Help! I've got five mortgages and drowning in debt. What should I do?!

Background

 

The Johnson family, residing in Bowmanville, consists of David, an entrepreneur, his wife Lisa, a school teacher, and their three children. The Johnsons owned their first home for eight years before deciding to leap into what they believed would be a real estate investment opportunity.

 

The Problem

 

Their real estate agent, recently licensed and inexperienced, persuaded them to purchase a second home as an investment. The agent painted a rosy picture of the property's potential for significant value and rental income appreciation. Encouraged by this, the Johnsons decided to take out a second private loan mortgage using a Home Equity Line of Credit and buy the property.

 

Just six months later, an attractive third property came to their attention. Their real estate agent, once again, advised them to seize the opportunity. Seduced by the potential return on investment and trusting in their agent's enthusiasm, the Johnsons stretched their finances. They took out private financing from Easy Financial to purchase their home, as the bank refused to lend them any money. 

 

Unfortunately, the rosy picture soon turned bleak. The rental income from the two investment properties needed to be more consistent and sufficient to cover the mortgages. Two of the three renters were inconsistent with their payments. The third renter left before the lease was over, as the Johnsons could not afford maintenance costs. Additionally, David lost his job and was unemployed for three months. 

 

Consequences

 

The Johnsons found themselves in significant debt with five mortgages and an unstable income. The stress of managing three properties and their financial struggle put immense strain on the family. Their dream of creating a profitable real estate portfolio became a financial nightmare.

 

The Approach

 

Recognizing their predicament, the Johnsons decided to take several actions:

 

- **Seek Professional Financial Advice:** In distress, Lisa spoke to their neighbor about their financial issues. Their neighbor gave her a card to her mortgage broker from Perch, with whom the couple later spoke to discuss their options. 

 

- **Reevaluate Property Management:** They hired a property management company to ensure better rental consistency between the two properties.

The Outcome

 

Their financial advisor referred them to a new real estate agent from the Michelle Fraser Team. Together, they went over the Johnsons' options and concluded that selling one of the properties would be their best option for reducing their debt burden. After crunching the numbers and considering various factors, they sold the third property. Although they had to sell at a loss, it allowed them to clear that mortgage and reduce their monthly financial obligations.

 

With the property management company, they were able to stabilize the rental income from their second property through the implementation of a rent collection system that aggressively implements late fees to ensure on-time payment. The consistent rental income and decreased expenses allowed them to manage their debts more comfortably. 

 

Lessons Learned

 

The Johnsons' story is a cautionary tale about the risks of over-leveraging and the importance of experienced guidance when making significant financial decisions. They learned that real estate investment is not a guaranteed profit-maker and requires careful planning, substantial knowledge, and a comprehensive understanding of the market.

 

It also underscores the value of seeking high-quality professional advice like that from Perch and the Michelle Fraser Team before making significant financial decisions. Today, the Johnsons are more cautious and informed when making financial decisions, and they advise others to do the same.