Real Estate – My Unintentional Rental Property

I currently own a beautiful, three-story, three-bedroom, three and a half bath townhouse in a different state (not pictured). I rent this house out for $1,375 per month and have been renting the house for four years at the end of this coming summer.

For Rent - Unintential Rental Real EstateHowever fantastic as all that sounds, the house is unfortunately not investment grade rental property; purchased during December of 2007, at the peak of the housing bubble, the house lost approximately 30% of its value during the initial crash. As the economy and jobs outlook have increased, the house has been regaining value, but is still about 15% below the original purchase price.

The house was purchased as a primary residence with only five, yes FIVE, percent down which coupled with the bubble popping, lead to a severely underwater house. The purchase of the property was originally a joint purchase, however, since then I have moved to a different state, and am also the sole party with any financial responsibilities towards the house. This already poor situation has proven difficult to improve while waiting for the value to rebound, and dealing the ‘investment property’ classification by the banks. Between those two things, I have been unable to refinance the house in order to improve the monthly cash flow situation.

The Numbers

Excluding the summer of 2012, where I didn’t have tenants for almost two months, I have been fairly fortunate thus far with my vacancies and on time payments. With the distance, roughly three and a half hour drive to the house, I have engaged a property management company to assist with the leasing, managing of tenants, and contracting of labor to fix maintenance issues that don’t justify a trip down.

Here is a quick summary of a typical month’s financials for this house. Spoiler alert: Not a pretty picture.

Monthly Rent Income
Less: Management Fees
Net Rental Income
Mortgage (P&I)
Escrow (Taxes, Insurance, and PMI)
Homeowner's Association
Repairs/Maintenance Allowance
Total Expenses
Net Income (Deficit)

Sell this mess

Yikes! Like I said, not a pretty picture! My unofficial goal for 2013 is to try to sell this real estate disaster. Representing my largest financial mistake, I am hoping that the continued low-interest rates and the economic rebound will be enough to increase to value to a point where I can sell the house. Ideally I will be able to do this with as little cash as possible on my end; however, I am willing to put some money in to close the deal, as  I’d much rather have $700 dollars in additional free cash flow!

So there it is, my biggest financial mistake; what has been your biggest financial mistake? Have you had any real estate disasters?

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  1. What’s your thoughts on real estate going forward?

    I often think I’ll continue to rent for the time being. Once one is financially independent, then you are naturally geographically independent as well. Owning a home could potentially negate some of those benefits, even if you rent it out.

    I’m convinced renting is cheaper over the long run. Even if it weren’t cheaper, the flexibility and liquidity would be worth the premium.

    Prof. Shiller actually blasted real estate recently, stating that most people are better off renting and investing the difference (something I’m doing):

    Best wishes!

    • writing2reality says:

      Personally, I think it depends on quite a few things, but can be broken down into couple of main areas of thought. This first is life priorities, which relates to family/kids, and thus real estate. Generally speaking, if one is to plan on “settling down” and having children, I think the stability of a home can be immensely rewarding in a manner that cannot be shown on the personal income statement. While the actual purchase of the home should be subject to some guidelines, the purchase of the house isn’t made solely on the grounds of an investment gain. Now, if that isn’t the goal, due to anything (ex. geographic freedom), AND someone has the discipline to invest the difference, then renting for your primary place of residence can be a rewarding financial decision.

      Now, the second is investing in real estate. I am a full supporter of this type of investment. While obviously the house I currently rent is not an example of this, I did not purchase this house with any sort of investment mentality. As a result, it fails every single method of deciding on a rental property. However, purchasing a rental property that will cash flow, and provide an solid cash on cash return (12% plus) is an outstanding investment. This doesn’t account any appreciation or debt pay down, which would further your return on investment.

      Shiller, for the most part is speaking of the first scenario above. Too many people went into home ownership assuming their primary residence would appreciate and make them money. This is entirely the wrong mentality to have. Purchase a home that is LESS than you can afford, with a minimum of 20% down, and with the intangible benefits as your reason to buy. If you want investment properties, that is an entirely different conversation, and an entirely different set of calculations. Personally, I am bullish on the second scenario of real estate investing, and open on the first, which is an independent and not necessarily purely financial decision.

      Hope that answers your question, and thank you, because it has fostered a great post idea!

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