Fight or Flight? Hold or Fold? Hang on or Sell?
In the heady years when real estate properties appreciated in highly accelerated rates, sometimes in double-digits, people were enticed to join the band wagon and buy real estate. The hope was that real estate will continue to appreciate; and in terms of residential income properties, for the landlords to see positive cash flow.
However, those dreams faded...heck, they burst when the economy tanked and real estate values fell into an abyss. Many investors are now grappling with what is right for them, as well as what is the right thing to do.
Borrowing includes promise to pay
When investors borrow money, whether from banks or from private individuals, they promise to repay that loan. It isn’t just a business decision but it’s also a moral dilemma. What do you think? Vote here.
But when expenses soar, and incomes flatten, what should investors do?
Unlike stocks, real estate property is brick and mortar. And unlike stocks, rental properties still generate some income. And if the properties result in losses, according to Smart Money and the article titled “So you want to be a landlord?” there are some things one can write off:
“...deduct mortgage interest and real estate taxes on rental properties. If you pay mortgage points, you must amortize them over the term of the loan (unlike points on a mortgage to purchase a principal residence, which can be deducted immediately). You can also write off all other operating expenses -- like utilities, insurance, homeowner association fees, repairs and maintenance, yard care and so forth.”
What if the pain become unbearable?
However, there comes a point when the pain of ownership may be too much to bear, as in the increasing cost of repairs with no relief from increased rents. If the decision is made to cut one’s losses, then it becomes a choice of walking away/strategic default or short sale.
Ramifications
It isn’t just about the effect on one’s credit scores or the tax consequences. But one should factor what happens next.
- After a short sale, investors will receive 1099s showing that the difference of what is still owed on the property and what it sells for is taxable income. Since this is not a principal residence, it will not qualify for Mortgage Debt Forgiveness Act
- Of major concern: will the investor be slammed with a deficiency judgment after a foreclosure or short sale?
Walk away/strategic default or short sale? Choose wisely.
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