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rated:
Hi all,

My wife (and by extension, me) and her sister co-own a rental condo (originally purchased to live in, but now it is rented out) in Virginia.  The condo is about $70k underwater if we were to sell today.  Additionally, it is cash flow negative (wife, me, and sister contribute about $700 total each month to the mortgage).

My long-term view of this is just to keep going as we are, let rents eventually rise and cover more of the mortgage payment, and treat it as a potential source of income in retirement once the mortgage is eventually paid off (we are all late 30s).  The $700 monthly income gap is annoying, but not overly burdensome when split among us.  (Edited, since it's unclear: our household contributes half, and the sister contributes other half of the $700 shortfall)

But, FW always has different (and probably better) points of view.  Do you think there are any more optimal ways to handle this situation?   If the value recovers to the point where we could cover the mortgage balance and selling costs, should we ditch it?

 

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i guess so.

OP makes mortgage payments. a portion of the payment goes to principal. some people make rental calculations ... (more)

solarUS (Nov. 08, 2016 @ 3:32p) |

But that isn't the question.  The two options are either pay $300k for a house worth $300k but requires you to pay $700 ... (more)

Glitch99 (Nov. 08, 2016 @ 8:28p) |

$700 of the mortgage payment goes towards the principal owed on the loan. IOW, the 70k negative equity they have will co... (more)

fwuser12 (Nov. 08, 2016 @ 10:38p) |

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rated:
coaster831 said:   Hi all,

My wife (and by extension, me) and her sister co-own a rental condo (originally purchased to live in, but now it is rented out) in Virginia.  The condo is about $70k underwater if we were to sell today.  Additionally, it is cash flow negative (wife, me, and sister contribute about $700 total each month to the mortgage).

My long-term view of this is just to keep going as we are, let rents eventually rise and cover more of the mortgage payment, and treat it as a potential source of income in retirement once the mortgage is eventually paid off (we are all late 30s).  The $700 monthly income gap is annoying, but not overly burdensome when split among us.  

But, FW always has different (and probably better) points of view.  Do you think there are any more optimal ways to handle this situation?   If the value recovers to the points where we could cover the mortgage balance and selling costs, should we ditch it?

 

  As with this type of decisions, it really depends on how the future will look like for rents and sale price on the unit.
With that said, are you breaking even if you account for the principal payment (equity build-up), even though you are cash flow negative?

The other factor here is the ownership structure. How amicable is the relationship between the sisters and how liikley is it going to stay that way in future? Do you have a written plan/agreement/understanding as to who gets what when you sell it. You said the three of you contribute towards the $700 shortfall but you are not on the title.

rated:
I hope OP means his household jointly contributes his wife's half of the mortgage and HOA payments.

rated:
fwuser12 said:   
coaster831 said:   Hi all,

My wife (and by extension, me) and her sister co-own a rental condo (originally purchased to live in, but now it is rented out) in Virginia.  The condo is about $70k underwater if we were to sell today.  Additionally, it is cash flow negative (wife, me, and sister contribute about $700 total each month to the mortgage).

My long-term view of this is just to keep going as we are, let rents eventually rise and cover more of the mortgage payment, and treat it as a potential source of income in retirement once the mortgage is eventually paid off (we are all late 30s).  The $700 monthly income gap is annoying, but not overly burdensome when split among us.  

But, FW always has different (and probably better) points of view.  Do you think there are any more optimal ways to handle this situation?   If the value recovers to the points where we could cover the mortgage balance and selling costs, should we ditch it?

 

  As with this type of decisions, it really depends on how the future will look like for rents and sale price on the unit.
With that said, are you breaking even if you account for the principal payment (equity build-up), even though you are cash flow negative?

The other factor here is the ownership structure. How amicable is the relationship between the sisters and how liikley is it going to stay that way in future? Do you have a written plan/agreement/understanding as to who gets what when you sell it. You said the three of you contribute towards the $700 shortfall but you are not on the title.

 It's in Northern VA (DC area).  I think rents will gradually improve, as will the sales price, but it will take a long time (5-10+ years?) to break even on either.  And yes, we are breaking even if you exclude the principal payment, so I'm kinda thinking about it as an interest-free loan on the property.

The relationship is very amicable, and I expect it to stay that way.  We have a written, but not notarized, agreement that my wife and the sister have a half-interest in the property, so responsible for half of any payments/repairs, and half of proceeds.  And correct, I am personally not on the title.

rated:
taxmantoo said:   I hope OP means his household jointly contributes his wife's half of the mortgage and HOA payments.
  Yes, our household contributes half of the $700 shortfall, and sister contributes the other half.

rated:
> make sure there is no room to refinance...especially a HARP
> make sure rent is appropriate
> make sure management fees and service are appropriate
> i assume the income tax effects have been separated, right?
> $350/mo loss BEFORE any repairs, assessments, etc is terrible of course. you probably make a lot of it up on depreciation and tax losses, though.

rated:

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> make sure there is no room to refinance...especially a HARP
Good point, I thought there were income limitations on HARP, but apparently not.  Currently the interest rate is low, but it *is* an ARM, so might be worth locking in a long-term fixed rate.  

> make sure rent is appropriate
> make sure management fees and service are appropriate
We can't negotiate the condo fees, but we do the rental management ourselves, and I've been able to do all repairs so far, limiting expenses to just materials.

> i assume the income tax effects have been separated, right?
Correct.
> $350/mo loss BEFORE any repairs, assessments, etc is terrible of course. you probably make a lot of it up on depreciation and tax losses, though.
Yes, certainly not ideal.  The biggest bummer is the depreciation value is based on the time of conversion to a rental, which is the underwater value, as opposed to the purchase price.


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Since it is underwater and cash flow negative, why isn't one of you living in it?  In the bigger picture view, that would be the better "investment."

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dcwilbur said:   Since it is underwater and cash flow negative, why isn't one of you living in it?  In the bigger picture view, that would be the better "investment."
  Yes, I've been thinking about that.  The problem is how does one party treat it as a rental while the other treats it as a primary residence, and how do we split costs fairly?  I.e., if wife and I lived there, what portion of the mortgage would we pay vs. the sister?  It really muddies the situation a lot, so we've been avoiding it... I feel like even though everyone has a good relationship, this could be the one situation that introduces friction.  But, if there is a clear fair way to do it, I would consider it.  (There are other logistical concerns: the space isn't ideal for us, our commutes would be terrible, etc, but defining how the payments would be split is probably the biggest driver.)

rated:
One of you could pay the other off and live in it.. One might pay less than 1/2 of the $70k maybe 20-25k and let the other person assume ownership of the whole.

What did their contract say when they purchased it?

How much would you be willing to pay your SIL to live there? would you continue paying the $350? If so would you reap anything if by chance the market switches and becomes profitable?

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The costs exceeding fair market rent continue to be split 50/50 and the person who lives there pays fair market value rent towards the costs. Example:

Current:

Rent: $2,000
Costs: $2,700
Paid by you for shortfall: $350
Paid by her for shortfall: $350

You as tenant:

Costs: $2,700
Paid by you as rent: $2,000
Paid by you for shortfall: $350
Paid by her for shortfall: $350

Anything else is unfair to the non-tenant. Alternatively, one of you pays the other half of the negative equity to be done with it.

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Rajjeq said:   The costs exceeding fair market rent continue to be split 50/50 and the person who lives there pays fair market value rent towards the costs. Example:

Current:

Rent: $2,000
Costs: $2,700
Paid by you for shortfall: $350
Paid by her for shortfall: $350

You as tenant:

Costs: $2,700
Paid by you as rent: $2,000
Paid by you for shortfall: $350
Paid by her for shortfall: $350

Anything else is unfair to the non-tenant. Alternatively, one of you pays the other half of the negative equity to be done with it.

  +1
It is up to you to decide whether moving into the condo and paying 2k as rent is beneficial compared to your current living situation (cost and convenience). Presumably both sisters should be given the option of moving in and one of them decides to take it (or both decide that renting condo to a third-party is still a better alternative).

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Rajjeq said:   The costs exceeding fair market rent continue to be split 50/50 and the person who lives there pays fair market value rent towards the costs. Example:

Current:

Rent: $2,000
Costs: $2,700
Paid by you for shortfall: $350
Paid by her for shortfall: $350

You as tenant:

Costs: $2,700
Paid by you as rent: $2,000
Paid by you for shortfall: $350
Paid by her for shortfall: $350

Anything else is unfair to the non-tenant.

I agree this is the logical way to do it if one party wants to live there, but if my current housing costs in a more ideal property for me and my wife are roughly equivalent to that $2000 in rent, there is really no difference to that situation vs. my existing one of renting out to a 3rd party tenant and paying the $350 shortfall, right?  Just want to make sure I'm considering this correctly.

Tangential question: if hypothetically, say 7-10 yrs out, the property became both cash-flow neutral, *and* the value recovered to the mortgage balance, would you sell or continue to rent with the hopes of providing income in retirement?

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letsspendlotsofmoney said:   One of you could pay the other off and live in it.. One might pay less than 1/2 of the $70k maybe 20-25k and let the other person assume ownership of the whole.

What did their contract say when they purchased it?

How much would you be willing to pay your SIL to live there? would you continue paying the $350? If so would you reap anything if by chance the market switches and becomes profitable?

  I don't think either party is interested in dumping a large amount of up-front cash to be rid of it, nor assuming whole ownership.  

 The contract between the two sisters, you're referencing?  It's not extensive. It basically says they co-own it 50/50.

I'm not sure I understand the last question.  We wouldn't pay SIL anything to live there - we would pay $350 to cover the mtg deficit, and continue to hold 50% stake in the property.  Let me know if I'm misunderstanding.

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Currently live in DC (granted, not Virginia)... how do you have a $700/mo negative cash flow property? Rents are through the roof in DC and NoVA.

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vnuts21 said:   Currently live in DC (granted, not Virginia)... how do you have a $700/mo negative cash flow property? Rents are through the roof in DC and NoVA.
The biggest issue is the property was bought at the absolute peak of the housing boom, so the mortgage amount was sizable.  The rental income would be solid if it was bought a couple years earlier or later.  Not blaming that on anyone but ourselves, of course.

We're a bit further outside of the city... rental demand is solid, but there are a lot of condos in the area, with more always being built.

rated:
FMV = Fair Market Value.
LA = Loan amount.

Apparently: LA = FMV + $70k.

Give one of the two options to your Sister in law:
1. You pay her $35k + $X (headache fee for underwater condo). She pays down the loan by $35k + $X, and purchases the condo for FMV + ($35k - $X).
2. Do #1, just in reverse. i.e. She pays you $35k + $X and you purchase above FMV.

The only potential problem could be the appraisers. However, in most active markets - $20-$30k above FMV is usually okay. I just saw a house sell for $40k over it's FMV by my calculation based on comps (which is an imperfect science anyway). ...

Not sure if arms length transaction will come up with the banks or not.

Right now you have a potentially dangerous situation where family and money are mixed in a stressful scenario. $350/mo may not seem like much, but statistically one of you guys are almost certain to hit some patch where it does start to weigh in - at which point the relationship has a high probability to nosedive.

So I would try to untangle this as soon as possible if your wife values her relationship with her sister.

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coaster831 said:   
Rajjeq said:   The costs exceeding fair market rent continue to be split 50/50 and the person who lives there pays fair market value rent towards the costs. Example:

Current:

Rent: $2,000
Costs: $2,700
Paid by you for shortfall: $350
Paid by her for shortfall: $350

You as tenant:

Costs: $2,700
Paid by you as rent: $2,000
Paid by you for shortfall: $350
Paid by her for shortfall: $350

Anything else is unfair to the non-tenant.

I agree this is the logical way to do it if one party wants to live there, but if my current housing costs in a more ideal property for me and my wife are roughly equivalent to that $2000 in rent, there is really no difference to that situation vs. my existing one of renting out to a 3rd party tenant and paying the $350 shortfall, right?  Just want to make sure I'm considering this correctly.

Tangential question: if hypothetically, say 7-10 yrs out, the property became both cash-flow neutral, *and* the value recovered to the mortgage balance, would you sell or continue to rent with the hopes of providing income in retirement?

  The benefits to you living there vs. a tenant are:
1. You can have a deadbeat tenant or vacancies. Problem avoided if you are the tenant.
2. Presumably there would be less wear and tear with you there than a random tenant.
3. If the property goes up in the future, capital gain exclusion for primary residence.
4. If you all decide to strategically default, more chance of excluding the gains and cash for keys as homeowner.
There may be more

The downsides:
1. If later you need to move and have trouble finding a tenant, could cause bad blood with the sister.
2. There may be added resentment from the sister if she's paying for a shortfall on the home you live in. Also it adds pressure to make it your problem rather than a joint problem if it's your home. It's not logical, but I bet it happens.
3. As you said, it's less ideal and you're not gaining enough benefit necessarily.

Personally, I'd stay out.

rated:
puddonhead said:   FMV = Fair Market Value.
LA = Loan amount.

Apparently: LA = FMV + $70k.

Give one of the two options to your Sister in law:
1. You pay her $35k + $X (headache fee for underwater condo). She pays down the loan by $35k + $X, and purchases the condo for FMV + ($35k - $X).
2. Do #1, just in reverse. i.e. She pays you $35k + $X and you purchase above FMV.

The only potential problem could be the appraisers. However, in most active markets - $20-$30k above FMV is usually okay. I just saw a house sell for $40k over it's FMV by my calculation based on comps (which is an imperfect science anyway). ...

Not sure if arms length transaction will come up with the banks or not.

Right now you have a potentially dangerous situation where family and money are mixed in a stressful scenario. $350/mo may not seem like much, but statistically one of you guys are almost certain to hit some patch where it does start to weigh in - at which point the relationship has a high probability to nosedive.

So I would try to untangle this as soon as possible if your wife values her relationship with her sister.

  I would definitely like to get us out of mixing business with family, but right now, I don't think either side is seeing that $35K+X as worth it.  If things become acrimonious, maybe that price will seem cheap.  I appreciate the clearly laid out scenario, though.  Thanks.

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dcwilbur said:   Since it is underwater and cash flow negative, why isn't one of you living in it?  In the bigger picture view, that would be the better "investment."
  Not necessarily - the rent they're recieving could be more than they're paying for their own housing, in which case renting it out is the better use.

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Rajjeq said:   
coaster831 said:   
Rajjeq said:   The costs exceeding fair market rent continue to be split 50/50 and the person who lives there pays fair market value rent towards the costs. Example:

Current:

Rent: $2,000
Costs: $2,700
Paid by you for shortfall: $350
Paid by her for shortfall: $350

You as tenant:

Costs: $2,700
Paid by you as rent: $2,000
Paid by you for shortfall: $350
Paid by her for shortfall: $350

Anything else is unfair to the non-tenant.

I agree this is the logical way to do it if one party wants to live there, but if my current housing costs in a more ideal property for me and my wife are roughly equivalent to that $2000 in rent, there is really no difference to that situation vs. my existing one of renting out to a 3rd party tenant and paying the $350 shortfall, right?  Just want to make sure I'm considering this correctly.

Tangential question: if hypothetically, say 7-10 yrs out, the property became both cash-flow neutral, *and* the value recovered to the mortgage balance, would you sell or continue to rent with the hopes of providing income in retirement?

  The benefits to you living there vs. a tenant are:
1. You can have a deadbeat tenant or vacancies. Problem avoided if you are the tenant.
2. Presumably there would be less wear and tear with you there than a random tenant.
3. If the property goes up in the future, capital gain exclusion for primary residence.
4. If you all decide to strategically default, more chance of excluding the gains and cash for keys as homeowner.
There may be more

The downsides:
1. If later you need to move and have trouble finding a tenant, could cause bad blood with the sister.
2. There may be added resentment from the sister if she's paying for a shortfall on the home you live in. Also it adds pressure to make it your problem rather than a joint problem if it's your home. It's not logical, but I bet it happens.
3. As you said, it's less ideal and you're not gaining enough benefit necessarily.

Personally, I'd stay out.

  Excellent and succinct points on both sides (esp 1 on the "benefits" and 2 on the "downsides"). Thanks very much for the additional input.

rated:
coaster831 said:   
dcwilbur said:   Since it is underwater and cash flow negative, why isn't one of you living in it?  In the bigger picture view, that would be the better "investment."
  Yes, I've been thinking about that.  The problem is how does one party treat it as a rental while the other treats it as a primary residence, and how do we split costs fairly?  I.e., if wife and I lived there, what portion of the mortgage would we pay vs. the sister?  It really muddies the situation a lot, so we've been avoiding it... I feel like even though everyone has a good relationship, this could be the one situation that introduces friction.  But, if there is a clear fair way to do it, I would consider it.  (There are other logistical concerns: the space isn't ideal for us, our commutes would be terrible, etc, but defining how the payments would be split is probably the biggest driver.)

  The person living there pays the partnership a market rent, just like any other tenant.  It's only advantageous if that rent is less than your current housing cost.

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coaster831 said:   
Tangential question: if hypothetically, say 7-10 yrs out, the property became both cash-flow neutral, *and* the value recovered to the mortgage balance, would you sell or continue to rent with the hopes of providing income in retirement?

As long as the rent is covering your expenses and the interest on the mortgage - even if not covering the entire mortgage payment - you are coming out ahead by holding it. Once you gain some positive equity, then the question becomes if what you are gaining is a worthwhile return on that equity.
  

rated:
coaster831 said:   
 
  I would definitely like to get us out of mixing business with family, but right now, I don't think either side is seeing that $35K+X as worth it.  If things become acrimonious, maybe that price will seem cheap.  I appreciate the clearly laid out scenario, though.  Thanks.

  
Not sure I was able to explain properly!!

You don't own that $35K+$X - any more than you own AOR money from the CC Company. Treat it as a $70k loan your wife has co-signed with your in-laws. Financially there is zero difference!

Assuming you have the means - I would run as far as possible from such a co-signed loan!
 

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Glitch99 said:   
coaster831 said:   
Tangential question: if hypothetically, say 7-10 yrs out, the property became both cash-flow neutral, *and* the value recovered to the mortgage balance, would you sell or continue to rent with the hopes of providing income in retirement?

As long as the rent is covering your expenses and the interest on the mortgage - even if not covering the entire mortgage payment - you are coming out ahead by holding it. Once you gain some positive equity, then the question becomes if what you are gaining is a worthwhile return on that equity.
  

  Thanks, this is the mindset I've been in, and I suppose the true answer won't be knowable for quite some time.  But barring putting up the $ to transfer it to one party or the other to avoid any future discord, it sounds like just holding onto it and paying the extra every month is the way to go until the situation changes.

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puddonhead said:   
coaster831 said:   
 
  I would definitely like to get us out of mixing business with family, but right now, I don't think either side is seeing that $35K+X as worth it.  If things become acrimonious, maybe that price will seem cheap.  I appreciate the clearly laid out scenario, though.  Thanks.

  
Not sure I was able to explain properly!!

You don't own that $35K+$X - any more than you own AOR money from the CC Company. Treat it as a $70k loan your wife has co-signed with your in-laws. Financially there is zero difference!

Assuming you have the means - I would run as far as possible from such a co-signed loan!

  True, but similar to an AOR, I can invest that money over a very long time horizon -- $35K+X will make a lot of $350 monthly payments.  I definitely appreciate how sticky things can get with family, though.  I'll discuss this more with my wife.  Thanks again for the point of view.

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You pay $700 per month to have someone rent from you? wow... Any chance on doing a short sale? I know it's not 2010 and banks are about done with them. Maybe a ding on her and her sisters credit. $35k each... How much is good credit worth? Just keep things in your name till she rebuilds her credit?

How long do you let the arm bleed before you cut it off? It might take 10 year just to be even..

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letsspendlotsofmoney said:   You pay $700 per month to have someone rent from you? wow... Any chance on doing a short sale? I know it's not 2010 and banks are about done with them. Maybe a ding on her and her sisters credit. $35k each... How much is good credit worth? Just keep things in your name till she rebuilds her credit?

How long do you let the arm bleed before you cut it off? It might take 10 year just to be even..

  Of course, you need to assume that the mortgage balance is a debt that will be paid off in full one way or another.  So that $350/month isn't an expense, it's retiring a portion of that outstanding debt.

If there is an opportunity to negotiate the payoff amount of that debt, that changes the scenario drastically since it would realize an immediate positive return.

rated:
letsspendlotsofmoney said:   You pay $700 per month to have someone rent from you? wow... Any chance on doing a short sale? I know it's not 2010 and banks are about done with them. Maybe a ding on her and her sisters credit. $35k each... How much is good credit worth? Just keep things in your name till she rebuilds her credit?

How long do you let the arm bleed before you cut it off? It might take 10 year just to be even..

  As OP stated in an earlier post, the $700 is a monthly cash flow shortfall. OP does get equity built on the property (or wiping out part of the negative equity). They are breaking even when principal payment is considered.

rated:
fwuser12 said:   
letsspendlotsofmoney said:   You pay $700 per month to have someone rent from you? wow... Any chance on doing a short sale? I know it's not 2010 and banks are about done with them. Maybe a ding on her and her sisters credit. $35k each... How much is good credit worth? Just keep things in your name till she rebuilds her credit?

How long do you let the arm bleed before you cut it off? It might take 10 year just to be even..

  As OP stated in an earlier post, the $700 is a monthly cash flow shortfall. OP does get equity built on the property (or wiping out part of the negative equity). They are breaking even when principal payment is considered.

  They are already down $70k and throwing $700 month just to make the mortgage payment that is surely on the 30 year plan. At the rate their going it will be another 10-15 years before they could sell it for what they owe.. In the meantime just keep throwing $700 at the house hoping it appreciates... Think of it as a business, would you buy this condo today to rent out if you knew you had to come up with the $700 every month?  Probably not.. 

I know.. PYBDB... Might be time to see if they bank would help.. never know... 

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letsspendlotsofmoney said:     They are already down $70k and throwing $700 month just to make the mortgage payment that is surely on the 30 year plan. At the rate their going it will be another 10-15 years before they could sell it for what they owe.. In the meantime just keep throwing $700 at the house hoping it appreciates... Think of it as a business, would you buy this condo today to rent out if you knew you had to come up with the $700 every month?  Probably not.. 

I know.. PYBDB... Might be time to see if they bank would help.. never know... 

  They are down 70k. That is a given. But the $700/mo is only a cash flow issue; they get that as added equity on the house --- assuming no appreciation or depreciation.

Whether OP can and wants to sustain that the cash flow negative but still neutral (taking into account principal paydown) status quo is something OP needs to consider. But ignoring the $700 principal pay down is not the way to make a right decision.

rated:
fwuser12 said:   
letsspendlotsofmoney said:     They are already down $70k and throwing $700 month just to make the mortgage payment that is surely on the 30 year plan. At the rate their going it will be another 10-15 years before they could sell it for what they owe.. In the meantime just keep throwing $700 at the house hoping it appreciates... Think of it as a business, would you buy this condo today to rent out if you knew you had to come up with the $700 every month?  Probably not.. 

I know.. PYBDB... Might be time to see if they bank would help.. never know... 

  They are down 70k. That is a given. But the $700/mo is only a cash flow issue; they get that as added equity on the house --- assuming no appreciation or depreciation.

Whether OP can and wants to sustain that the cash flow negative but still neutral (taking into account principal paydown) status quo is something OP needs to consider. But ignoring the $700 principal pay down is not the way to make a right decision.

  I'm guessing the extra $700 is not going towards principal and more likely interest.. There's a very steep curve on a 30 year mortgage with mostly interest paid the first 20 years. Maybe a refi if they are paying above 3.5 percent might help them gain ground faster or have less out of pocket every month. 

rated:
letsspendlotsofmoney said:     I'm guessing the extra $700 is not going towards principal and more likely interest.. There's a very steep curve on a 30 year mortgage with mostly interest paid the first 20 years. Maybe a refi if they are paying above 3.5 percent might help them gain ground faster or have less out of pocket every month. 
  There is nothing to guess; OP says exactly this: " And yes, we are breaking even if you exclude the principal payment, so I'm kinda thinking about it as an interest-free loan on the property.." Based on OP's posts, he knows what he is talking about regarding the numbers.

In any case, $700 is not too far fetched. OP said: "The biggest issue is the property was bought at the absolute peak of the housing boom, so the mortgage amount was sizable". Presumably that was in 2007 (say Nov 2007). Assume 350k mortgage at 4.5% APR. 30 year amortization schedule says the principal portion of mortgage payment in Nov 2016 is $691.

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Are you familiar with deprecation recapture? You should figure out how much deprecation you've taken so far and sell it just before you have to pay the tax back. While you're taking the 700 loss in cash flow, you've taken the interest deduction and the deprecation on the property so without more numbers, it's possible that you're cash flow negative but tax positive on the property. Basically if you paid 300k for the property but it's only worth 230k, if you've taken 50k worth of deprecation so far and you sell it for 230k, you don't have any gains so you won't owe any recapture tax. The other thing you didn't mention was the interest rate and the balance on the loan, are you still underwater on the loan? If not, you should consider a refi to cut your losses, if you're just slightly underwater, it might make sense to come up with the small difference.

rated:
letsspendlotsofmoney said:   
fwuser12 said:   
letsspendlotsofmoney said:   You pay $700 per month to have someone rent from you? wow... Any chance on doing a short sale? I know it's not 2010 and banks are about done with them. Maybe a ding on her and her sisters credit. $35k each... How much is good credit worth? Just keep things in your name till she rebuilds her credit?

How long do you let the arm bleed before you cut it off? It might take 10 year just to be even..

  As OP stated in an earlier post, the $700 is a monthly cash flow shortfall. OP does get equity built on the property (or wiping out part of the negative equity). They are breaking even when principal payment is considered.

  They are already down $70k and throwing $700 month just to make the mortgage payment that is surely on the 30 year plan. At the rate their going it will be another 10-15 years before they could sell it for what they owe.. In the meantime just keep throwing $700 at the house hoping it appreciates... Think of it as a business, would you buy this condo today to rent out if you knew you had to come up with the $700 every month?  Probably not.. 

I know.. PYBDB... Might be time to see if they bank would help.. never know... 

  Right - think of it as a business.  You can't ask if you'd buy the house today knowing you had to come up with $700 every month, without mentioning the $70k penalty you'll have to come up with right now if you decide not to buy it.  

They can either eat a $70k loss now and walk away with nothing, or "keep throwing $700 at the house" and eventually get all that money back plus still own the house.  The potential for appreciation would just accelerate the payback period, it isn't required to eventually get ahead.  

 

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henry33 said:   Basically if you paid 300k for the property but it's only worth 230k, if you've taken 50k worth of deprecation so far and you sell it for 230k, you don't have any gains so you won't owe any recapture tax.
this is actually a really good point. recapture rules are funny - if you don't have a tax loss, you don't pay a dime in recapture. stated a different way - if a building (not land) used for investment purposes declines in value faster than 3.6%, you get to depreciate it while you own it, and then never pay back that depreciation. conversely, if there is a tax gain, you gotta repay what you took (@ max 25% rate)

depending on OP's situation, this may be worth tens of thousands of dollars.

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solarUS said:   
henry33 said:   Basically if you paid 300k for the property but it's only worth 230k, if you've taken 50k worth of deprecation so far and you sell it for 230k, you don't have any gains so you won't owe any recapture tax.
this is actually a really good point. recapture rules are funny - if you don't have a tax loss, you don't pay a dime in recapture. stated a different way - if a building (not land) used for investment purposes declines in value faster than 3.6%, you get to depreciate it while you own it, and then never pay back that depreciation. conversely, if there is a tax gain, you gotta repay what you took (@ max 25% rate)

depending on OP's situation, this may be worth tens of thousands of dollars.

  As a rental unit, our basis for tax purposes is the value at the time of conversion to a rental, which at that point was already $70K lower than when we bought it.  So, since it's been a rental, the value has not declined.  In that case, this would not apply, correct?

Either way, great point, and one of the reasons I wanted to post here is to generate ideas like this.  Thank you.

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fwuser12 said:   
letsspendlotsofmoney said:     I'm guessing the extra $700 is not going towards principal and more likely interest.. There's a very steep curve on a 30 year mortgage with mostly interest paid the first 20 years. Maybe a refi if they are paying above 3.5 percent might help them gain ground faster or have less out of pocket every month. 
  There is nothing to guess; OP says exactly this : " And yes, we are breaking even if you exclude the principal payment, so I'm kinda thinking about it as an interest-free loan on the property.." Based on OP's posts, he knows what he is talking about regarding the numbers.

In any case, $700 is not too far fetched. OP said : "The biggest issue is the property was bought at the absolute peak of the housing boom, so the mortgage amount was sizable". Presumably that was in 2007 (say Nov 2007). Assume 350k mortgage at 4.5% APR. 30 year amortization schedule says the principal portion of mortgage payment in Nov 2016 is $691.

  Yes, this is pretty much the exact scenario.  The mortgage is an ARM with a current interest rate of 3.5%, but everything else is pretty accurate.

Skipping 10 Messages...
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letsspendlotsofmoney said:   
fwuser12 said:   
letsspendlotsofmoney said:   You pay $700 per month to have someone rent from you? wow... Any chance on doing a short sale? I know it's not 2010 and banks are about done with them. Maybe a ding on her and her sisters credit. $35k each... How much is good credit worth? Just keep things in your name till she rebuilds her credit?

How long do you let the arm bleed before you cut it off? It might take 10 year just to be even..

  As OP stated in an earlier post, the $700 is a monthly cash flow shortfall. OP does get equity built on the property (or wiping out part of the negative equity). They are breaking even when principal payment is considered.
 

  How are they breaking even? "when principal is considered" ??
 

  $700 of the mortgage payment goes towards the principal owed on the loan. IOW, the 70k negative equity they have will come down by $700. It is moving money from his checking account to home equity. It is a cash flow issue but there is no net effect due to this $700. It will be recovered back when the house gets sold.

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