1st & HELOC; + cash flow rental? - Posted by josep

Posted by josep on April 15, 2006 at 09:27:10:

Thanks for the great advice as always. I paid $167K for the property about 8 years ago so I’ll do ok if I sell. The tax advice is well taken and is a definate consideration. The neg amortization is probably a no go since I don’t see the great appreciation in that area anymore.

As I go from owning 1 property to owning 2, I thought it would be worth exploring whether I can keep both. I thought maybe some creative financing could apply here.

I’m going to go with an aggressive price drop on my VA property until I sell. I’m going to drop it $15K this week; then 10K every month thereafter.

1st & HELOC; + cash flow rental? - Posted by josep

Posted by josep on April 14, 2006 at 22:24:29:

I am not a Real estate investor and have been lurking in on these boards with the idea of getting in bigger into RE investing. I have recently had to move cross country from DC to CA and left my home in the VA suburbs.

I’m trying to sell my VA house but with a backup plan to make it a rental. However, I’m looking at a serious negative cashflow situation. The house hasn’t sold after a month so I need to think about renting it down the line.

Here’s my situation:
I owe $150K on my VA house which translates into $1500/mo mortgage payment (w/all local taxes included) 6.5% 30YR fixed w/about 22 years remaining.
I just took a $150K HELOC on this house @ 6.5% = $900 month payment.
Comps have been going for about $500K
Comparable market rentals have been around $1700-1800/mo
My FICO scores range from 650-690.

Everyone in VA say market is “softening” which to me means that houses sit on the market for months on end. Also a lot of inventory on MLS.

Any creative refinancing suggestions to make this a workable option if I go the rental route? I know there’s a lot of creative financing types here so thanks for any suggestions in advance.

Re: 1st & HELOC; + cash flow rental? - Posted by John Corey

Posted by John Corey on April 15, 2006 at 08:43:55:

You have been on the market 1 month. Hence there is little to learn so far. Unless you are seriously underpricing the market having no sale after 30 days would be ‘normal’ in traditional (non bubble) markets.

Why even keep the place? What are you expecting to happen in the future? If you are considering a negative cash flow situation you are implying that you think you will make it up in the future.

Why not drop the price to something below the market and complete a sale. I did not see any comments about what you purchased the place for. It might have been worth $500K in the past but that does not make it worth that now if the market has gone down. Even if it is worth $500K in theory, having it sold at $475K might be better than feeding it every month as a rental.

If you hold a negative cash flow rental you are speculating on the future value. Such speculation can get expensive and you get a reminder every month. You can never tell exactly what a property is worth until you sell. On the other side you have a painful reminder of the negative cash flow is rather mentally draining.

Not all properties make good rentals. Not all owners will make good landlord and investors (more so when the property is a long distance away). Think carefully about what the future could look like (the best and the worst scenarios) and then decide if holding is a good plan. One crude way to reduce the negative cash flow is to pay down the mortgage. Brian has suggested a second idea. There are lease/option deals and other ways to boost the cash flow. There are limits to what a renter will pay extra each month. If you enter a L/O deal (or similar) you are also capping your upside so run the numbers.

Note Brian’s comments about the 1 off tax benefit if you sell and report a profit.

John Corey

Re: 1st & HELOC; + cash flow rental? - Posted by Brian n CA

Posted by Brian n CA on April 15, 2006 at 02:38:50:

Well the question is do you want to be a long distant landlord or not. Also do you want to give away the 250k per spouse tax free money. If you decide to just sell dont let it sit price it to sell and take your profits…
IF you decide to rent and need positive cash flow you can always use the NEG AM Loan. I wouldnt typically suggest this in a soft market though. In a rising market it can be great for cash flow. In CA many investors have had to use this loan just to make up for the difference in rising home prices without the same rise in rents.
Good Luck and Welcome to CA
Dove Capital