Underwater on a rental property in NY -- any ideas?

Question

Hello all .. I'm new to the forum and my wife and I are beginning to pursue real estate investment .. but we're unfortunately not rookies.  I wanted to see if perhaps anyone had any other ideas with a situation on our rental property.

The deal is this -- I moved to Boston 8 years ago from Upstate NY for work and my relocation package included a loss on sale provision, but between the market for my house in NY and my initial handling of everything, the house didn't sell and at this point I'm underwater.  I bought the house when I was in my low 20's and just went along with the creative financing my mortgage broker sold me on.

So here's where we stand:

- Value of the home is ~$140,000

- Loan on the home is ~$135,000 - this is where I made my mistake with financing -- I did the whole borrow 20% to put down to avoid PMI with a second mortgage.  So i have a $98,000 first @ 6.25% and a $37,000 second at 9.375% (be kind .. it hurts to type this!)

- Mortgage payment in total is $1600 (taxes and insurance included) but the rent is only $1200

Thankfully, my wife and I do well and the financial reward of moving for the job far outpaces the $400 loss every month.  I have 20 years left on both mortgages.  I've tried to refinance the first through HARP but the second wouldn't re-subuordinate.

If I sold the house, I'm not sure I'd get appraised value for the home.  And with realtor fees I'd likely have to stroke a check for $20-$30k at closing .. which is money I'd prefer to use on investing in other properties, now that we have a clue!

The point is, it's a losing situation right now financially, and I'm looking for any thoughts on how I might be able to turn it into a winner.  I'll take any (constructive) advice I can get.  Should I look at institutional investors to get a short term loan for the entire balance and then refi that amount later with a bank?  That was a thought I had .. but i'm not sure if its prudent.  Again, thanks for any assistance anyone can offer.

Jamie Gruber · Answer

Hey Jerry

We do have considerable equity on the Boston home and closed on a HELOC recently that we've considered using to get the NY house out of jail. Or we will use cash. Still thinking through. This post was a last ditch effort to see if there was any way around laying out the cash. But I guess not!  Thanks for the response!

Christopher Brainard · Answer

@Jamie Gruber

If you have the capital, I think I would pay off the second and refinance the first. The interest rate on both of your notes is exceptionally high, but by removing the second and getting a reasonable APR on the first, I think you'll be able to bring this down to where you break even every month. Then you just need to ride the wave and eventually it will be paid off.

-Christopher

Chad Duval · Answer

@Jamie Gruber how much principal is being paid down each month? If its $400 or more, I'd keep the house and use your Boston HELOC to double down on another property.

Mike Hurney · Answer

@Jamie Gruber Welcome.

It's a bitter pill to swallow but the suggestions to get NY down to 75LTV, I believe, are your best moves!

Ryan Dossey · Answer

You could always try a FSBO sale. Take good quality pictures and post everything to postlets.com. If you're looking to "get out" from it... That's what I would do.

You could try a lease option. Maybe ask for 5k down to cover the 400 a month loss for the year?

Harriet Baldwin · Answer

@Jamie Gruber, you could also try posting on the Rent to Own aka lease option forum here at BP.  Two thoughts:

1-are your current tenants rent to own candidates? And would their income handle the mortgage payments?  If so you could do a lease option or a subject to style deal.  The mtg payments totaling above-market rent make this a bit of a stretch, but you can always ask.

2-does the zoning allow rooming houses? Likely not, but if it does, you could rent out by the room (possibly with some investment upfront - fire separation, etc) and likely cover the payment.  This would possibly work best with a local (or even on-site) property manager. You would want to figure out if the additional effort to manage a rooming situation is worth it to avoid investing cash to 'cure' the situation - there's no absolute right answer, it's a question of what you are most comfortable with.

Since you have the ability, I would be tempted to pay off the second and then take another try at HARP...

Jerry Padilla · Answer

@Jamie Gruber

For a rate and term refinance you would have to be 75% LTV for an investment property. The rest of it would have to come out of pocket. Interest rate and payments would be much lower with a 30 year though.

Do you have equity in your primary in Boston? Maybe you could cash out refinance on your primary to help cover the costs of the investment refinance?

Jamie Gruber · Answer

Thanks Christopher - I feared that may be the only way!! Haha.

Underwater on a rental property in NY -- any ideas?

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