Author Topic: Case Study sell or rent  (Read 2316 times)

Buster

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Case Study sell or rent
« on: December 12, 2014, 10:20:46 AM »
Hi, Im new to the forum been following the blog for about a year. thank you in adavance for your advice and patience
To sell or rent out our current home:

Market Value: 170K
Original Purchase price:142k
Original Mortgage Amount: 142k Bought w zero down during the housing boom 2006
Interest Rate: 4.5%
Mortgage Term: 30yrs
Term remaining: 29 yrs
Amount remaining on mortgage: 125k refinanced last april, Lowered interest rate, and paid off a HELOC
Gross Rents: 1800
Principal and Interest (the P&I of your PITI - should match with the above info): 642
Taxes and Insurance (the T&I of your PITI): 263
HOA costs:0
Deferred maintenance notes: currently remodeling basement. Adding  a 2nd bathroom and 4th bedroom which will maximize rent or boost sales price. 170k market value assumes this work is complete. Cost 4k. Home needs a new driveway soon 2-3yrs. cost 5k. Roof, HVAC, doors and windows are all less than 5 yrs old.



Anything else special or unique in regards to the numbers of the property (not the property itself; things such as city assessments, back taxes, special costs due to unique features of the property, etc. etc.):  Yes a one time  single family home rental conversion fee of $3500 would need to be paid in order to obtain a rental license .


Quick pros and cons
pros: Home will cash flow $600 per month. Easy to find tenants (Its located within easy walking distance to 2 colleges)
Cons: Home will be rented by college kids = increased repair and maintenace costs, Driveway replacement cost, rental license fee cost



Fallenour

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Re: Case Study sell or rent
« Reply #1 on: December 12, 2014, 10:30:18 AM »
The con is you lying to yourself.

If you arent holding your tenant responsible for damages they are doing to your property, you are only hurting yourself in the end.

There's a reason why apartments take people to court for damages to places.

The courts almost always rule in the apartments favor if the damage claim is even remotely reasonable, usually because the tenant cant prove they DIDN'T DO IT, and they didn't list it as damaged on the first 14 days of move in. (that's what that sheet is REALLY for).

Once a tenant has a note of backed amounts due, your real estate business name on it, and shows as delinquent (or collections), it severely damages a tenants ability to rent in the future, and forces them to pay it off in order to get reasonable rent terms again in the next 7 years.

Additionally, more nasty collection processes and measures can be taken that are more aggressive than this, should you choose to do so, such as rolling transfer (which keeps balances on their credit indefinitely), and other nasty tactics.

Even more aggressive measures can be taken should they choose not to pay, such as pushing it through civil court, passing on those legal fees as additional fees, and gaining wage garnishments for all the costs, which will usually finish through courts by the time they start actually working.

Remember, as a landlord you are an investor in RE, your RE is your property, and your investment. Protect your investment.

Another Reader

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Re: Case Study sell or rent
« Reply #2 on: December 16, 2014, 12:18:22 PM »
I own properties in Tempe, not too far from ASU.  I do not rent to college students. I rent to other folks that are associated with the university from time to time, including post-grads.

College students are generally too young to be responsible.  Co-signing parents often resist paying for damages because their child could not possibly be responsible for the destruction.  I see the results in some of the houses consistently rented to students.  The wear and tear and the cost of repairs between tenants is not worth it.  Fortunately, students are not a protected class.  If you can restrict your tenants to post-docs and the like, you may succeed.

A $3,500 license?  That seems excessive to me.  Why does your city hate landlords?  Are there other problems with discriminatory behavior by the City?  In Tempe, the code enforcement people have the licensed rentals on an exterior inspection schedule.  The house next door may have junk in the driveway and weeds instead of a lawn, but if anything is out of place in your landscaping, you will get the citation.

Your numbers look ok, it's the environment I would be concerned with.  You also might be able to refinance to a lower rate today, further lowering you costs.

Edited to add:  Oops, I missed the $600 cash flow comment.  Use the 50 percent rule and subtract mortgage P&I.  Sammybiker is correct.  When you add in the student factor, you may be close to zero cash flow.
« Last Edit: December 16, 2014, 01:21:24 PM by Another Reader »

sammybiker

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Re: Case Study sell or rent
« Reply #3 on: December 16, 2014, 12:52:39 PM »
This home will cash flow closer to $250/mo, not $600.

You're not accounting for unforeseen maintenance, repairs, vacancy, turnover, etc...your home sounds like it's >1400sq ft, these expenses won't be cheap.

Gross rent *.5 = a decent ballbpark rent after expenses

rent after expenses - mortgage = net cash flow

Options...

- You deem $3,000 in annual cash flow is acceptable for a 170k property, not to mention the tax benefits, mortgage pay down and possible future appreciation.

- You get creative on the sale side - look for a buyer that can't quite qualify for a mortgage yet, but has steady employment and decent credit.  Put them on a lease-option, use a 3rd party firm to work on their credit and they will help you cash flow and achieve maximum market buy-out (175k?  180k?) in 12-24mo.

A little more info on what I'm talking about here:  http://www.biggerpockets.com/blogs/1226/blog_posts/8749-the-lease-option-magicians

Good work on making it out of a 2006 home purchase with both cash flow & profit!

Fallenour

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Re: Case Study sell or rent
« Reply #4 on: December 16, 2014, 01:52:12 PM »
This home will cash flow closer to $250/mo, not $600.

You're not accounting for unforeseen maintenance, repairs, vacancy, turnover, etc...your home sounds like it's >1400sq ft, these expenses won't be cheap.

Gross rent *.5 = a decent ballbpark rent after expenses

rent after expenses - mortgage = net cash flow

Options...

- You deem $3,000 in annual cash flow is acceptable for a 170k property, not to mention the tax benefits, mortgage pay down and possible future appreciation.

- You get creative on the sale side - look for a buyer that can't quite qualify for a mortgage yet, but has steady employment and decent credit.  Put them on a lease-option, use a 3rd party firm to work on their credit and they will help you cash flow and achieve maximum market buy-out (175k?  180k?) in 12-24mo.

A little more info on what I'm talking about here:  http://www.biggerpockets.com/blogs/1226/blog_posts/8749-the-lease-option-magicians

Good work on making it out of a 2006 home purchase with both cash flow & profit!

Hooo myyy mind! It just exploded on my screen. BEHOLD! This new magic called "Land Contract".

You could very easily utilize that almost like a leveraged borrowing platform.

Since the land itself is worth less than the land+house, on paper, credit wise, you show much less actual "debt" owed, if any.

In financial terms, as long as you don't overextend yourself recklessly, you could very easily amass large sums of land contracts, and thus, houses, as long as you honor your land contracts.

sammybiker

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Re: Case Study sell or rent
« Reply #5 on: December 16, 2014, 04:03:39 PM »
@Fallenour, I'm not sure why sarcasm was required - I'm sharing another cash flow & exit option to a poster who likely hasn't considered it yet.

I didn't call it new & certainly didn't call it magic.