Empty house, no income, mortgage due

[Pat Snyder]

I have a modest, newer modular home that i was unable to sell within about 6 or so months, so, i decided to rent so that i could have some money to pay the mortage.

Recently, the renters, after about 2-3 yrs have had their first problem, they burned the shed down. They are claiming it was an acceident, that the "device" that was plugged in overheated and caused the fire. I have a fire report from the fire department and arson investigator. When I left the home, the shed had no power running to it but it was wired for power at a later time if i choose to (switches, lights, outlets).

The renters insurance company denies the claim, my insurace company is going to go after the renters....O it's a nightmare!

So, what if my renters decide to leave? I have a month to months lease (yea well may be not a good idea now).

My real question is, If i don't have renters in the house, how do i come up with the money for the mortgage? I don't have extra funds. I don't make enough money to make two mortgage payments. I don't live in the area to move back. I cant sell it quick enough.

What do I do?

[Jon Holdman]

Being a landlord REQUIRES that you have some cash reserves. Its an absolute requirement. Because stuff like this is just part of the business. So, the real answer to "how to I have to payment if I don't have a tenant" is that you pay out of your reserves. And you use those reserves to clean the place up and get it ready. Six months PITI is a good starting number. Six months rent is better.

First, it sounds like, for now, the tenants are still there. I assume they're still paying. So, this isn't a problem, yet. Believe me, having a longer lease will have no effect if they decide to leave. So don't fret about that.

Is the place rentable? Did the shed damage the house? If they do move, you will, at least, need to clean up the fire mess. Is that a big deal?

Do you have landlord insurance? If so, it usually include payment of the rent to you if the property is unlivable. If you don't have landlord insurance, and they're actually going to pay out on this, consider yourself extremely lucky. And buy landlord insurance.

Others have given you suggestions about what to do to scrape up a payment or two. Hopefully your market is not so slow that it takes more than a month long vacancy to get a good tenant. So, dig deep, find the cash and make the payments.

Now, lets prevent this in the future. Not the fire, that sort of thing happens. At least it was just the shed. My grandparents put tenants in my great grandmother's house and they burt the whole house down. And good for your insurance company going after the tenants. There must be some clear evidence they intentionally or unintentionally set it on fire.

So, is this a good rental. Sounds like you're self managing. To be profitable and able to deal with events like this, the rent needs to be about 1.6 times the P&I part of your payment. If you're paying for a PM, it needs to be 2X the P&I. That extra is to cover the taxes, insurance, and incidents like this. And vacancies and maintenance and etc., etc., etc. If the rent isn't this high, you have a loser. That means you need to putting aside cash every month to build up your reserves. If the rent is high enough, then many months you will have something left. You need to be putting that aside to build up the reserves.

If this is a cash flow negative rental (rents are less than my multipliers above), and you don't have the ability to fund the shortage from your other income, you MUST sell. You can't afford to keep it. Yeah, you may take a loss on the sale. You might even have to do a short sale or convince the lender to let you carry a note for the shortage. But you if you can't afford to keep it, you're just delaying the pain.

You say you're no longer in the area. My guess is that this was your residence. You had to move. You either tried to sell, but wanted too high of a price (i.e., I have to get at least X to pay off the loan, but the market says it worth less than X) or you just figured you couldn't. That usually happens because you're underwater. So you ended up being an accidental landlord. Probably with a cash flow negative house. Maybe the rent is enough to cover the PITI payment, but nothing more (that's a cash flow negative house.) But rather than take a big loss all at once, you chose to take a series of small losses. So, its now time to pay the piper.

Now, I am just guessing about your situation from what you wrote. Perhaps things are different. Bottom line is that you will have to come up with the payments out of pocket if the tenant leaves.