

Bryan Hancock · Answer

How is your lease structured?  Is it month to month?

What state is the property in?

Jason Hill · Answer

I asked them when we were talking about renting if they wanted to buy and they said no.  The had sold their house that was in bad shape and were afraid to have to maintain another with him being disabled.

Bryan Hancock · Answer

I don't like the 50% rule of thumb, but it would only need to cover PI, not PITI to work.  TI is already accounted for so you will just need to cover debt service.

If your 6% rate is fixed see if your glory tenants would be interested in owning.  If they are see if they have money for a down payment.  If they do, consider selling the property to them on a wrap note.  If you do this you can save all of the money you would stuff into a new note, produce positive cash flow, pocket a down payment, etc.  This does carry risk, but it is better for the scenario you have described IMO than your other options.

Jason Hill · Answer

My rainy day fund isnt big enough to get the PITI down to 50% of rent.  Not yet anyway.
Sine my wife and I live below our means we have purchased a house and still have plenty to cover the rental.
My rate is 6% now.

Its not in a good area at all it's a small town where the second largest employer just went bust.  However my renters are retired and their family is local so they shouldn't be moving anytime soon.  He is disabled military so I dont have to worry about the rent check.

I should have added this in the post but walking away is not an option, both morally or credit score wise.  I worked hard to get a 790 before 30 and I'm not going to ruin it now.

Bryan Hancock · Answer

You may consider selling the house on a wrap note.  There are potential pitfalls with this strategy, but it is better than letting the property go to foreclosure.

A 2nd best option IMO would be to pour more money into the project and refinance it so that you will get positive cash flow.  Letting it go is a terrible option that will hurt your credit and ability to borrow for a long time.

What state is the property in?

Mark N.A · Answer

Sell the house.  If you're in a good market you might be able to sell it yourself and save the 6% broker's fee.

Jeffrey K. · Answer

What is your rate right now?  Why cant you refi at this point?

You have to look at where your money will be best spent.  If it makes sense to take the loss and start over... do it.

Where are you living now?  Do you have enough to buy another house?