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The Roof, the Roof, the Roof is on Fire!

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We don't need no water... well you know how the rest of it goes, right?

I got news a few weeks ago that the first property I bought, a condo, has major design flaws. You'd think this would have been uncovered in the first 40 years of its existence, but it wasn't.

Every owner has to pony up an estimated $15,000 for the project. One of the reasons I love condos is that the cost of snow removal, roof repair, repainting, etc. is all wrapped in the HOA fees... except that it clearly isn't. It's a good thing that the average American keeps tens of thousands of dollars in an emergency account to deal with these things... except they don't. Most Americans can't afford a $1,000 emergency expense.

(Please excuse the sarcasm. It's a little therapeutic for me given the news)

The condo association put together a few different payment plans. Each owner can:

  1. Pay the $15,000 up front (funding from whatever source you happen to have available).
  2. Use a credit line they were able secure at a 4.7% fixed rate over 15 years. In this case we'd pay an estimated $130 per month.
  3. A couple of different combinations of 1 and 2 where we'd pay half the money up front and reduce the monthly payments.

I think this presents an interesting financial situation/challenge.

The association points out that if you get your own home equity line of credit, you might be able to deduct the interest of the loan. However, if you take their credit line you wouldn't be able to. Of course, since it is an investment property, I wouldn't be able to deduct the interest anyway...

... or could I? If I got a home equity line of credit on my current home and paid the $15,000 to the association, I'd be able to deduct the interest on that line of credit. It could be a good plan, but I tapped our home equity for our solar panel purchase.

We were working on paying that down with this year's tax refund and hoping to make another huge dent with the solar tax credits next year. We'd clear up around $15,000 just to put it back on with this roof project. We'd get a lower rate at least at first. Our HELOC is an adjustable 3%, and it looks like the Fed is looking to raise rates. At least it would be tax deductible, right?

Mathematically, this is the best option. But, sometimes there are other things to consider.

When I look at the option of using their credit line, I find that it has a couple of non-mathematical advantages:

  1. It would leave us with $15,000 in our HELOC. More safety net is better than less safety net.
  2. If we sell the condo, the new buyer pays off the loan. This might be wash in the sales process, but it will still feel better to make someone else pay for the bad roof.

Some may ask, why not just tap our emergency fund? Our emergency fund has been hit to the tune of $35,000 this year. I know! That's crazy stuff, right? I'd say that 75% didn't come from "emergencies", but from maintenance of our investment properties (expensive stuff like windows, HVAC systems, and kitchens). The other 25% were legitimate unexpected emergencies.

The lesson here is that it isn't cheap or easy to be a landlord. Our gains on the properties are paper equity. Since they were bought between 2003 and 2004 are valued at significantly less than what we paid for them. (They were never intended to be investment properties, it was just making the best of a bad situation.)

I'm heavily leaning towards using the associations line of credit and preserving ours in case we have another year like this one.

Posted on August 31, 2015.

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9 Responses to “The Roof, the Roof, the Roof is on Fire!”

  1. Money Beagle says:

    Back when I lived in a condo, we had a special assessment because of the roof. In our case it was that the shingles failed much sooner than they had anticipated, and so while part of the fees collected were to cover eventual replacement, they needed to do a special assessment to cover the difference. In our case, we were able to spread the special assessment over an eighteen month period, which was pretty nice. Of course it wasn’t anywhere near $15,000 either….I think it was around $1,500-$2,000 if memory serves.

    • Lazy Man says:

      We had something on a similar level with the excessive snow and cost to remove it this year… it is just on a small scale (under $1000 and spread over a few months) that I didn’t mention it.

  2. I totally get wanting to protect your emergency fund at all, if you’ll pardon the pun, costs. Especially after a barrage of unexpected expenses like the ones you described.

    If it makes you feel better, take the credit line. You can make larger payments to avoid too much interest and still have peace of mind.

  3. Ben says:

    “The association points out that if you get your own home equity line of credit, you might be able to deduct the interest of the loan. However, if you take their credit line you wouldn’t be able to. Of course, since it is an investment property, I wouldn’t be able to deduct the interest anyway…”

    Why isn’t the interest deductible on Schedule E? Based on the info here, it sounds like it might be deductible as Other Interest?

    I would need to know more to be sure, but you might want to discuss this with your tax advisor.

    This is meant only for guidance purposes and not as professional legal or tax advice – just need to throw in that little disclaimer.

    • Lazy Man says:

      Thanks Ben. That’s a question for my tax person. Obviously all this information is run through my tax advisor. If it can be, I’ll just let it be a nice surprise.

  4. What do you suggest for a townhouse owner with an association that provided him with a $1,000 bill that’s due in 3 months and the house is $26,000 underwater with a second mortgage, he owes $42,000 in other unsecured and undocumented debt, and he has $150 left after paying his bills and expenses each month? Thank you in advance.

    • Lazy Man says:

      I don’t think there’s anything a homeowner can do except pay the $1,000 bill or get a loan for it. This sounds like someone who needs to cut expenses and probably grow their income. It’s hard to say which would be easier without being able to audit the person’s financials.

      • Thank you for the response, Lazy Man. I know that he can’t get out of paying it. ;) He cannot do either of your suggestions, so he will go further into debt until he decides to leave his house. My question was whether he’d be able to obtain a HELOC since his house is underwater and has a second mortgage? He will also need a new furnace any day.

        • Lazy Man says:

          It’s impossible for him to make any more money? I’m always impressed when people sell products on Etsy or Uber drive in their spare time.

          Sometimes treading water helps with an underwater house. I had a condo that was 75K underwater and now it’s got 50K of equity. It took close to 10 years, a lot of paying down the mortgage and a good recovery.

          I don’t think anyone would give him a HELOC with an underwater house. In my experience, they are used to tap home equity… hence the “HE” in “HELOC.” With zero home equity that’s just a “LOC” ;-).

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