The unfortunate aspect of buying property is there is almost always a bubble. But, knowing when the bubble will burst is almost impossible. Anything you buy property you are taking a chance that it could burst and you ended up buying at the wrong time.
And when this happens, you find yourself underwater. In other words, you are paying more than your house is worth. In the case of a landlord, you are paying a big mortgage, losing value on your home and not collecting enough rent.
If this is the case, then you have to make some tough decisions. In this article, I will go over several things to keep in mind if you find yourself underwater.
You’ll have to ask yourself some questions to know what the right move is going to be.
Are you making any profit?
Take a look at your spreadsheets or your accounting software and try to gauge if you are making any profit at all.
Take all of your expenses and take 10% of your rental income and add the figures together. It’s important to set aside 10% of your rental income and use it as a reserve so that is why that should be added to your expenses.
Now, substract that number from your rental income. If you have a net positive then that is a good sign. Next, take a look at your mortgage. If that number is higher than your calculation you just did, then you have to make a tough decision.
If there is a profit then you may want to hold onto it and hope the market turns around soon.
Should you sell?
The most obvious answer is to sell the property. It isn’t an easy decision to make and there is a lot that goes into it.
For instance, the condition of the property is important. If it just needs some cosmetic fixes then you could probably sell it and pay off the mortgage as the value is there.
If you need to hire an electrician to get it up to code or there is some structural damage that needs to be fixed, then this makes it more expensive to get it ready to sell.
Lots of repairs means loss of out of pocket expenses. Will you add enough value to justify spending the money? Will you be able to recoup these expenses by getting a good price on the home?
When the answer to those questions is “No”, then selling it quickly is probably your best bet.
We Buy Ugly Houses pay cash and will take your house off of your hands quickly so you can get rid of your expenses instead of waiting for a lengthy sale. Hopefully, you’ll get good value for the house and can at least break even. It may be worth it to sell even at a loss if you have an empty rental that isn’t generating an income and have a lot of expenses.
Can you cover a negative cash flow?
There may be a case where you have multiple properties and you are only underwater on one of them. When this happens you have to ask yourself if it is worth it to use the income from your profitable properties to prop up your unprofitable one.
This is worth it when you feel like the real estate market is due to turn around and the value of the property will increase. Likewise, if the economy stays stalled, it may mean more renters and you can charge a higher rent depending on the rental market.
To evaluate this, you’ll need to do a good deal of research to understand what is actually happening in the real estate market both in terms of rental and sales. Check out what others are asking for rent and how many rental units are available. Then look into what types of property are selling and how long they have been on the market.
If there is a good rental market happening and your property, yet you aren’t getting good tenants, then try to find out how your property compares to others. It may be a case of the competition having a nicer or bigger property than yours.
Evaluate if it is worth it to put some money into the property to make it more attractive for better tenants that are willing to spend more money while you wait for the market to pick up.