Real estate woes...
October 5, 2008 6:40 PM Subscribe
Over my head with the real estate market downturn....any advice?
I am a female single, young, 30 something who owns two rental properties. Both are duplexes, and I live in one of the 4 units. I bought one about 8 1/2 years ago and the other about 2 1/2 years ago. My first property appreciated nicely and I use the equity from that one to put down on the next one...at the time this seemed like the way to go. After buying the second, however, the market quickly slide and I was left with a property that was barely worth what I paid for it. Between the taxes, up-keep and maintenance, I can barely handle them both as I also work full time as a teacher. Neither of the properties are netting much in cash flow and likewise, I pour a lot of my own funds into the homes each month as well to make up the difference.
Recently, I received an opportunity to go to an out of state school for an advanced degree and likewise, I will need to move by the end of the school year...(6 months or so). I am currently considering putting both homes on the market, hoping that one will sell before that time, but as all already know, the market it sloooooow. I am simply overwhelmed and do not know the most logical steps of action in this instance...IF I don't sell one or both in that time, I would have to pay a management company to help me as I could not handle both from a long distance. Yet, holding onto them for any great length will be difficult due to the neg cash flow. Both are only worth about 10% more than the balance on them and that would get eaten up by real estate commissions so I do not have a lot of breathing room...HELP? Ideas, suggestions...???
Recently, I received an opportunity to go to an out of state school for an advanced degree and likewise, I will need to move by the end of the school year...(6 months or so). I am currently considering putting both homes on the market, hoping that one will sell before that time, but as all already know, the market it sloooooow. I am simply overwhelmed and do not know the most logical steps of action in this instance...IF I don't sell one or both in that time, I would have to pay a management company to help me as I could not handle both from a long distance. Yet, holding onto them for any great length will be difficult due to the neg cash flow. Both are only worth about 10% more than the balance on them and that would get eaten up by real estate commissions so I do not have a lot of breathing room...HELP? Ideas, suggestions...???
Since you would be renting all 4 units would this increase in rent income cover the maintenance cost? If so, it might be beneficial for you to pack up now and find a friend or relative to move in with now so you can have the available unit rented and settled by the time you make the real move.
I reason I suggest this is because I am sort of in the same position. If some crucial plans fall through, Im going to have to move out of my side of my duplex, rent it out, and move in with a friend to lower my expense of a mortgage to that of a less expensive (READ:smaller, crappy, and not the greatest location) rental.
If that is not the case then take heed of Rafaelloello's advice. Good luck either way.
posted by MiggySawdust at 7:44 PM on October 5, 2008
I reason I suggest this is because I am sort of in the same position. If some crucial plans fall through, Im going to have to move out of my side of my duplex, rent it out, and move in with a friend to lower my expense of a mortgage to that of a less expensive (READ:smaller, crappy, and not the greatest location) rental.
If that is not the case then take heed of Rafaelloello's advice. Good luck either way.
posted by MiggySawdust at 7:44 PM on October 5, 2008
Rafaelloello, you say "sell one of the properties immediately" and "Sell one property as quick as you can." That sure is easier said than done, in the present market.
I'm more with Miggy about renting all four and holding them until the market rebounds. If you can break even or tread water for a couple or few years, it is more likely your property will re-valuate.
posted by netbros at 8:41 PM on October 5, 2008
I'm more with Miggy about renting all four and holding them until the market rebounds. If you can break even or tread water for a couple or few years, it is more likely your property will re-valuate.
posted by netbros at 8:41 PM on October 5, 2008
Could you keep your head above water if you had someone handy to move into the place you're currently living, to manage and help maintain the properties in exchange for a lowered rent? It might mean scrimping on a place in the city you're moving to for school, but it might work out well in the long run.
posted by padraigin at 9:01 PM on October 5, 2008
posted by padraigin at 9:01 PM on October 5, 2008
Rafaelloello, you say "sell one of the properties immediately" and "Sell one property as quick as you can." That sure is easier said than done, in the present market.
In real estate, any property *will* sell immediately if the price is right. I won't hide the fact that I'm an absolute bear right now in equity and RE markets. Credit markets are already in the crapper.
posted by Rafaelloello at 10:09 PM on October 5, 2008
In real estate, any property *will* sell immediately if the price is right. I won't hide the fact that I'm an absolute bear right now in equity and RE markets. Credit markets are already in the crapper.
posted by Rafaelloello at 10:09 PM on October 5, 2008
I'm certainly no one to listen to regarding real estate. I don't own any. I'm still going to give my advice, for what it's worth. I would sell both. Right now is not the time to have debt. Especially when you're not sure of your own income in the future. Rental property is great, but there is no guarantee that someone will always be renting from you. Even if you have to take a loss, it's better than owing a shitload and having it foreclosed on.
Really, though, you need to talk to a financial planner who has experience during tough times. Interview any real estate agent or financial planner or what not. You might not find someone who has been around for something like what we're looking at now, but you should be able to find someone who has a pretty good idea about what to do.
I know this is like saying see a lawyer or a doctor or whatever when you're not asking for that, but really, you need to talk to someone who has experience and whom you've checked out and you are pretty confident you can trust what they are telling you. Advice on the internet is great and all, but you're talking about a substantial sum of money.
posted by robtf3 at 10:30 PM on October 5, 2008
Really, though, you need to talk to a financial planner who has experience during tough times. Interview any real estate agent or financial planner or what not. You might not find someone who has been around for something like what we're looking at now, but you should be able to find someone who has a pretty good idea about what to do.
I know this is like saying see a lawyer or a doctor or whatever when you're not asking for that, but really, you need to talk to someone who has experience and whom you've checked out and you are pretty confident you can trust what they are telling you. Advice on the internet is great and all, but you're talking about a substantial sum of money.
posted by robtf3 at 10:30 PM on October 5, 2008
The decline in the value of the properties is only relevant if you want to sell them. The more pressing issue seems to be that the rental income is not covering the rental outgoings. If you can address that issue, then simply sitting on the properties long enough will mean the value bounces back. Do you have a spreadsheet for each of the properties showing the rental income vs. monthly maintenance and the annual taxes proportionally divided between them and allocated monthly?
Traditionally, real estate has been a long term investment, and the appreciation of your 8.5 year property demonstrates this. However, if selling the newer property will get you enough to pay off the mortgage and you simply want to have less property to manage, than talking to a broker about what the market looks like would be a good first step. If the price you can sell for won't cover what you owe, than the whole exercise will be moot.
posted by DarlingBri at 10:38 PM on October 5, 2008
Traditionally, real estate has been a long term investment, and the appreciation of your 8.5 year property demonstrates this. However, if selling the newer property will get you enough to pay off the mortgage and you simply want to have less property to manage, than talking to a broker about what the market looks like would be a good first step. If the price you can sell for won't cover what you owe, than the whole exercise will be moot.
posted by DarlingBri at 10:38 PM on October 5, 2008
I don't understand the question. Are you asking "is it worth hanging onto these? (it's going to be really hard)" or "I know I have to sell; how do I do that in a declining market?" Or something else?
My random two cents: I don't think you need to hire a management company just for two duplexes if you're willing to come out a couple times a year.
posted by salvia at 10:44 PM on October 5, 2008
My random two cents: I don't think you need to hire a management company just for two duplexes if you're willing to come out a couple times a year.
posted by salvia at 10:44 PM on October 5, 2008
Are you sure the rents are at (or even, possibly, on the high-ish side) of the market? Do you raise the rents every year? Do you raise them *enough*? Keep in mind that housing prices going down does not necessarily equate to rental rates going down--quite often they have something of an *inverse* relationship. (If housing prices are going up, lots of people will buy houses as "investments", then rent them out--driving rental prices down. Conversely when the bubble collapses many people are out of their own home and that means renting instead and that demand puts and upward pressure on rent. Of course a lot of other factors come into play but the point is, you can't just assume housing prices down means rental rates will go down as well.)
I know a couple of guys who ended up with a bunch of rental property just before the Great Real Estate Mess of the 80s and what they did is get the rents to the place where the properties were break-even or at least pretty darn close to it, and then rode it through.
They came out pretty well on the other end of it. Not saying that will work for you or that the Great Real Estate Mess of the 00s will end up the same.
But the trick is to get cash flow to break even. If you can get them to that point you can hold on if you like, whereas if you can't you're probably best getting out sooner rather than later.
What if you raised the rents X% this year & X% again next year--would those rents that get you at a break-even cash flow situation in two steps be *wildly* out of line for your current (or 2-years-hence) market? Or just mildly out of line? Or right *in* line? And what if you stay vs move out at these higher rental rates? That's the sort of thing you might be playing around with to see if you can get the things to look more on a break-even cash flow. Obviously, consider *all* expenses, including maintenance, not just the mortgage payment.
And if it does indeed look actually impossible to get the situation to break-even cash flow, then that tells you something right there . . . you can make money in the long term with real estate if the real estate pays for itself in the short term. But if it doesn't, waiting around for the long term is really really hard!
posted by flug at 11:11 PM on October 5, 2008
I know a couple of guys who ended up with a bunch of rental property just before the Great Real Estate Mess of the 80s and what they did is get the rents to the place where the properties were break-even or at least pretty darn close to it, and then rode it through.
They came out pretty well on the other end of it. Not saying that will work for you or that the Great Real Estate Mess of the 00s will end up the same.
But the trick is to get cash flow to break even. If you can get them to that point you can hold on if you like, whereas if you can't you're probably best getting out sooner rather than later.
What if you raised the rents X% this year & X% again next year--would those rents that get you at a break-even cash flow situation in two steps be *wildly* out of line for your current (or 2-years-hence) market? Or just mildly out of line? Or right *in* line? And what if you stay vs move out at these higher rental rates? That's the sort of thing you might be playing around with to see if you can get the things to look more on a break-even cash flow. Obviously, consider *all* expenses, including maintenance, not just the mortgage payment.
And if it does indeed look actually impossible to get the situation to break-even cash flow, then that tells you something right there . . . you can make money in the long term with real estate if the real estate pays for itself in the short term. But if it doesn't, waiting around for the long term is really really hard!
posted by flug at 11:11 PM on October 5, 2008
How far is long distance? You're going to be in school, so you'd have time to manage the properties if the distance is something like 4 hours or less. If it's more, you're going to be pushing it, because it becomes more and more difficult to come back for a weekend.
posted by zhivota at 7:19 AM on October 6, 2008
posted by zhivota at 7:19 AM on October 6, 2008
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posted by Rafaelloello at 6:50 PM on October 5, 2008 [2 favorites]