Getting out from under rental home isn't easy
Q. A couple of years ago, I purchased an investment property in Sacramento, Calif. For a period of time all went well. But in 2006 I was without a tenant for the first half of the year. Making the mortgage payments ate through all of my cash reserves. Currently I have tenants, but the income does not quite cover the expenses. As I look at the property, I see that my cash flow is negative and the value is static at best. If a tenant were to move, not pay the rent or if I lost my job, I would be in financial trouble almost instantly.
I don't know what to do. I can't sell the property (even if there is a buyer out there) for what I owe on it (after closing expenses), and I don't have the money to bring to closing if I lose money. I would love to just walk away. I know that would destroy my credit rating, but I am desperate enough to do that because it is likely to be destroyed as soon as there is any problem (so why continue to spend money just to keep an unsatisfactory status quo?).
Is it possible to sign ownership over to the lenders? Would that free me from the problem, or would I still be responsible for whatever shortage results from their sale of the property? Are there any other options I should know about or consider?
I am getting desperate. Any advice or information you can give would be appreciated. -- D.T., Cedar Hill, Texas
A. You're in a very tough position, akin to the people I described as "condo slaves" during the worst of the late '80s Texas real estate bust. Back then condo owners couldn't refinance their high-interest mortgages because they were upside down. And they couldn't sell their properties except at a loss. Worse, speculative buyers would buy comparable condos at foreclosure and then rent them at lower rates because their costs were lower.
The condo owners, however, had one advantage you don't have: They could at least live in their overly expensive condos.
If you give up the investment property, you will still have a liability. When the lender sells the property, it may sell it for less than the amount of the mortgage. In that case you will get a form 1099 indicating "income" in the form of loan forgiveness. You may not be liable for the deficiency itself, but you will at least be liable for income taxes on the loan loss.
I have two suggestions. First, start learning to live with little or no credit today. You'll be amazed at how easy it is and how good it feels when you don't have to pay interest. Remember, no one was ever hurt by paying cash for a car, and you can always have a credit card backed by a cash deposit. Second, visit with a good real estate attorney, preferably one experienced in loan workouts.
Q. One of my IRAs earned 18 percent this year. That is $4,300 in earnings on the $23,940 that you suggest I should draw from the IRA to replace Social Security income that I should delay so as to get an additional $1,675 a year in benefits. Explain to me again why delaying benefits is such a good deal! -- R.S., by e-mail
A. The argument for delaying Social Security benefits is based on relative risk and return. It is not based on your return in a single year because the benefit change is long-term. Remember, that increase in benefits is not for a single year -- it is every year for the rest of your life.
To buy an inflation-adjusted life annuity that would provide the same additional income each and every year would cost about $36,000. In effect, if you delay taking $24,000 of SS benefits, you are "investing" it in high future benefits. So giving up $24,000 of benefits gives you a guaranteed lifetime benefit increase worth $36,000 -- a 50 percent increase on your money, guaranteed and certain.
I think that compares favorably with having a one-time 18 percent increase in that portion of your IRA account.
© 2007, Universal Press Syndicate