Author Topic: Case Study: Pre-Mustachian Property Dilemna  (Read 3853 times)

Imastoner

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Case Study: Pre-Mustachian Property Dilemna
« on: November 26, 2014, 12:55:32 PM »
I been considering selling my rental condo having learned a lot from the mustachian community. I just seems I can sell this now and find a better property to invest in.  What Would Mustachians Do (WWMD)?

Market Value:  $290,050 (according to Zillow but seems about right, last similar unit in complex sold for $280,000 on 06/12/13)
Original Purchase price: $215,000
Original Mortgage Amount: $172,000
Interest Rate: 4.875%
Mortgage Term: 30 years
Term remaining: 24 Years, 10 Months  (actual time left from extra pymts = 22 Years, 7 Months)
Amount remaining on mortgage: $149,230.97
Gross Rents:  $1600 (getting this now)
Principal and Interest: $910.24 (current breakdown, Principal= $296.6, Interest= $613.55)
Taxes and Insurance (the T&I of your PITI):  Annual:$2897.64 (Monthly Escrow payment:$241.47),  Insurance is $396 per year
HOA costs: $300
Deferred maintenance notes: my guess is about $500 per year in minor repairs and turnover costs (its an old building)

Anything else special or unique: HOA Reserves are very unhealthy due to the poor mgmt of previous boards. High risk of special assessments over the next 5-10 years. I got elected to HOA board and have fixed the mismanagement. My guess is averaged out it takes about 5 minimum hours of my time each month to be on the HOA board on top of the time it takes to be an owner (Not factoring in headache times dealing with complainypants people).  One positive is I can keep this unit rented fairly steady.  I would estimate subtracting only 2 weeks of rental income each year for turnover. Remember depreciation over the last 5 years along with real estate fees will cut into profit if sold. I did put in about $15k to redo the kitchen after initial purchase.

By the way, this is in San Diego and real estate prices are insane. I would be happy to invest outside the area but remember that does include the cost of a Property Manager as I can't see moving in the next few years. So again, WWMD?  sell or keep it? If sold, what to do with the money?

marty998

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Re: Case Study: Pre-Mustachian Property Dilemna
« Reply #1 on: November 26, 2014, 01:47:33 PM »
Based on your numbers I'm going to assume you are about cash-flow neutral?

However you've invested capital of $42,000 equity + $15,000 for the kitchen.

So you've put in $57,000 and the value has gone up $75,000 - a return of 131% in 5 years. (Not taking into account extra principal repayments, which brings the total return down to somewhere around 100% over 5 years.

(This is why interest only loans are better for investors. You could have taken that extra $23k in principal payments and put it towards a deposit on another property).

100% return is not something to feel bad about over 5 years. Why sell and incur all the costs involved? Keep it and buy another.

Another Reader

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Re: Case Study: Pre-Mustachian Property Dilemna
« Reply #2 on: November 27, 2014, 02:03:54 PM »
My guess is over time you will be slightly cash flow negative, unless rents grow faster than expenses.  You are betting on appreciation for your profit.  In general, that's worked out ok in San Diego, but condos are not somewhere I would want to put my money, for the reasons you cite.  For me, the rate of return is just not worth the risk.  I think you can do better elsewhere, do a 1031 exchange and defer the taxes if you can find something better.

Imastoner

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Re: Case Study: Pre-Mustachian Property Dilemna
« Reply #3 on: November 28, 2014, 06:38:47 PM »
Thanks for the replies. I didn't know average people can retire earlier than their 60s when I bought this condo 5 years ago. All my other finances are on track with no debt, low expenses, and aggressive index fund investing. But when it comes to this condo the fundamentals don't seem to be great unless my goal is to retire in my 60s. I am 38yrs old and hoping to reach financial independence much sooner than 60. The good news is I can sell this condo at a profit even after fees and taxes if I want.

What I am finding is I just don't know about condos. Of course you have all the normal risks in real estate but with condos you have the added risks of HOA boards and the madness of other owners. In this condo I have first hand knowledge that there is a high risk of special assessments over the next decade along with some really bad owners.

Feel free to respectfully disagree with me.  Part of the reason I am posting this case study is to hear both supporting and non-supporting arguments.
« Last Edit: November 28, 2014, 06:40:48 PM by Imastoner »

sammybiker

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Re: Case Study: Pre-Mustachian Property Dilemna
« Reply #4 on: November 29, 2014, 01:46:30 PM »
How is the area?  Would your condo be a contender for short term rental?

Airbnb can make this cash flow if your location is in demand.  It's a bit more work on your end (or sub it out to management) but you could be getting the best of both worlds - cash flow & appreciation.

"In 2012 I bought an apartment specifically to rent out on airbnb. Iíve been managing it remotely for the past year. This post includes everything I learned as well as some revenue numbers."

http://needwant.com/p/buying-apartment-airbnb/

GrayGhost

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Re: Case Study: Pre-Mustachian Property Dilemna
« Reply #5 on: November 29, 2014, 04:05:59 PM »
Buying vacation/short term rentals is something I've been interested in, but scalability is a concern for me... it seems like you can only have so many before dealing with tenants/guests becomes a full time job.

sammybiker

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Re: Case Study: Pre-Mustachian Property Dilemna
« Reply #6 on: November 29, 2014, 08:18:27 PM »
Sub it out.

Get a great, smart gal like Autumn to manage the properties:  https://www.airbnb.ca/users/show/1121532

GrayGhost

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Re: Case Study: Pre-Mustachian Property Dilemna
« Reply #7 on: November 29, 2014, 11:44:23 PM »
I just looked at a couple of cities on AirBnB--Seattle, Vegas, and a couple around me--and I'm not really seeing the numbers working out. Maybe it's because people don't book until just a few days out, but it looks like vacancies are 80% minimum.

Do you use "Autumn" to manage any vacation rentals in Seattle?

Imastoner

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Re: Case Study: Pre-Mustachian Property Dilemna
« Reply #8 on: November 30, 2014, 03:51:38 PM »
Interesting idea with the airbnb.  I will read a little more about it but I don't feel my unit would be a good candidate and frankly I don't know if I would be able to deal with it.  I have a feeling the other owners in the building would quickly complain. But as I said, even though this unit won't work I may consider it an option when I am looking for more real estate projects so I appreciate the feedback. 

sammybiker

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Re: Case Study: Pre-Mustachian Property Dilemna
« Reply #9 on: November 30, 2014, 05:21:05 PM »
@GrayGhost - interesting re: vacancies...I understood that Seattle for one has a very low vacancy rate in downtown/belltown, for example, due to such limited supply (airbnb + hotels combined).  I would anticipate Vegas being similar, depending on location of course.

I hold no vacation rentals in Seattle but have been researching it lightly as of late.  It's my home state, 0 income tax, downtown is amazing, growing and to be able to pick-up 1br/2br sub 350k within walking distance to Pike Place is intriguing.

I was modeling below market airbnb rents w/average 50% vacancy and by reinvesting the profits into paydown, I could see the property paid off in <13 yrs (based on 30yr conventional with minimal down payment).

Some more reading that I found interesting...

SECRETS OF RUNNING A SIX-FIGURE AIRBNB BUSINESS

RENTING ROOMS ON AIRBNB CAN BE A PRETTY GOOD BUSINESS, EVEN IF THATíS NOT HOW THE COMPANY REALLY WANTS YOU TO THINK OF IT.


http://www.fastcompany.com/3021179/secrets-of-running-a-six-figure-airbnb-business

escolegrove

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Re: Case Study: Pre-Mustachian Property Dilemna
« Reply #10 on: December 04, 2014, 12:05:55 AM »
I own two houses  in an HOA. They are not my favorite thing to invest in but it has still down . At the same time it cash flow great and is building equity. You just need to figure out what you want to do. You are more than breaking even and also having a tax break.

We are buy and hold investor. We are in it for long term. The key is to make sure you asset is appreciating not depreciating.