How much trouble am I in?

Question

Hello, I am new to BP and have been reading posts for the past month.

I am currently active duty military and set to be relocated in the spring. I bought a house here and some things didn't go as planned. The military moved up my orders by 9 months and the other homes in the area sold in the past year for much lower than my home. The new buyers have since reno-ed the houses and are now renting them. Mine was a flip turn key property so with these new lower sales and the quicker relocation than I was expecting I would lose 15k just on sale price plus have to take a huge credit hit and lose my VA benefits. I don't want this to happen so I am currently refinancing my home so that if I must I can pay it all out of pocket. To prevent this I want to rent the home.

These are the details on the home:

$135675 - 30yr @ 3.125% (PI 581.20 and PITI 745)

Rent potential of $1200 - $1250/mo.

From my research I should generate a cash flow of about $100/mo. I know this isn't the greatest investment property, but it is what I have to work with. Honestly I will be happy as long as the house pays for itself. and doesn't negative cash flow. Or the tenant does not destroy the house.

My question is are my numbers and expectations realistic? Any advice, recommendations or pitfalls to avoid going forward would be greatly appreciated. Thank you all in advance!

Andy D. · Answer

@Adam Dassie Whatever you do, do NOT let it get to the point where your credit gets affected! I'm surprised to see that no one else has stated this as clearly.

As far as I'm concerned you're actually in a pretty cool situation: you entered the realm of real estate, albeit involuntarily. You posted on BP, so you are obviously not entirely put off by that fact. You have a steady job = steady income and you are apparently somewhat willing to deal with the idea of becoming a (distant) landlord.

All you now have to do is find a way to make that combination work. :-) Would it be easy? No, but anybody can do easy and certainly anybody can give up! You're in the military. Giving up in field duty gets you typically killed. Giving up on the back end typically gets some else in the field killed, ultimately. Not what you were trained for and not your personality, right? So...

Adam Dassie · Answer

@Dan Call thank you for all the resources. It is really helping me to understand more and more about all the different aspects of becoming a landlord and just investing in real estate in general. For a guy just starting out you have pointed me in direction for some very valuable information that I did not even begin to consider. Thank you and seeing as I only got a hand full of responses to this post I will defiantly include location in the title when appropriate from this point on.

Thomas S.

Adam Dassie · Answer

To anyone still following this,

I have decided to rent the place out. After doing a bunch of legwork and meeting with some PMs I believe it is the best option for the situation. Especially after hurricane Mathew came through the area. It caused over $10K in damages that the insurance company is going to picking up. Seeing the house survive that has really help put my mind at ease from natural causes and the damages were all the things I was worried about having to replace once rented or before so hurricane was a good thing for me.

I believe this should complete this forum post so I just wanted to thank everyone for their time and participation. BP has really helped open my eyes to real estate.

Adam.

Andy D. · Answer

@Cory Adams Sorry, I missed that particular post. Damn Internet! ;-) And yes, you are indeed right and confirming my statement by providing even more explanation. Very good! OP and others should be thankful for you having taken the time to write this. And I do mean that.

Cory Adams · Answer

@Andy I thought I was pretty clear regarding not letting a short sale hit his credit report.

I'll spell it out - a short sale and or "deed in lieu of foreclosure" will most likely show up on a credit report as “settled for less than the full amount due”.  If you have no late payments associated with the short sale, expect your credit report to be hit by approx 60 points (that was my personal experience).  Expect also that there will be few if any loan products available for up to approximately 3 years.  After that period and perhaps up to 4 to 6 years later you will probably need to explain, in a very detailed manner, what the circumstances were that led to the short sale, etc.  Adding any late payments to that scenario will compound the hit to the credit report.

Note that the above may not be exactly accurate as loan product requirements shift very often.

Michael Rutkowski · Answer

Just want to throw out that a "deed in lieu of foreclosure" may work for you It would be less of a hit on your credit than if you have to foreclose.

Dan Call · Answer

@Adam Dassie, I agree with @Cory Adams about the short sale.  I understand your and @Will Pritchett's point about not having your own money in the property.  However, you do have somebody's money in that property.  And they will care if you do a short sale. To Cory's point, if you short sale and wreck your credit, it may be more difficult for you to get a loan on your next investment. (if you chose to go that route)

Additionally, to clarify, I am not advocating for you to bail on the property or to rent it out.  I am just trying to make sure that you were aware of all of the potential costs involved in your decision.

Let us know where this property is and you will be able to get others from that area to chime in and help out.  They are the ones that will be able to make sure that you are using realistic numbers for your area.  (You don't have to give the address, just city, county state...etc)

Cory Adams · Answer

If you want to invest in the near future having a short sale on your credit report is not the way to go.

Long distance rentals are not that bad. You can screen tenants before you leave potentially.

Colleen F. · Answer

Consider also where rents and housing prices look to be going. If they are rising that could factor into your decision. Are there jobs in the area ? Base closures?  If the economic situation in the area is unstable or worsening selling is your answer. Otherwise run the numbers.

Will Pritchett · Answer

Adam Dassie,     I wholeheartedly and respectfully disagree with the other posters on your thread and the negative slant.  I agree with being cautious and perhaps I missed some details.  From the info you have shared, I would keep that house as a rental any day. I started with numbers like yours and have had no trouble. I would just screen your tenants very well. I like that you have no money into the property.      Read up on self-managing from a distance. I haven't done it from a distance but I find self management to be very easy. I am not sure what all the calculators take into account but often they disregard the tax benefits, debt paydown, potential appreciation, and the value of getting some experience landlording.      That's my two cents. Good luck! -Will

How much trouble am I in?

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