Home>Discussions>YOUR HOME>Home & Real Estate>When do you spend money to improve a home with an underwater mortgage?
6 posts / 0 new
Last post
When do you spend money to improve a home with an underwater mortgage?

Very simply I bought an old home to rehab. This is not a flip, my family and I reside there. Recently, I finished the first of three stages in the rehab and had the home re-appraised. I found that the home depreciated 100K below the purchase price. This means that, additionaly, I also lost the ~40k worth of improvements I invested. So, I have a net loss of 140k in equity. Furthermore, as a result of the depreciation, I am underwater on the mortgage by about 80K.

So, here is my dilemma: Do I continue to spend money improving a house that has a mortgage that is underwater? What are the general rule(s) of thumb or things that I should consider?

More specifically, I am smack in the middle of converting a 2flat to a single family home. Average value of a 2-flat in the area is 420K according to apprasial report the average value of single family homes is 600K. I am in no-man's-land on my rehab. These are my options:

(1) Finish as planned and get to a single family home within the next 5 years. (Without available financing not sure how I'll get to this, but not impossible)

(2) Alter the plan and create a very nice duplex unit, but keep the building a 2-flat (not sure if this would increase the value based on the appraisal?!??!? but it would be MUCH less expensive than option 1).

(3) Stop spending money on home improvements because we are underwater on the mortgage already and use all spare money to pay down the un-refinancable 2nd mortgage. Or save the money.

Looking for advice.

A. Spruce
Re: When do you spend money to improve a home with an underwater mortgage?

First, it is unclear what your plans are with this home. You say it's not a "flip", but the questions imply that this is neither a primary residence nor a permanent residence. If it will remain your primary residence for at least the next five years, then you may recoup your current investments. If you plan to keep the home more than 10 years, then further rehab may be in order, depending on the magnitude and necessity. If this is to be a permanent residence, then no amount of money spent to make it what you want and need it to be will be ill spent.

Barring interference with the market, the real estate market follows roughly a 10 year cycle. It will slowly swing up to the top of the market, hold the peak for about a year or two, then the bottom will drop out and the property will be worth about what you bought it for a decade ago. This last cycle remained artificially bloated for several years - I bailed in '02 - the market continued for another astonishing 4 years until we find ourselves where we are today with unprecedented foreclosures and other problems. But I digress.

If this is to be your primary residence for less than the next 10 years, then you only want the home to be comfortable and habitable. If you're going to hold onto the home for longer, then more personal creature comforts are in order, keeping in mind that the real estate market will rebound eventually. If this is to be a permanent home that you will never sell, then don't worry about what improvements you make because they will never directly benefit you as far as resale goes, but they will make this your dream home for as long as you live.

Your perspective on value must coincide with your plans for the home. Remodels and upgrades should be commensurate with those plans.

Re: When do you spend money to improve a home with an underwater mortgage?

At this point I would keep it as a duplex. A lot of people are loosing their homes or walking away from mortgages. This increases the renter pool and generally drives up rent. As a rental a lot of the exterior and some interior upgrades will be tax deductible, you will have some income on the property to help offset the cost. As the housing market improves you can convert later.

Re: When do you spend money to improve a home with an underwater mortgage?

I agree keep your house as a duplex. Sure you can convert a duplex into a nice single family home but to do so is fairly expensive. As someone has also stated this will help during tax time as you can deduct the cost of your renovations on your taxes if you plan to use the other part of your house as a rental.
We have been renting my grandmothers house for many years since her death and have had our ups and downs but at least it helps to pay the bills.
Just keep a few things in mind though hire a good lawyer and have a strong lease written up for a potential tenant before you even have a tenant. A lease from an office supply store just will not do as it doesn't offer enough protection. A tip though to help you save money with the lawyer,if you know of a realtor or even a friend who is renting ask them for their copy of a professionally written lease and then just copy it into a word processor by typing it in. Changing the things in it as you go along so it applies to your property. Then go see the lawyer.
A lawyer can advise you on whether you need to make a declaration about lead on your premises and what things you can do to protect yourself against liability.
Once you have your lease ask your lawyer if he or she knows of a good credit reporting agency that can check your potential tenant out. If you don't check them out and there are problems it can be real bad, I know because I have already been down that road and don't want a repeat of it in court.
As for improvements on the tenant side I don't think you really need to do much except make sure that part of the house is water tight and is up to code with the plumbing and electrical and then maybe some new cabinets in the kitchen or even good used ones that some charitable organization is selling and some paint and you are good to go.
Also a good bit of patience and tolerance is needed when renting as sometimes tenants don't have all of the rent immediately. If they don't and say your rent is $1200.00 then make sure they give you at least $300.00 and if they can't then try to work with them because even the best of tenants have hard times too. If you get good tenants then they may turn out to be your best friends as ours have. Good luck to you whatever you decide to do!:)

When do you spend money to improve a home with an underwater mortgage?

This really helped me out. Thank You.

Sponsored Stories

TV Listings

Find TV listings for This Old House and Ask This Old House in your area.