I just finished reading a Mint.com blog post about whether or not you should walk away from your home. It was especially interesting to me because I made the decision almost a year and a half ago to walk away from all three of my rental properties when I saw what was happening to the market. If you're not familiar with my situation, you can read my comment on the post, or below, for a quick overview.
I purchased my first rental property at the age of 21. Everyone said I would make a killing and was really smart for investing so young. I wish I had done more research and seen that we were approaching an inevitable bubble. I bought my first property (a 2-family) for $190k in 2003. Within a year it was valued at double that.
After refinancing and putting money into the first property, I bought two more properties the following two years. I had 12 tenants total (being a landlord is no easy task!). The mortgage lenders were pushing ARM’s like crazy… and they made sense to an investor like me. I needed the lowest monthly payment so I could take the little income left from the rent to put back into the properties. Plus, I could always just refinance my 2-year fixed / 28 year adjustable mortgage before the 2 years-fixed were up (refinance to a conventional 30-year fixed)… right?
Well, taxes went way up. I had a few tenants that cost me over $15k in lost rent (damn tenant-rights laws!), unexpected property damage from frozen water pipes, a couple more bad tenants, and while all this was happening the value of my house secretly dropped below the amount I owed… oh sh*t.
Then I get a letter in the mail saying my monthly mortgage payments are going to increase by more than $600 a month… but wait, I’m already dishing out over $200 a month from my pocket to pay for the properties (assuming all the units are fully rented)! I can’t refinance because the value of the property is less than what I owe. I can bust my ass for the next 5-10 years trying to keep up with the payments or I can let everything fall down, file for bankruptcy, and move on.
I’m filing. And I’m damn glad. $450k multi-family properties are now for sale at $140k… less than I bought my first property in 2003. For me it’s easy because they were investment properties, not houses my family lived in (I’m single). I’m renting now and saving as much money as I can, because when things start to turn around I want to be ready, not buried under a million dollars in debt.