Author Topic: I think I want to sell my rental co-op or am I being greedy?  (Read 2631 times)

money_bunny

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I think I want to sell my rental co-op or am I being greedy?
« on: April 03, 2015, 07:56:54 PM »
Hello everyone. I'm not sure I am doing the numbers right here, so I am confused about how to proceed. My gut says put it on the market if the tenant does not renew again. Mainly because of the limitations similar to condo investing but worse. Plus the current hype and low supply making things move.

I lived in it from 2004 to 2012, and it's a 400 square foot studio. I have no intention to move back in. I don't want to rent to friends and family. I'm renting now somewhere else and math wise it's the MMM thing to do for my area by a long shot.


Market Value: 51,000 (Based on last few sales of almost identical units)
Original Purchase price: 41,000
Original Mortgage Amount: 32,800
Interest Rate: 5.325%
Mortgage Term: 15 year
Term remaining: About 16 months. I pre-paid about 10-12K while I was living there.
Amount remaining on mortgage: $4,437
Gross Rents: 950 (Tenant in second year, lease up in June)
Principal and Interest (the P&I of your PITI - should match with the above info):
   Principal:    $244.87
   Interest:    $20.97
Taxes and Insurance (the T&I of your PITI): 
   Taxes: $889
   Ins: $118

HOA costs: 326.25/mo
   This includes the taxes above, heat, and hot water, and services and repairs to the building.
   They have been very good at keeping his stable and has only gone up about 75 dollars in the last 12-13 years. We also supposedly have big reserves if I am reading the yearly statement right. 1170 Units in the complex. So it's big and costs are spread out over many people.

My schedule E profit for 2014: $5,256
Tax Brackets: 25% Federal, 6.37% NJ
(NJ does not deduct for 403B, HSA so I am paying taxes on everything)
Personal tax: $1648.80
Actual in my pocket at the end of the year: $3607.20

1% Rule: $950 rent per mo/( $41,000 sales price + $6000 in non-depreciable repairs) = 2.26%
50% Rule: 53%

Rented out now legally with leases and Sch. E since September 2012

Annual Return: I think it's about 12%. Because I lived there for 8 years first I'm not sure how to calculate that.

2014 profit / ( 3K closing costs + 32K paid by me as principal and down payment over the 8 years I lived there+ 7K repairs (new kitchen, re-glaze of tub, fixtures, etc.) = About 12.5% not including the interest I paid while I was living there. Which would skew those numbers down a bit.

Deferred maintenance notes:
   None. Maybe could use a coat of paint. Bathroom is dated but solid. The tenants might not care but a buyer might. A/C unit is an older Carrier model. Stove and fridge in good shape.

Other:
1) Each new tenant causes me to pay 500 dollars to the co-op for them to interview and do background check. They want to make money if I am making money. I think it's the same fee to sell. They do not have an “Exit tax” which is a commission the corporation gets on the sale.

2) I can't really refinance. I can get a co-op investment loan but the LTV is capped at 60% and the minimum amount is $70,000. Could we have a bubble that would make this unit worth 70K? I doubt it any time soon. Really who is going to pay 70K for a studio that is not in NYC? Especially one that you have to put 20% down on.

That being able to refinance and get even 25K back would let me put that money into the usual MMM Vanguard index funds and the interest would reduce the amount of money I am showing to the taxman.  Since NJ taxes you on basically every cent you make since I have a 403b at work and not a 401k.

Sold at about a wash $50,000-minus all the fees

3) I probably won't make much of a profit if any. I am ok with this as for ten years I payed about $550 a month for “rent” near NYC. Plus for most of it I made so little I got to itemize because of those bills my school expenses and had enough money to pay for grad school cash.
 
4) I could offer to sell to my Tenant as she seems to be happy. The original lease listed a procurement clause. The renewal lease which I did all the paperwork on does not.

Apparently I was also supposed to pay 1mo rent to the Realtor when I renewed the lease with this tenant. So if that lives on forever I guess the procurement fee lives on forever.

Newbie mistake on my part to miss that in the contract. Surprised I did not get a “Where's my money?” letter from the Realtor.

If it was not sold to the current tenant then the co-op makes the buyer jump though a lot of hoops 6% of $50,000 to not have to do endless hand holding and drive up to show the unit a couple times at 1 hour each way might be worth it.

5) If I FIRE in 7-10 years I would be in lower tax brackets and then I have passive income from this unit every year forever. If I can even do that due to my OCD and self definition tied into my work combined with OMY syndrome.

6) I am concerned that I am being inpatient or greedy by saying “Oh it's only 3.6K a year.” Some of you guys make it by on less than 10-15K a year.

Many of you have stated that real estate is a long game. Ideally multiple generations. At the very least building a portfolio now and then the real payoff comes from when it's all set up, you are on top of the repairs, the tenants are competent, all the notes have been paid by someone else and the cash is flowing. Which can be up to 20-25 years away.

7) I live an hour away from this unit now. I self manage. The unit is shown by a local Realtor who the tenants pay a broker fee to. I have a handyman who can do most of the other stuff if I am somewhere else or it's time critical like the lock breaking on the front door.

If the tenant gets locked out the complex security can open the door for her with a key they have on file. They own the furnace and the roof.

Like MMM I am pretty handy and did most of the repairs on the apartment before I left myself. I like doing all of that stuff.

5) My Girlfriend and I would like to do some travelling which means we would probably want/need to get a property manager. We may not be always accessible to take calls on fixing things.

6) FIRE for us means finding somewhere not in NJ or near NYC to live since it would be very challenging for us to make ends meet with very high property taxes. We can game the income tax a bit. We have friends in Upstate NY that we could use as a base of operations in lieu of doing repairs for them.

7) We are not sure where we are going to end up. Hence the travelling to figure it out. When we get there we would like to do a FHA eligible multi-family if it makes sense. Rent if it does not.

Thanks in advance.

Doulos

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Re: I think I want to sell my rental co-op or am I being greedy?
« Reply #1 on: April 03, 2015, 09:16:58 PM »
This really sounds like a lot of details that come down to... "I am not sure I want to be a landlord at all?".
Only you can answer that.

money_bunny

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Re: I think I want to sell my rental co-op or am I being greedy?
« Reply #2 on: April 04, 2015, 05:37:28 AM »
I actually like landlording. It's the numbers that I am asking about. Is 3.5K after personal taxes and all these limitations a good enough return? Am I following good practice or is the return too small and I might be better waiting for a duplex. Since it's hard to sell a co-op I was thinking if people got all revved up about it this would be a good time to sell.

I do not have the experience so I am hoping areblespy wades in.

Plus compared to other businesses the paperwork is not that bad. I have 12 incoming transactions and 20-30 outgoing ones.

Right now in Near where I live I can only find 0.5% rule properties for sale. Cost of about 400K for 2-2.5K in rent. I would love to find a duplex that is not in a neighborhood that most of my  patients live in due to heroin and privacy.


arebelspy

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Re: I think I want to sell my rental co-op or am I being greedy?
« Reply #3 on: April 04, 2015, 03:12:11 PM »
I do not have the experience so I am hoping areblespy wades in.

That's a good way to get me to post.  :)

That HOA is pretty rough on your cash flow.

Being a condo, I'd estimate you'll see more like 35% expenses when you self manage and pay the Realtor to rent it, 40% when you get a manager.

Then subtract the condo fees.

The 15 year mortgage also messes up your calculations, so let's ignore that for a moment. You're also close to paying it off, only owing ~4.4K, and only $20/mo going to interest.  Since that will pay off in less than a year and 1/2, probably better to run the numbers after, IMO.

When you switch to a PM: 950 rent - 40% expenses - 326/mo HOA = 244/mo. cash flow.  If you owned it outright (which you will soon, and is our assumption), and it was worth 51k that's a 5.7% return, fairly meh.

Though you'll probably lose ~9% to sell (6% Realtor costs, a few percent closing costs, a few percent to price just under the market if you want to sell quick), so it's more like 2928 cash flow out of 46410 after selling costs = 6.3%.. still eh, but if you expect some appreciation too, it's not horrible.

Watch out for those HOA special assessments - read through all the financials as they are right now, and check the latest reserve study and projections. 

6) I am concerned that I am being inpatient or greedy by saying “Oh it's only 3.6K a year.” Some of you guys make it by on less than 10-15K a year.

Imagine if you had 10 of them.  :)  Even if not, it helps offset some FIRE expenses, and provides steady cash flow, assuming it's a good rental (decent area, decent tenants) for market down years.  If it gives you 3k/yr, at a 4% rule that saves you from saving 75k more in your portfolio, even though it's only giving you 3k annually.  It all adds up.

Leaving the equity intact and earning a decent return and diversifying a little may be worth it. This is an edge case, not a clear sell (as most are when people come on), or clear hold.  If you understand the risks of RE and want the diversification in your portfolio, and have a good PM in mind, it's probably slightly over the "keep" line, IMO.

Hope that helps a little.  :)
« Last Edit: April 04, 2015, 03:18:24 PM by arebelspy »
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money_bunny

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Re: I think I want to sell my rental co-op or am I being greedy?
« Reply #4 on: April 05, 2015, 11:59:46 AM »
Thanks for being a good sport with me baiting you.

As you state at the end it's not clear cut like the last 40-50 of these on this site where the numbers are typically horrendous. I very much appreciate reading all the case studies where I can see some of the failure modes. I also appreciate the repeated reminder to consider investing out of area. All of you and Bigger Pockets saved me from buying two really problematic properties. One would have been an outright disaster and the other would have been 1-2 years of nights and weekends in addition to my 9-5 getting it fixed up and habitable to a point that I would not feel conflicted by the tenants living conditions.

The HOA (Co-op corporation) is well funded according to the last set of annual reports. However as discussed here in previous posts abount Condo investing the HOA (or Co-op corporation) "Allows" me to rent my unit to other people. They could decide to not allow me to do that if they tenant does not renew. I've read enough here to be really wary of HOA's. I was going to sell it 3-4 years ago but I was convinced not to by the board President and he changed the rules to allow a certain % of rental units. He's very big on Real Estate though and I did not know that much back then. We were still in 2012 at the end of the trough after the bubble though?

The location is in Fort Lee NJ. There is a lot of demand for rentals. I'm not sure how much for sales. I have to do some research. The 52K was based on the last sales price. There are fantasy listings at the 60-70K mark. However there are one bedrooms that have sold at that price point so it's going to remain fantasy listings. The studio means that there is no way to really tap into longer term tenants unless they are elderly.

The 52% was based on my Sch. E for 2014. The co-op maintenance fee includes: Property Taxes, Heat, Hot Water, and building upkeep and repairs. So you might be counting the taxes 2x. Co-ops are unusual and even my accountant last year had to review how to do the breakdown on the fees to get them in the right places on return with the Junior Accountant/Tax Preparer.

The actual HOA-Taxes is still 2660/yr. So still 23% of gross. Thank you for pointing that out.

Those are real numbers unfortunately. So add in the additional 8-10% for management if I move far away. Comes up to 55% with a manager's fee.
The 5.7% you got from: Profit per year/Est sales price?
I'm getting from my Sch. E: 6166 / 52000= 11.8% Which takes it from a bond like return to something maybe worth keeping.

I'm ok losing the 9%. I'm even ok breaking even. I saved enough money from living there for 10 years at about 50% of going rent.

Thanks. I've made up my mind in that if the tenant moves out I am going to sell. If they stay another year I have to keep them in due to NJ's anti-eviction act. It will give me more money at the closing.
Maybe they will buy from me, maybe I can try selling it on Craigslist? Since in NJ we use Lawyers who do most of the work.

"Imagine if you had 10 of them." Eventually the goal would be to FHA a Quad. One that needs work. Repair it for a year, then get a small house or a duplex for the GF and I. The taxes in my area make renting or owning multi family the only options that work without having my fixed expenses grow so high that I cannot FIRE before most people Regularly Retire.











arebelspy

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Re: I think I want to sell my rental co-op or am I being greedy?
« Reply #5 on: April 05, 2015, 12:06:17 PM »
Cool.  Glad you were able to reach a conclusion you're happy with.  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
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money_bunny

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Re: I think I want to sell my rental co-op or am I being greedy?
« Reply #6 on: April 05, 2015, 12:31:05 PM »
Thanks. It really helps to have someone or a group of people who are not "In the deal" or "In the hype." I think you and I commented on someone new who was getting the "Buying is always better than renting" routine from the co-workers and friends.

I personally thought I knew a decent amount until I became a landlord and then realized there are two types of real estate. What is aimed at consumers with a very finely tuned psychological message honed over decades, and then the whole landlording/commercial side of the business. Now when I look at properties I think about it from the commercial side and then from the emotional side.

Overall because the onwing was much cheaper than renting in this case I did ok. Those numbers could have been very different. This could have been a slow drain over the last 11 years. There is no way I would have been able to do RN and NP school with minimal debt and have the FIRE accounts where they are now if I was paying market rate.