Investment property mortgage question

[NWRider]

Hi,
I am loaded in credit card debt- over 65k and am thinking of filing chapter 7 due to major decline in income
I have a primary residence and an investment property- both are not upside down but have little if any equity. I wish to keep both properties if possible and I have always been current on all payments.

My question is on the rental I have a 1 year lease and the rent payment exactly covers my mortgage. If I file chapter 7, can I keep this house and continue to use the rent payments to cover the mortgage? I've been told by someone if I file that they will notify the tenants and they will pay the court directly and the payments will go toward paying the debtors (I can't direct it to paying the mortgage). Of course this will lead to the mortgage not being paid and most likely resulting in a foreclosure.

Any ideas or advice? A chapter 13 is another idea but not sure if I'll have enough income to work out a plan...

[frogger]

Originally Posted by NWRider

Hi,

My question is on the rental I have a 1 year lease and the rent payment exactly covers my mortgage.

Then you're losing money.......

Get out of the property.

[NWRider]

well I plan on moving back there eventually- I put a lot of money and time (8 years) remodeling it and the value will come back. If it is breaking even, I don't see it as losing money. I would like to keep it but am hoping I will still be able to collect those rent payments toward paying the mortgage

[frogger]

Originally Posted by NWRider

If it is breaking even, I don't see it as losing money.

Taxes
Insurance
Maintenance
Repairs
Damages
Upgrade Reserves
Tenant Turnover

If you don't have at least a 30% cushion between the rent and the mortgage payment, you're losing money. AT LEAST 30%, should be more.

Been there, done that, got the t-shirt.......

[HHM]

I agree with Frogger, if you are at break even, you are losing money. You need to approach this from a business perspective, too many people got into this whole rental property deal and never really took the time to understand where the numbers need to be to make it work.

To get yourself to a 10% return on investment, your rent must exceed the hard costs (mortgage, taxes, HOA, and insurance) by about 35%. That allows you to develop a cash reserve for maintenance, repairs, damages, turnover and upgrades. Or another way to look it, in a 12 month time frame, you should be able to put away at least 3 months worth of rent. Thus, if you are renting a property for $1,000 per month, then you should have net profit (net after monthly costs) of $250 per month. Otherwise, you are losing money and don't even know it.

If the house is negative equity, then DUMP IT. The real estate market is not going up any time soon, with 10.2% unemployment and over 1.4MM homeowners with a mortgage that are unemployed, we have years of foreclosures still on the horizon and no one to buy houses). Get out now. Between your credit card debt and this rental, you are simply bleeding money, you can either do the smart thing, and get out now, or blow another $19,000 over the next year (that is what your minimum payments would equal over the next 12 months) and then you will probably be back here again wondering why you didn't get out at this point in time.

[justbroke]

I'm with HHM and frogger too. I got into the Rental Business. However, on my multi-unit building (a multi-use one at that), I had to get an actual commercial loan. This is where I learned what debt-service was all about. If you're debt ration is not at least 1.20:1 (meaning you're making 20% over the cost of maintaining and paying down encumbrances), then you shouldn't be in that business. I did get rid of the apartment building way before I filed.

But I did keep my single family rental unit. This one killed me. I was probably at a debt service ratio of 0.8:1 and that was just the death of me. If you're not making enough to cover all repairs, mortgage, taxes, and insurance... you're losing money. To top it off, too many people forget this other phenomenon in the rental market, empty units. Even if it's empty 2 months out of every 24 months, that affects the debt-service ratio.

I'm now out of the rental business. It never "made" me money. It was all speculative that it would pay for itself in 25-30 years, and I could retire with $8M in property at that time. (I did also co-owned a 100-room hotel that we were converting to apartments, but I gave up on that dream too.)