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General: Real Estate, Everyone has an opinion... Should I keep my rentals?

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  1.  
    • CommentAuthordmanson
    • CommentTimeJan 12th 2009
     Report Post# 1
    I am once again appealing to the almighty Gumshoe Think-Tank for advice. You listen to some people and they expect the US real estate market to pick up in 2010 or 2011 at the very latest. Now, pick up probably doesn't mean get back to the levels they were, but prices will have bottomed and the prices will be based on supply and demand.

    I currently own two rental homes in Santa Cruz within walking distance to the beach. One is quite close, the other a few blocks away. Typically, this would be a no-brainer to keep because a lot of people like this town and a lot more like to live near the beach.

    According to today's real estate prices, I'm upside down on both of them. BUT, I had planned on keeping them to retirement, another 30 years. These aren't homes in the middle of Nebraska, they will always be desirable. I'm willing to take some heat and although being a landlord is a pain, I still (perhaps vainly) believe they will be a solid investment long term. Should I be willing to pay mortgages for more than the houses are worth in order to have an asset like this in the long run? Had I known the crash was coming, I never would have bought them so hindsight is 20/20 but I'm here now. I can renegotiate the loans and try to get my seconds reduced in order to help now.

    Any ideas? Are all of you guys strictly stock junkies or do you invest in real estate as well? I appreciate anyone's opinions on this and understand I'm giving you a very general picture.

    Thanks in advance!
    dmanson (Cereal Killer - Trix is on the hitlist)
    • CommentAuthorDarrell
    • CommentTimeJan 12th 2009
     Report Post# 2
    Banks ,I've talked to refuse to refiance rental property for those of us who they believe ;they trust to protect our credit. Most bankers want to sell me more property that they have on their books. Small community banks in good positions are making deals, but they are trying to help home owners, not Rental owners, unless you have large accounts with them. The refi... market is just tough right now for multiple home owners. Have you thought about a short sell? I talked with a builder in California about buying a home he'd built and wanted to see if he had any deals. He offered me a beach house free, if I'd buy the one I was looking at in Oct.
    • CommentAuthorkrishna
    • CommentTimeJan 12th 2009
     Report Post# 3
    wow! buy one, get one free????
    • CommentAuthordmanson
    • CommentTimeJan 12th 2009
     Report Post# 4
    Wow, no kidding! I'm considering loan modification where they try to lower the principal and fix the interest rate low. But I'm just wondering if it's worth keeping. I know that it's not worth keeping for 5-10 years, but if I'd keep it much longer (20-30 years), what do you think? Or is the residential Real Estate market so thoroughly decimated that no one will make money in it for 20 years? I can't believe that...
    • CommentAuthortuck
    • CommentTimeJan 12th 2009
     Report Post# 5
    You should follow a strategy that will have positive results in a max 6yr time frame.
    • CommentAuthorDarrell
    • CommentTimeJan 12th 2009
     Report Post# 6
    I agree with tuck. Hell, I'm looking at adding some. A friend just bought a $1,000,000 horse farm at a tax auction in Georgia for $40,000.00, because the owners had sold a part ownership for $200.000 to the football player, Micheal Vick; and when he didn't come through with the "Property Tax money" cause of jail; they lost everything to the "TAX MAN". My friend only buys at these auctions right now and says he's stealing these properties.
    • CommentAuthortuck
    • CommentTimeJan 13th 2009
     Report Post# 7
    Let me clarify a point. dmanson the word "retirement" has no literal significance from your point of view as an observer. It has significance to a bureaucrat, or actuary, or census takers observing you. If you are generating surplus wealth for "retirement" you are doing the right thing for the wrong reason. The reasons for "retirement" wealth have general corollaries that are relevant and superior.
    • CommentAuthortomcat
    • CommentTimeMar 9th 2009
     Report Post# 8
    Just now reading this post. I've been a real estate investor in N. CA since 1973. The ultimate name of the game is CASH FLOW. I don't think we'll see a bottom in prices until 2011...maybe later. Prices don't really mean much until you want to sell. If your cash flow is okay (not a big negative) and there are ways that you can increase it (loan modification, fix ups to be able to raise rents or adding a unit???) you have plenty of time to wait. The real estate market will recover...sometime. Unless you're in a terrible cash flow problem...I'd hang in there...you've already taken the BIG hit and should have sold much earlier. And...they're not creating any new beach front property...unless maybe it is a high density condo development on your land.
    • CommentAuthordmanson
    • CommentTimeMar 9th 2009
     Report Post# 9
    Tomcat,

    Thanks for the advice. I'm negative a bit on each one but I'm also in ARMs that will be adjusting this year on one and next year on the other. I spoke to a loan mod person who told me that the lawyer she works for could do the loan mod but I'd have to short sell a house, which I wasn't really wanting to do, but would be willing to do it if I was able to get really nice mods to the other 2 homes. What is your experience with loan mods? Also, do you think this is the right time to get a loan mod or should I wait for the prices to go down more? The interest rates are low but are going to come up here soon and I'd hate to have waited too long.

    Thanks
    • CommentAuthortomcat
    • CommentTimeMar 9th 2009
     Report Post# 10
    dmanson,

    I'm assuming that your loan balance(s) exceed the value(s) of your home(s). Correct? I'm a real estate investor and mortgage broker but we don't do any loan mods. Be very careful here...there are some sharks swimming around. I really cannot give you any specific advice without knowing more specifics like loan balances, interest rates, payment amounts and how much negative you have now and how much your payments will rise when the loans reset. You can probably figure this out yourself and calculate what your negative cash flow will be after the resets.

    I expect that property values will continue to drop this year and next. It will vary by area and your specific location. Eventually...maybe a few years...the market may stabilize and values will begin to increase. But, this could take quite a while. Depending on the severity of the recession/depression...rents in your area may drop which will increase your negative cash flow. If the negative is considerable each month just the continuing loss may offset any future gains in your property values. Since all real estate is very local you may want to consult a couple of top producing real estate agents who work in your immediate area. Agents working with foreclosures and short sales would be best. They can probably give you the pros/cons of holding or selling.

    Most investment properties are valued based on cash flow and return on investment. Apartment complexes, office buildings, retail centers, etc. all produce some cash flow and this usually determines their value. The more cash flow...the greater the value. Houses used as rentals are not really valued on cash flow...but on comparative sales. You could have a free and clear house with excellent cash flow...but the value would be based on comparative sales...not the cash flow. So, the local market will dictate your sales price(s) and your cash flow +/- will dictate whether you keep the houses or sell. I've seen investors who chose to keep their properties in bad markets (declining prices and rents) and they eventually were forced to sell at even lower prices (distress sale) because they could not take the negative cash flow anymore. They lost in two ways. If it looks like your negative cash flow will increase and be a burden you may be better off cutting your losses now before they grow larger. A good local agent can probably help you with this decision. Good luck!
    Thankful People: dmanson
    • CommentAuthordmanson
    • CommentTimeJun 9th 2009
     Report Post# 11
    Hey Guys,

    I thought I'd bring this one up again as some time has passed. I don't know if many of you have contacts in the real estate financing field or have much knowledge here but it doesn't hurt to ask, does it?

    Long story short... I have a home and two rentals and am upside-down on all of them and all of them are ARMs, adjusting soon. I make decent money, so when I went to a loan modification lawyer, he told me that no lender would modify the loan without seeing hardship and that I'm still making my payments. I guess working my arse off to keep up with my obligations and keep income rolling in despite a bad economy is penalizing me. (This isn't a political rant category so I will bite my tongue here)

    Anyway, if I could get these things at fixed rates, I think I'd be willing to keep them for the long run, even if my loan is more than the homes are presently worth because I'm looking 10-20 years down the road. But right now, I can't refi. Some people have said to just stop making the payments and force the lenders to work with you. Besides trashing my credit, I don't like that idea at all just based on the idea that it's deceptive. However, I have no love for what is being done to me as a taxpayer and have no love for banks and/or lenders so if something was really workable I might consider it although I would much prefer to have a conversation with someone and work something out. The problem is, these lenders employ telemarketer-types who just read from a script and you get nowhere.

    I might sell one and keep the other or whatever works. Obviously, I want to keep my primary home and that's probably the easiest to hang on to anyway. I just wanted to see if anyone had knowledge/experience or a contact who you really trust to work with someone in a situation like mine. I'm getting close to the ARMs resetting so I'm looking to do something ASAP. I might even be interested in getting with a private money lender. I have other collateral that my lenders don't know about and could be trusted to make payments.

    Thanks guys and gals.

    P.S. If you want to tell me: "What the hell are you doing?? Sell ASAP you idiot!", that's fine too. I'm looking for any advice in light of recent events.
  14.  Report Post# 12
    I have no experience with real estate (other than my own home). Personally, I'm thinking of (trying to sell) selling my home and renting a house, perhaps with a long term option to buy. Here's why.

    Remember the days of double digit fixed mortgage rates (think Jimmy Carter)? I think that going forward, credit is going to be much tighter and much more difficult to obtain than it was in the past. When it will happen and how long it will last is anyone's guess. But the days of easy, cheap credit for real estate are in the rear view mirror.

    What will happen when interest rates go up significantly? It will make it much more difficult for average middle class people (with a heavier tax burden) to afford a home........unless........prices fall pretty significantly. So I'm suggesting that real estate values will (continue to) fall as interest rates rise. Seems inevitable; and with an adjustable rate mortgage, you're doubly screwed. Your mortgage payment goes up and the value of your home goes down.....and you know the saying.......screw me once, shame on you.......screw me twice.......
    • CommentAuthorDarrell
    • CommentTimeJun 9th 2009
     Report Post# 13
    I locked in low fixed rate loans and then found good renters who loved the places and did a private owner financing deal in a rent to own contract. If they fail to pay, it's mine again. It's a gamble and I've only had 1 walk away and that was because of family problems and loss of income.
  16.  Report Post# 14
    • CommentAuthorkrishna
    • CommentTimeJun 9th 2009
     Report Post# 15
    dmanson
    whether you keep your properties, or not is a call for another time - if I read your note right, your ARM is resetting now, probably in too short a timeframe to actually sell the property

    instead of calling a loan mod lawyer - why dont you call the bank (entity?) that is holding your resetting mortgage 7 explain the "situation" to them - that you have been a good, regular payin guy, who hates to create problems. That the reset will really cause a hardship, and may cause you to default (if you are indeed upside on the property - then the loan officer (hopefully, you have reached a superior/officer after multiple phone calls) has every incentive to keep you in the home). Explain that you want a fixed loan (can be modestly higher than prevailing fixed rates), can he work with you - if not he has a problem, not you. This way, it all gets done a phonecall (I'm sure more than a casual phonecall, but you get the drift)- no messing with credit history etc.

    You will have a decision to make, if the loan officer turns you down (dare - double dare!). If you indeed have 2 properites that are in need of resetting, and you do indeed default, then multiple banks go after your assets, there is time delays, uncertainties, etc, etc. If you play all these cards, maybe one of the loan officers will fold & give you what you want

    Good luck
    • CommentAuthordestry
    • CommentTimeJun 9th 2009
     Report Post# 16
    I don't think I'd risk a default...We're in the undiscovered country here (I'm a terrible plagarist...
    I've been trying to fit "Undiscovered Country" into a coversation for years....I know...It's some pitiful).
    Let the ARMS reset, and put the rentals on the market, if the mortgage rate is unacceptable...
    Which it could be. Your ARM was based upon a reset formula...A new mortgage rate could be cheaper, depending on the maturity, and your ability to qualify for a new mortgage....
    A default will beggar you, one way or another....3 resets have a good shot at doing it also, depending the multiplying factor they adjust to. Get out from under as much debt as you can, while you can. Banks are going to raise rates as fast as they can...And inflation is on the horizon.
    Figure how much you net on the rentals...Consider the risk you are running, and look around.
    You might be able to match the net income annually in an MLP, or something. Bankers are not going to be your friend...And, as if you hadn't guessed by now; A disturbing number really don't know all that much about money.
    • CommentAuthordmanson
    • CommentTimeJun 9th 2009
     Report Post# 17
    Thanks for the feedback guys. I think one is actually worth keeping while the other I think it makes sense to let go of. Now, if I decide to short-sell one, can the lender come after me for the difference? And if he can, will he? Or would he just write it off and get a check from Uncle Sam?
  20.  Report Post# 18
    .....evidence that rising long term rates will squash residential real estate values. As affordability is impacted by higher rates, values will have to be adjusted downward to facilitate a viable market. Thus, even lower home values are coming.

    http://news.yahoo.com/s/nm/20090610/bs_nm/us_usa_economy_mortgages

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