@StressExpress
You are right. The real looming problem isn't the condo, it's the fact that FIL is heading for a financial disaster in old age which could impact our finances and our relationships with him and each other. Do you have any suggestions on this set of core issues which you correctly see as more important than the condo?
As for the condo as an investment, I haven't seen numbers of all cash inflows and outflows. I only know what I've been told. But roughly, it's:
$100K current market value
no mortgage
55-plus community
20 min from great beach
taxes and fees of about ~$7500/year
other costs would include maintenance, costs of landlording (including flying there to check it out periodically), and any special assessments
rentals allowed for 6 mo/year
last few years $2000/mo long term renter for 5-6 mos ($10,000-$12,000 total)
higher effective rents might be possible with series of shorter vacation rentals, but with some additional costs and efforts required.
Over past few years (before making this offer), FIL has described the rentals as "paying for the costs of the condo," never as an actual money-maker.
So, that's what I know. Any thoughts?
Let me start with my thoughts on the rental vs. the more important topic of impending financial disaster just due to time and this being more my wheelhouse.
The numbers are not great from what you shared, but if it were me - i would do some more due diligence to see what we are really talking about.
- I always start with rental records. Ask FIL to provide you with the last 5 years of rental history and all associated expenses on the property. You need to see insurance, taxes, repair items, HOA, heat, water, electric, cable, wifi, phone, cleaning, etc. You want a P&L, but if he doesn't have it, build it with the data he provides so you can have a clear view. If he does not have any records - that's a red flag and requires more work to understand.
- Ask FIL to request the financial records including all assessments, budgets, reserves from the HOA and to share them with you.
- Ask FIL to provide the HOA covenants including all limitations on rental property.
- Go to Homeaway and find condos in the same association (hopefully multiple) and get an understanding of what rates they are charging. Reach out to the owners or property managers of these condos and see if you can get them on the phone. Tell them you are considering purchasing within the complex and see if you can get them to share their experiences in renting, concerns with area/condos, and any information they will provide on rent/profitability/vacancy/surrounding area/etc. If you get a management company, ask how much they charge to manage, how many units they manage in the building, and what history they can share on managing within this complex. Owners and Mgmt companies will be a great source of information if you can get them talking.
- Map out the business for the next 10 years based on the information that you know and what your exit strategy is (sell, etc). Rents, expenses, expected assessments, etc and see where you net. Include all aspects of the sale as well (realtor fees, taxes, etc). Do an Risk and Opportunity assessment so you can fully understand what could happen and what that would mean (big assessment, insolvent HOA, Rent increases, appreciation, etc).
- Consult an account or lawyer if needed to discuss concerns with income, taxes, gifting, etc
- Call a local real estate agent and ask for comparable sales in the same condos.
- Model other scenarios - If you used a property mgmt company vs. yourself (this may be a need in the future) - longer term - shorter term
- This should give you a very solid basis to understand your thoughts on the transaction, what options you have, and how you would address them.
From what you shared at a high level, it sounds like fees and expenses will eat up any potential cash profit so your gain will really result in the equity transfer. Meaning, lets say you lost 2K/yr for 10 years, your gain on sale (at same valuation) would be 80K minus realtor fees. Obviously not ideal as you would have had to come out of pocket 20k over this time period, invest your time/effort, etc, but net result is still a pretty positive number. From your assessment above, you will need to determine what you are comfortable with and what you feel will likely happen. The ideal scenario here is one where the condo profits quite a bit more annually and overall return will go up over time.
If your likely circumstances are one you would accept, I would focus on the terms and agreement with the FIL and be entirely business driven about the approach. Meaning, telling your FIL what your analysis shows and what possible things you see happening in the future. What you are willing to accept and what you are not. It's not personal, its just a business discussion about the asset. Indicating clearly (and in writing, if moving forward) that anytime this impacts the financials/time constraints of your family, you will sell the condo and he will no longer have access to it. Ignoring the family aspects - if he gave it to you today and said you could sell it and keep the money, its a great deal. Being willing to try and make the scenario work (if its one you can accept) for X years, selling it and you profit enough to cover your time invested, excellent. But given the risks associated, I would completely have an agreed to relief valve (sale of the condo) that you have openly agreed to with FIL that you can execute. The outcome of this discussion will determine if FIL is emotionally attached to protecting 'inheritance' (moving forward regardless of your relief valves and openly giving you full rights to sell) or if he is trying to do something else. I would keep detailed records of everything related to business (good practice anyway), and this amount would be what I would openly talk with my wife about being the limit available to help her FIL if needed.
The above (except the last sentence) is entirely about the business transaction and understanding how it could impact/benefit you in the future financially - not about the emotional family issues or impending FIL financial blow up which could change this entirely and is very much more difficult to measure/understand. I will try and address my thoughts on that later as i have to run now.
It is likely my personality but I always start with what you can measure/understand first and then move on to emotional concerns as they tend to get very mixed up in these situations. Hoping any of this is helpful for you in some way.
