Underwater Rental Property - Hold or Fold?

[Kwambe H.]

Hello BP! Several years ago, a 22 year old me (and my wife) with a baby on the way decided to purchase our first property (with little to no money OR real estate experience). We purchased this home mid 2006. Fast forward to two years ago...We moved into a SFH due to the arrival of my second child. The townhome is upside down in a major way and we are losing some serious cash on it monthly (especially now since our first and only tenants just vacated the rental). My question is do we hold onto the property and wait for the market to pick up or should we fold on the home and try and get out of it?

Here is some background info on the Loan:

• Loan Type: VHDA - Rural Development
• purchase price: $286,008.00
• balance left: $251,121.00
• loan rate: 5.75%
• Zestimate: $162,329.00
• underwater: $88,792.00
• mortgage: $1,850.00
• taxes (2013): $1,278.00
• SQFT: 1700

And some background info on Rent:

• rent: $1,395.00
• Property Manager: 10% of rent per month
• Take home Rent: $1,255.50
• monthly loss (tenant): -$455.00
• yearly loss (tenant): -$5,460.00
• monthly loss (no tenant): $1,395.00
• yearly loss (no tenant): $16,680.00

Option 1 - Hold

Im tempted to keep the home because the homes in that location tend to rent very well and the home is still in very good condition. Another reason to hold is the tax situation. The benefits would still be there but I would assume most of that is being eaten away by my negative cash flow. With the Mortgage Forgiveness Debt Relief Act off the shelf id be liable for the forgiven debt if I were to successfully conduct a short sale.

My wife and I both work, so with some new lifestyle modifications, we have been able to afford to keep making payments (even with no tenants). If I keep the home, I would do my best to try and pay down on the loan primarily through wholesaling/flipping so that I could attempt to refi and drop the mortgage payment.

Option 2 - Fold

Ive thought about walking away because I believe the money we would free up could help drop some debt we have elsewhere (small amount of CC debt and student loans) or with saving up for our future REI adventures we have been planning.

One of the major issues I have with this option is I'm not 100% sure how this would affect the building of our REI business in the future. The home is in my name only so my wife wouldn't be affected by a short sale. However, I was looking to partner with my father this summer on some deals. If we moved forward with a short sale, how would that affect those proceedings?

Part of me sees the negative cash flow and thinks this property has to go. But the other part can see the value in having this unit (with the right financing). I just wanted to put this out and hear from others who may have run across this situation previously. Thanks for any advice you offer up.

Thanks,

Jermaine

[J. Martin]

@Kwambe H.

In your calculation, don't forget that you're paying off some principal every month, even though you're losing cash flow.. so you'll be getting closer to even equity over time.. especially if there's any increases in the market (but not sure about your area..)

Can you afford it now? Have you tried any of the gov't programs to refi? Are rents going up? Down? Can you see the light at the end of the tunnel?

Tough situation, but it may very well affect your ability to get financing on deals at least in the near future.. Some banks understand. But they view it differently if you got overleveraged and don't have the ABILITY to pay now. They view it differently if you're able to pay, and you decide to walk...

Be careful if you have a worthless second also, b/c they may come after you.. (see one-action rule in your state if any..)

@Bill Gulley , I don't see much residential stuff, but have you encountered these situations from the other side of the table much, and do you recommend to never walk, even if you think it's better for your family/kids?

TOugh call! Good luck!