What to do with a rental property when you owe more than it's worth

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Q. I bought a home in Fort McMurray, Alta., for $413,000 in 2007. Five years later, in 2012, I moved out and started renting the property, and it has remained an income property since then. With the decline in oil prices, the town of Fort McMurray has seen real estate losing value like crazy. After 12 years of paying the mortgage, I am now underwater. The rent I’m currently able to charge does not cover all of my expenses; in 2018, I received $15,000 in rental income and had $19,000 in expenses, excluding payments on the mortgage principal. I owe $282,000 on the mortgage, at 3.4% fixed interest; it comes up for renewal in 2024. If I were to sell, the estimated price as of Nov 16, 2019, is $150,000 to $180,000. (Yes, I know it is bad!) As you can see, I’m in a black hole and I don’t know what to do about it. I am not receiving any positive income and the property value has dropped each year that I’ve held it. I want to sell, but don’t have enough savings to cover the gap between the expected sale price and what I owe on the mortgage. –Renee A. We have all heard the expression “location, location, location” when it comes to real estate. Renee, I recommend you speak to one or more people that have local knowledge and experience of the real estate industry and economy of Fort McMurray. Once you have collected and reflected on everyone’s best educated guesses, including your own, you have to make a decision. Do you stay or do you go? If you decide you want to keep your income property, then you will have to look for ways to minimize your losses until it becomes profitable. Is there any way to improve your cash flow? Here are some things to consider:

Reducing your expenses

Renegotiating your mortgage and extending the amortization so that your regular mortgage payments are smaller and easier to handle.
Review your property expenses as, at $19,000 per year, they seem high. Are there any expenses you could eliminate?
Claim the Capital Cost Allowance (CCA) on the building. This is a tax deduction against your rental income. However, you need to get to a place where your income is greater than your expenses, as you cannot use the CCA to increase a net loss, only to offset your income.
Making your property more energy efficient may significantly lower your utilities bills.

Increasing your income

Raise the rent you currently charge.
Create another rental unit in the same property.

If you conclude that you do want to sell, as you have indicated, you need to talk to your mortgage lender. They will have access to your total financial situation, and they should be able to give you good recommendations on how not to let this property sink your long-term finances. I suspect they have dealt with real estate situations like this in the past. On a somewhat positive note, when you do sell you might have a capital loss of $250,000 or more, which you can carry forward indefinitely and use to offset any capital gains you may have in the future. How can you use this loss to your advantage? What investments might you make that would generate capital gains? Would you want to purchase another income property, or do you have other income properties? I feel for you, Renee; this was a good plan gone wrong, through no fault of your own, and I hope this is just a little hiccup in your longer-term plans. Allan Norman is a Certified Financial Planner with Atlantis Financial Inc. and can be reached at www.atlantisfinancial.ca or [email protected]. This commentary is provided as a general source of information and is intended for Canadian residents only. Allan offers financial planning and insurance services through Atlantis Financial Inc.

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Mike says:

April 22, 2020 at 3:46 pm

Hopefully this will force over leveraged folks to liquidate or go bankrupt.

No sympathy here for people who bid up property prices with 5% down and a 10x plus or using their current mortgaged first home as collateral.

It’s actually great for people who used this crazy market to save and wait for these suckers to get washed out.

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Anand Lobo says:

April 22, 2020 at 6:51 pm

Hi
Renee is only looking at the income from the rent. Shouldn’t mortgage pay down also be considered as well as tax deductions on eligible expenses (I.e interest insurance utilities???)

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Luc says:

April 27, 2020 at 11:51 am

the price of oil has collapsed, but it is not going to remain this low. Selling now would probably be selling at the bottom.

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Dawn Walker says:

April 27, 2020 at 1:06 pm

Something not mentioned is the mortgage penalty, which would likely be quite high in this case because the mortgage has fixed interest. The Interest Rate Differential formula used to calculate a penalty for a fixed rate mortgage is confusing while the calculation for a variable rate mortgage is simply three months interest. This isn’t usually explained to borrowers when they’re looking for a mortgage. Fixed interest mortgages are popular but stats have revealed that variable rate mortgages typically save borrowers money over the long term. If the mortgage is a convertible mortgage perhaps it makes sense to convert it to a variable rate mortgage to reduce mortgage payments given that variable rates are currently lower than fixed and aren’t expected to rise anytime soon. Also recommend finding a mortgage broker that focuses on real estate investors.

Hopefully this investor can find a way to reduce expenses and increase income until the market turns around.

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Sandie says:

April 27, 2020 at 7:42 pm

There is “Rent to Own” option.

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Donna says:

May 10, 2020 at 9:25 am

Hello. She would actually have a terminal loss on the building and a capital loss on the land. The building was used to earn rental income therefore a depreciable property. A terminal loss is deductible against all income.

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Gary says:

May 19, 2020 at 1:25 pm

Duplex the house and get two tenants in there

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