Author Topic: Should my dad sell an investment property in the Bay Area?  (Read 743 times)

jeromedawg

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Should my dad sell an investment property in the Bay Area?
« on: February 13, 2018, 11:28:40 PM »
Hey guys,

So my parents own a couple investment properties in the Bay Area. One of them is a small 1bd/1br bottom-unit condo in Alameda built in 1969 I believe. He probably paid $40-45k or less for it and it would likely sell for somewhere between $500-525k so he thinks. I did get some numbers of the expenses and income and he's probably netting around $8k per year on it (I'm pretty sure this could be higher but he and my mom decided to give low rent to their tenant... there's also rent control in Alameda - I don't think Costa Hawkins applies since the building is from '69 and CH Act applies to residences built in/after '95, but someone can correct me). HOA dues, insurance and property taxes are all going up and he's "getting tired of paying for everything and collecting rent" - AFAIK there are no issues with the tenant, probably because he's giving him super-discounted rent. EDIT: I don't know if he correctly factored in the insurance costs as an expense but it's possible with insurance he may be netting only $7k, that's if we assume he's paying $1k per year on landlord insurance.

He was recently talking about gifting my brothers and I the property but we wouldn't want to absorb the cap gains on that, which is probably going to be at least $100k and more. So I kept telling him just keep it as-is and let it pass on through inheritance or via CA Common Property so we or the surviving spouse gets the stepped-up basis.

So now he wants to flat-out sell the condo and wipe his hands of it, even if it means throwing $100k+ out of the window. He said he would take the remaining funds from the sale and invest in CA Tax Free Funds... :T

I think he's just being lazy and selfish and wanting to not "be a landlord" tired of being a landlord (though, I'm not sure how much work he actually has to do to 'maintain' the place) as well as wanting to reduce his taxes/expenses so he's not "paying" for this property [even though I'm pretty sure he's cash flowing positive on it]. But perhaps he's not cash flowing enough (after what it ends up being once they're taxed on income taxes) to make it seem like it's worth it?

Is there any reason why he *should* sell the place? To me it seems like he'd be forfeiting a lot of money in cap gains. Why not just hold the property and cashflow on it till one of them passes, then sell for the stepped-up basis...  am I missing something here?
« Last Edit: February 14, 2018, 12:43:49 AM by jeromedawg »
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Goldielocks

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Re: Should my dad sell an investment property in the Bay Area?
« Reply #1 on: February 13, 2018, 11:58:00 PM »
Ask two questions

1)  What does he want to use the money for?   As good as the apartment may seem to be, perhaps he has a better (to him) use of the money.   Right now he is saying that
--$7k in income a year is not worth the hassle of being a landlord
--not worth having his money tied up.  Maybe he has another use for the money.?
-- Market is high right now so real property returns over next 15 yrs may be lower than another investment, even including stepped up basis (if it still exists in future).
-- perhaps leaving more money behind for others is not very important to him.  Maybe he thinks that he already has his family taken care of, so the stepped up basis doesn't matter because he won;t see the money after he is dead.
--maybe estate tax or probate fees law / exemptions will change and reduce the benefit of stepped up basis.   


2)  Find out if he can hire a property management company (or hire you) to do the management / landlord bits.   You do it all, pay all the bills, take your 5% cut of gross rents, and hand him the remaining profits.
« Last Edit: February 14, 2018, 12:04:09 AM by Goldielocks »

jeromedawg

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Re: Should my dad sell an investment property in the Bay Area?
« Reply #2 on: February 14, 2018, 12:06:50 AM »
Ask two questions

1)  What does he want to use the money for?   As good as the apartment may seem to be, perhaps he has a better (to him) use of the money.   Right now he is saying that
--$7k in income a year is not worth the hassle of being a landlord
--not worth having his money tied up.  Maybe he has another use for the money.?
-- Market is high right now so real property returns over next 15 yrs may be lower than another investment, even including stepped up basis (if it still exists in future).
-- perhaps leaving more money behind for others is not very important to him.  Maybe he thinks that he already has his family taken care of, so the stepped up basis doesn't matter because he won;t see the money after he is dead.
--maybe estate tax or probate fees law / exemptions will change and reduce the benefit of stepped up basis.   


2)  Find out if he can hire a property management company (or hire you) to do the management / landlord bits.   You do it all, pay all the bills, take your 5% cut of gross rents, and hand him the remaining profits.


So his response regarding the money is to put the net from the sale into CA Tax Free Funds and into their trust for our inheritance. I'm not sure where he got that idea other than one of my brothers telling him to sell and get rid of it. He probably does think that whatever's in the trust will be "more than enough" in terms of inheritance. We don't ask about specifics, and he doesn't tell. But it is a bit hard when he tells us his intentions of what they want to do with the property, and somehow passively asking for our input, all without disclosing to us their plans with the inheritance. I'm sure much of it is to guard us from possible contention...

I'd be willing to pay all the bills on that place - not sure how the rent collection works though. I'm pretty sure they're old school and collect CASH LOL!!! *facepalm*
« Last Edit: February 14, 2018, 12:09:45 AM by jeromedawg »
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MoseyingAlong

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Re: Should my dad sell an investment property in the Bay Area?
« Reply #3 on: February 14, 2018, 12:19:54 AM »
Dude, please go back and read your OP as if a newbie stranger wrote it.

This guy's dad offered to give him $250k and this guy doesn't want to pay
$50k of taxes so he called his dad 'lazy and selfish' for not wanting to continue managing a property to save those taxes.
Meanwhile his dad has been managing this property for almost 50 years and doesn't want to anymore.

So is there a reason he "should" sell?
Hell, yes, he's tired and wants to enjoy his retirement.

If you want to help your bottom line, not his, figure out how to make his life easier. Offer to manage the property. Or accept the gift gratefully and hold it until you die so your heirs get the stepped up basis.

jeromedawg

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Re: Should my dad sell an investment property in the Bay Area?
« Reply #4 on: February 14, 2018, 12:33:27 AM »
Dude, please go back and read your OP as if a newbie stranger wrote it.

This guy's dad offered to give him $250k and this guy doesn't want to pay
$50k of taxes so he called his dad 'lazy and selfish' for not wanting to continue managing a property to save those taxes.
Meanwhile his dad has been managing this property for almost 50 years and doesn't want to anymore.

So is there a reason he "should" sell?
Hell, yes, he's tired and wants to enjoy his retirement.

If you want to help your bottom line, not his, figure out how to make his life easier. Offer to manage the property. Or accept the gift gratefully and hold it until you die so your heirs get the stepped up basis.

Okay alright, "lazy and selfish" was uncalled for - maybe the current tenant has been giving him more problems lately, and now his desire to get rid of it has gone up. I'll find out what "management" has entailed as of late. Last time we checked though (which was maybe a couple months ago), the tenant was fine and it didn't sound like he's having to go over there every weekend to fix a broken toilet, faucet, microwave, stove, door, etc...

Other advice I've gotten on prior similar/related questions has generally been for my parents just to hold their properties and let them go to the spouse after one passes or to inheritance for the purpose of getting the stepped-up basis. And for the very reason that cap gains taxes and depreciation recapture can be killer. Who likes seeing $100k+ being thrown out the window when there are ways to prevent that?
« Last Edit: February 14, 2018, 12:44:42 AM by jeromedawg »
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Re: Should my dad sell an investment property in the Bay Area?
« Reply #5 on: February 14, 2018, 02:59:45 AM »
My view is that it is a bad idea to let the taxman make your life decisions.  Including what property you own or where you live.  Your dad has the absolute right to sell this property, or even gift it to you and your brothers, as he thinks is best for him without regard to the tax implications.  If he wants to give it to you and you don't want to deal with the tax issue you can refuse the gift and let your brothers have it between you: would you feel better if that happened?

Goldielocks has the right answer: please go back and read it again.  Then talk to your dad: make sure that he has the information he needs to make the decision that is right for him and make it clear that you will support whatever he wants to do.

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Feivel2000

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Re: Should my dad sell an investment property in the Bay Area?
« Reply #6 on: February 14, 2018, 03:16:08 AM »
Even if he has to pay 100k taxes on his 500k asset, with 7k net return we are looking at 7/400 = 1.75% RoI.

Would you advise him to take 400k out of the stock market to invest it in real estate yielding 1.75%? Probably not, even though it's the same.

The building is old, who knows what future investments are necessary to maintain it.

Or does he have terminal cancer and the tax savings will happen in the next 6 months?


Villanelle

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Re: Should my dad sell an investment property in the Bay Area?
« Reply #7 on: February 14, 2018, 04:26:43 AM »
Both my sister and I purchased properties from our parents in CA.

There is an exemption that allows you to keep the property taxes at their rate when purchased from family.  I bought a $300k property and continued to pay property taxes based on the $79k my grandmother was paying (dad took it as his part of the inheritance, then sold it to me). 

Just adding that in case it is relevant.  (Both our properties were going to be owner-occupied at the time of purchase.  No idea of that matters.)

Villanelle

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Re: Should my dad sell an investment property in the Bay Area?
« Reply #8 on: February 14, 2018, 04:33:41 AM »
Above post said, it sounds like he has sufficient money.  If that's the case, then it seems like you are trying to push the real estate version of OMY.  He has enough, but you think he need to keep the property so he (and then you) can have more?  Why?  Even if he only spends three hours a month, it's three hours he doesn't need to be selling in order to fund his lifestyle.

Would you tell him to keep going to a desk job three hours a month, when he doesn't need the money?  Just so you can inherit more?

jeromedawg

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Re: Should my dad sell an investment property in the Bay Area?
« Reply #9 on: February 14, 2018, 09:35:05 AM »
Above post said, it sounds like he has sufficient money.  If that's the case, then it seems like you are trying to push the real estate version of OMY.  He has enough, but you think he need to keep the property so he (and then you) can have more?  Why?  Even if he only spends three hours a month, it's three hours he doesn't need to be selling in order to fund his lifestyle.

Would you tell him to keep going to a desk job three hours a month, when he doesn't need the money?  Just so you can inherit more?

Good point with the desk job analogy.

Thanks all for the insight and perspectives. The whole cap gains thing got me all worked up from prior discussions... either way, it is still a gain. Of course, if there is a way to avoid this taxation my dad is always open to considering. I'm assuming the only reason why he's emailing us (and then asking for our thoughts) is because he actually wants our input for making a decision that would mutually benefit all parties with the least tax implications possible. Obviously, this is a decision that he could unilaterally make that would benefit everyone, but I think he too has been stuck on the idea of how best to avoid taxes.

Ultimately, it does comes down to what is "worth it" or "at what cost" more so for him. He started talking about he and my mom potentially downsizing and 'temporarily' moving into the condo for at least 2 years then turning around and selling. And suggested that while they are living there, we move up [at least temporarily as well] into their current place. I'm not sure we would want for this to happen. 

All things said, what would you guys generally advise as far as the "gifting" is concerned if he were to either sell or gift - better for him to outright sell and throw that money into the trust in a tax free fund? Or best to gift (or sell) to us or one of us directly for the purpose of income streams?

Or, if I was looking at building a RE portfolio for extra income anyway, would this be a situation where I should consider buying the property off them directly? Especially if my brothers aren't interested in owning rental property?

EDIT: One of my brothers offered to help with paying bills/taxes/insurance if that's all my dad has issues with. I suspect it's more than that but I've asked to clarify as to what his intentions are with wanting to sell.
« Last Edit: February 14, 2018, 10:38:49 AM by jeromedawg »
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jeromedawg

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Re: Should my dad sell an investment property in the Bay Area?
« Reply #10 on: February 14, 2018, 10:45:50 AM »
So this is the response as to why he wants to get rid of it:

"don't want to deal with increasing HOA Mgmt Fees, additional liability Insurance, Prop taxes  NONE of which will be useful for tax deductions as ours cap at $26.5K and NO SALT.

CASH FLOW will be declining and not worth hassle.

Not really managing anything, just one more thing I don't want to deal with and adds to taxable income."

In contrast to a property they own a couple doors down, which they only pay fire insurance and property taxes on (I'm assuming there are other expenses but no HOA or other fees)

He doesn't want to reinvest the money in something that has a higher return or anything else. All this is strictly around "management" of the place even though he admits he's not "managing" anything.
« Last Edit: February 14, 2018, 11:01:58 AM by jeromedawg »
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MoseyingAlong

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Re: Should my dad sell an investment property in the Bay Area?
« Reply #11 on: February 14, 2018, 10:57:04 AM »
I agree with the above poster who said don't let the tax tail wag the dog.

Is this a good rental property?

Based on your latest post, I suggest asking to see the books yourself. Your dad's statement that deductions won't help because 'NO SALT'indicates a misunderstanding about how rental expenses are treated for tax purposes.

So I suggest analyzing the property as if it was a new purchase, consider whether you or a sibling want to take over the work and then decide. If your dad is willing to give you the property or money now, it doesn't really matter what he would invest the proceeds in since you'll be investing according to your IPS.

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Re: Should my dad sell an investment property in the Bay Area?
« Reply #12 on: February 14, 2018, 11:02:56 AM »
Even if he has to pay 100k taxes on his 500k asset, with 7k net return we are looking at 7/400 = 1.75% RoI.

Would you advise him to take 400k out of the stock market to invest it in real estate yielding 1.75%? Probably not, even though it's the same.

The building is old, who knows what future investments are necessary to maintain it.

Or does he have terminal cancer and the tax savings will happen in the next 6 months?

This.

He will probably pay closer to 150k in taxes. (20% capital gains, 9.3% state income tax)  an easy 300k in liquid investments needs to produce 2.6% returns to match his current.  So yeah actually the CA bonds still make sense.

In general in CA it very often seems you don't want to be a landlord for the income stream, you want to for the capital appreciation. He's past that point in life.

Have you ever participated in the operation of a condo complex? been on a condo board? looked at the complex books to understand if they have appropriate reserves?

jeromedawg

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Re: Should my dad sell an investment property in the Bay Area?
« Reply #13 on: February 14, 2018, 11:24:21 AM »
I agree with the above poster who said don't let the tax tail wag the dog.

Is this a good rental property?

Based on your latest post, I suggest asking to see the books yourself. Your dad's statement that deductions won't help because 'NO SALT'indicates a misunderstanding about how rental expenses are treated for tax purposes.

So I suggest analyzing the property as if it was a new purchase, consider whether you or a sibling want to take over the work and then decide. If your dad is willing to give you the property or money now, it doesn't really matter what he would invest the proceeds in since you'll be investing according to your IPS.

Last time we got any sort of details was November of last year... at the time expenses for HOA and property taxes were $6174. Not sure what the insurance/other costs were. Annual income was $14,400 ($1200/mo) - this is in a rent-controlled city/area. Their rent is way below market. Average rents for a 1bed/1bath seem to go for closer to $2000/mo around there.

As of recent my dad said all expenses are increasing with the HOA, taxes and insurance. He also said he would raise rent by 5% in 2018 but I have no idea whether or not that has happened. Even if it has, it's peanuts.

EDIT: just got the details for the most current expenses:
HOA- $375/ Mo or $4500/yr
Prop Taxes- $1700/ year
Non HOA Insurance- $196
Additonal Umbrella Liability Insurance  about $200
No debt

I'm pretty sure insurance costs above are annual but am double-checking. With $14.4k rental income, that's just over $7800 which isn't very good. Now, if they were to raise that closer to market rent (which I'm not sure they could do with rent control), this could probably fetch at least $15,000/yr or more (net income). If they gift/sell, I'm assuming the new owners can set whatever rent they want within reason of fair market rents and go from there, right?

Buying it from him doesn't sound like it would make sense. And gifting it to us sounds like that would create more headaches, especially because nobody who lives close by would want to "manage" it.

At this point it sounds more and more like he should go ahead and just sell the place and park the funds if his main goal is not having to deal with the 'burden' of holding it.

« Last Edit: February 14, 2018, 01:13:26 PM by jeromedawg »
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Re: Should my dad sell an investment property in the Bay Area?
« Reply #14 on: February 14, 2018, 03:01:22 PM »
Would you and your brothers co-own the property? What if you disagreed about how to manage it or one of you wanted to sell? it's much easier to divide up cash than real estate.

jeromedawg

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Re: Should my dad sell an investment property in the Bay Area?
« Reply #15 on: February 14, 2018, 03:12:35 PM »
Would you and your brothers co-own the property? What if you disagreed about how to manage it or one of you wanted to sell? it's much easier to divide up cash than real estate.

Based on the current conversations we've been having, it doesn't sound like co-ownership is something they'd like. One brother isn't really into any sort of investing at all, let alone real estate. The other brother keeps complaining about how he doesn't want to manage the property and that he rented their old place for 3 years before selling and doesn't want to do all that again. It sounds like my dad is finally going to talk to some estate planning lawyers on how to best handle the situation among the other properties they're eventually looking to offload or pass-down. Cash does sound easiest at this point though.


My dad started talking about "gifting" us the property and then one of us "living in it" for 2 years without ever renting it out with the intention of not having to pay the capital gains. But wouldn't this technically mean that one family has to squeeze into the place and physically live there? I'm assuming it's not as "simple" as changing your place of residence/home address on your Drivers License, Post Office, etc. and then checking the mail every other day...
« Last Edit: February 14, 2018, 03:22:34 PM by jeromedawg »
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Re: Should my dad sell an investment property in the Bay Area?
« Reply #16 on: February 14, 2018, 03:14:00 PM »
He's way under charging for rent.  $2-3k per month is the current 2BR market, even for a relatively poor unit, most at $2800ish.  I agree with the prior poster recommending professional management, or having a sibling take over to preserve future tax basis.  If he wants to subsidize a person, why a tenant, just because they have been there a long time?

https://www.zillow.com/alameda-ca/apartments/

Had a high school friend move from Alameda last month due to rapid rise in rents. Sad for her, but you need to raise the rents on the tenant the maximum allowed, if you are about maximizing assets.  If not, thats cool, but it is the choice.  Selling would likely be even worse for the loyal tenant.
« Last Edit: February 14, 2018, 03:17:09 PM by PizzaSteve »
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jeromedawg

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Re: Should my dad sell an investment property in the Bay Area?
« Reply #17 on: February 14, 2018, 03:26:01 PM »
He's way under charging for rent.  $2-3k per month is the current 2BR market, even for a relatively poor unit, most at $2800ish.  I agree with the prior poster recommending professional management, or having a sibling take over to preserve future tax basis.  If he wants to subsidize a person, why a tenant, just because they have been there a long time?

https://www.zillow.com/alameda-ca/apartments/

Had a high school friend move from Alameda last month due to rapid rise in rents. Sad for her, but you need to raise the rents on the tenant the maximum allowed, if you are about maximizing assets.  If not, thats cool, but it is the choice.  Selling would likely be even worse for the loyal tenant.

The problem is rent control. I don't think he can raise rents more than 5% per year so even if he wanted to he couldn't play catch-up. They shot themselves in the feet big-time thinking that offering reduced rates to keep non-problematic tenants was the way to go. I can see their perspective but it's no good long term. He probably wouldn't be complaining about the diminishing cash flow as much had he been consistent about setting the rent to fair market and raising it year over year.

I'm not sure $2.8k would be realistic for this unit. I think it may be advertised as a "2br" but it's not. Unless I completely forgot what it looks like, there's one bedroom, one bathroom, a living/dining area and kitchen. Pretty sure it would command closer to $2k/mo rent.

My second brother (who doesn't want to manage property for long-term tenants) mentioning another option might be to put it on AirBNB
« Last Edit: February 14, 2018, 03:31:14 PM by jeromedawg »
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Re: Should my dad sell an investment property in the Bay Area?
« Reply #18 on: February 14, 2018, 05:12:30 PM »
I'd check with the Alameda County and City of Alameda laws to see if it's legal to evict a BMR tenant and convert the unit to STR. Something tells me that might not fly, but I don't know the particulars.

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Re: Should my dad sell an investment property in the Bay Area?
« Reply #19 on: February 14, 2018, 08:32:16 PM »
My grandparents went through a similar situation. They just got tired of dealing with the rental cycle of screening and finding new tenants, the uncertainty about whether the next tenant will be a good one, keeping up the house, and dealing with all the headaches associated with owning a rental. If your parents don't need the money because they're pretty much set then it's easy to see why they wouldn't want to deal with it any more.
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Villanelle

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Re: Should my dad sell an investment property in the Bay Area?
« Reply #20 on: February 14, 2018, 10:20:51 PM »
So he's "making" $7800/mo, before any maintenance and upgrades?  I'm assuming with a condo, the HOA is responsible for much of that, but just how much varies by association.  And even if they cover more than most (to includ roofs, painting, etc.), he is still the one who buys a new fridge when the old one dies, repairs the a/c (probably), pays for a plumber when the toilet won't stop running (most tenants won't do even basic repairs), etc.  Nor does that include any slush for periods of vacancy. 

You mention AirBNB.  Not sure if that would be if you buy it, or for your dad.  But you need to be aware that AirBNB is a *ton* more work than traditional landlording, and profits aren't always much higher, especially if you aren't in a heavy tourist area.  You certainly get more per day, but your vacancy days are far more.  And every time a guest leaves, the property has to be cleaned (perhaps covered by the AirBnB cleaning fee) and re set up again.  Google for blogs about the experience of running one of these before you consider that a moment longer, and know that if you are talking about for your dad, since he's already unhappy with managing a property, this moves him in the opposite direction of where he wants to be. 

Dicey

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Re: Should my dad sell an investment property in the Bay Area?
« Reply #21 on: February 14, 2018, 11:36:18 PM »
^^This.^^ Paula at Afford Anything did a great series on her experiences renting one of her units via airbnb. Lots more work for not a ton more reward. Also, our own @waltworks has a lot to say on the subject.

And I live in the Bay Area. That tenant must live in fear that the gravy train's going to end. I hope they've been banking and investing the difference.
« Last Edit: February 16, 2018, 02:27:36 AM by Dicey »
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jeromedawg

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Re: Should my dad sell an investment property in the Bay Area?
« Reply #22 on: February 15, 2018, 12:22:07 AM »
So he's "making" $7800/mo, before any maintenance and upgrades?  I'm assuming with a condo, the HOA is responsible for much of that, but just how much varies by association.  And even if they cover more than most (to includ roofs, painting, etc.), he is still the one who buys a new fridge when the old one dies, repairs the a/c (probably), pays for a plumber when the toilet won't stop running (most tenants won't do even basic repairs), etc.  Nor does that include any slush for periods of vacancy. 

You mention AirBNB.  Not sure if that would be if you buy it, or for your dad.  But you need to be aware that AirBNB is a *ton* more work than traditional landlording, and profits aren't always much higher, especially if you aren't in a heavy tourist area.  You certainly get more per day, but your vacancy days are far more.  And every time a guest leaves, the property has to be cleaned (perhaps covered by the AirBnB cleaning fee) and re set up again.  Google for blogs about the experience of running one of these before you consider that a moment longer, and know that if you are talking about for your dad, since he's already unhappy with managing a property, this moves him in the opposite direction of where he wants to be.

Yea, that's before maintenance/upgrades. I think he said they put $1500 of "work" (I'm assuming things like carpet, paint, new fixtures, etc) in I would think the HOA would maintain most of the outside areas/common areas - there are a couple of pools and covered carports.

AirBNB would be for if we (or one of us) takes it over. No way my dad would do any of that. One of my brother's financial advisors suggested that as an option so my brother threw it out there. This area isn't a heavy tourist area AFAIK so you'd probably get the occasional guest who needs a place to stay near family, etc. Not much else I can think of otherwise... maybe if the Warriors are in the finals and fans from the visiting team are in town :( LOL
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