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:
- Pay the $15,000 up front (funding from whatever source you happen to have available).
- 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.
- 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:
- It would leave us with $15,000 in our HELOC. More safety net is better than less safety net.
- 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.
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