Author Topic: Inherited Our Dad's Run Down House  (Read 2005 times)

Rani

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Inherited Our Dad's Run Down House
« on: March 03, 2017, 09:04:37 AM »
The current mortgage on the house is $135,000

Repairs will cost about $80,000 (let's say $100,000 to be safe)

Property is 20 miles south of Seattle and can rent for $2000/mo. at least.

After plugging numbers into the rental calculator, it looks like we would start off getting around 4% return on the property if we rented it out.

Is it worth it or should we sell his house and be done with it? Also, is there some way for us to buy the house and use part of the loan for the repairs?

We want to make the best business decision for the wealth of our family. Thank you everyone for the support.

marion10

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Re: Inherited Our Dad's Run Down House
« Reply #1 on: March 03, 2017, 09:22:42 AM »
What is the market value of the house?

Rani

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Re: Inherited Our Dad's Run Down House
« Reply #2 on: March 03, 2017, 09:35:12 AM »
Zillow says close to $300K. I'm not sure we could get that in the condition that it is in.
If we sold it, we would probably be lucky to get $150-200K

sammybiker

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Re: Inherited Our Dad's Run Down House
« Reply #3 on: March 03, 2017, 11:36:53 AM »
Can you get into those renovation costs a bit more?

80-100k - this is substantial or very high finishes.

I would go back to the drawing board with what do you really need to renovate to make a basic rental?  For the wealth of your family, can you take on any of the work yourself?  Performing basic stuff like paint, flooring will save $.

If you can draw that renovation down closer to 40-50k, you can cashflow well if you self-manage at $2k/mo rent rates (assuming existing mortgage of 135k).  You'll also have access to substantial equity which you can leverage to grow your portfolio if you so desire.

And for rate of return - if you can assume the existing mortgage, your out of pocket costs will only be the renovation.  50k reno/net cash flow of $400/mo (probably higher) puts you at nearly a 10% cash on cash return.  Not to mention you'll capture some significant equity in a hot market that only continues to rise.

But I really want to understand where this 80-100k reno budget came from.
« Last Edit: March 03, 2017, 11:39:17 AM by sammybiker »

Bobberth

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Re: Inherited Our Dad's Run Down House
« Reply #4 on: March 03, 2017, 12:02:13 PM »
I agree on the rehab price, $80k-$100k on a $300k property is in the ballpark of replacing a completely missing roof and rebuilding a brick wall that collapsed PLUS an interior rehab. If there truly are that many major things wrong with the house, you should sell as is if you can get more than the mortgage amount. If you can't sell it for more than the mortgage amount, don't mess with it and let the bank take it back. I have purchased several foreclosures that the family let go because they couldn't get any $$ out.

You may need to talk to a small, local bank's commercial department about getting a rehab loan for rental property. I wouldn't get my hopes up too high if this is your first and only rental. Although I won't say not to try.

Also, do you really want to own a rental? It's a business, not an investment. What is best for your family's wealth may not be what is best for your family if it's not something you can or want to do.


Rani

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Re: Inherited Our Dad's Run Down House
« Reply #5 on: March 03, 2017, 01:20:37 PM »
These are very good insights, thank you so much for sharing your perspective. The reno budget was coming from our overwhelmed expectation of the project. We wanted to prepare for high costs so that we didn't accidentally commit to something we couldn't financially handle.

My dad was a builder/electrician, and in his later years he took on renovation projects that he wasn't able to complete correctly or at all. The house will need a new roof, and to have an incomplete addition either re-done or removed and a wall replaced.
  • 2 bathrooms need remodeled and plumbing needs repair. There was a leak in the basement and we still need to asses the water damage.
  • Some of the electrical will need re-done
  • Carpet has been ripped out due to pest damage. So, new floors or carpet of some kind.
  • Walls need painted
  • Kitchen needs completely replaced

I had a contractor come out and he quoted $30K for roof, floor and bathrooms.

Also, do you really want to own a rental? It's a business, not an investment. What is best for your family's wealth may not be what is best for your family if it's not something you can or want to do.

Good question. There are 4 kids and if we all want to pitch in to do this, it will be manageable. I was the one who brought up the possibility because of reading this blog and being inspired to make more informed decisions about wealth and investments.

If you can draw that renovation down closer to 40-50k, you can cashflow well if you self-manage at $2k/mo rent rates (assuming existing mortgage of 135k).  You'll also have access to substantial equity which you can leverage to grow your portfolio if you so desire.

And for rate of return - if you can assume the existing mortgage, your out of pocket costs will only be the renovation.  50k reno/net cash flow of $400/mo (probably higher) puts you at nearly a 10% cash on cash return.  Not to mention you'll capture some significant equity in a hot market that only continues to rise.

Let me see if I can get the reno costs around $50K. It sounds like it will be a smart endeavor if we can do this.
If so, then I'll see if I can convince my siblings to get on board.

sammybiker

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Re: Inherited Our Dad's Run Down House
« Reply #6 on: March 03, 2017, 02:20:29 PM »
I think $50k is certainly achievable but you'll have to take on the role of GC and break out the different scopes of work. 

Some you'll sub out, others you should do yourself  (paint, flooring) and others you should reconsider or downgrade the quality (kitchen remodel - what about keeping existing cabinetry but giving it a a new paint job?).

Renovating a rental house is a lot different vs your own personal residence.

I missed the part where you were dealing with siblings.  So what would you do with rental profits - split those 4 ways as well?

This is sounding more and more like you ought to repair and sell and chop up the sale proceeds.  Especially with so many partners and the fact that it's all family.

okobrien

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Re: Inherited Our Dad's Run Down House
« Reply #7 on: March 03, 2017, 09:57:12 PM »
Sharing a rental among four siblings sounds like way more family stress than the income could possibly justify.
I would rehab and sell, but first talk to a local realtor and contractors to make sure the rehab would pay off.

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calimom

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Re: Inherited Our Dad's Run Down House
« Reply #8 on: March 03, 2017, 10:59:21 PM »
Sharing a rental among four siblings sounds like way more family stress than the income could possibly justify.
I would rehab and sell, but first talk to a local realtor and contractors to make sure the rehab would pay off.

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Pretty much this.

okobrien

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Re: Inherited Our Dad's Run Down House
« Reply #9 on: March 04, 2017, 08:39:56 AM »
I am actually starting a business in Colorado to deal with issues just like this.  We will rehab and flip homes for people in situations like yours, ensuring you get much more profit than you would if you were to sell as is. I will take a share of the profit, but the heirs don't have to do any of the work or management themselves, don't have to front the costs to update, and will earn more than if they were to sell it to a flipper.  I wish I were in WA so I could help you out with this house.

SwordGuy

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Re: Inherited Our Dad's Run Down House
« Reply #10 on: March 04, 2017, 08:41:31 AM »
Sharing a rental among four siblings sounds like way more family stress than the income could possibly justify.
I would rehab and sell, but first talk to a local realtor and contractors to make sure the rehab would pay off.


Pretty much this.

That really depends upon the character and maturity of the siblings.

My mom and her siblings rented out inherited farmland for about 50 years with nary a fuss and bother.

Bobberth

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Re: Inherited Our Dad's Run Down House
« Reply #11 on: March 06, 2017, 10:13:38 AM »
If you like your siblings, I would not rent. Otherwise, odds are this won't turn out good in the long run. Someone will want their cash out for something else. Someone will put in more work. Someone won't want to put more cash in when the roof needs replaced. In my own personal experience, landlording sucked until I hit 6 properties (not an exact number as I went from 3 to 6 with no down time in between). Every month rent would come in, mortgage payment and expenses would go out. The account balance barely  budged. Every time it would get higher, an insurance payment was due. Then taxes, then $50 to fix this....then that.... It wasn't until my 6th property that I felt the account balance was starting to move up. Your proposal is to stay at that worst position to be in-only 1 property-with your siblings as your business partners. You're looking at what, $50-$200/month TOPS net cash flow as your share each month? To me it wouldn't be worth renting it.

Make sure you read the Inheritance Drama thread over in the Antimustachian section. Several stories of siblings wanting to rehab an inherited house and ended up putting in too much money that they end up losing money in the end. If you can get the rehab to $50k, who is going to put up that money? Will all four equally? What if there is a hidden problem that causes you to go over budget? What if someone over spends and you go over budget with granite counters and subzero fridges? What if one wants to take the lower quick offer but another sibling wants to hold out for more cash? I never see more than 1 person/unit owning real estate worthwhile unless you have some very well thought out and written out documentation beforehand (business plans). I know it's tempting to look at it as, "If I put in $50k, I will be able to sell the house for $100k more!" You are only getting 1/4 of that. There will also be taxes on the gain. If the house is still in the estate as you rehab and sell, the estate will have to file a return. Not that it can't be done, it just seems messy to me.

To me, it looks like selling as-is is the best way to go.

Rani

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Re: Inherited Our Dad's Run Down House
« Reply #12 on: March 06, 2017, 11:04:49 AM »
Thank you to everyone who shared their experience and insight. I've relayed all of your comments to my siblings so that we can all consider what you've had to say about this situation.
This has been so valuable.

We've decided that if one person wants to take this on as a project, we will support them by being patient with results and potentially helping to put up money as an investment opportunity with a certain expected percentage return.

If no single person wants to step up and take this on as a project, we will be selling the house as-is.