Author Topic: Real Estate Case Study: Sell or Rent?  (Read 2964 times)

ikea4532

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Real Estate Case Study: Sell or Rent?
« on: May 20, 2015, 11:56:51 AM »
Market value: when fixed will be $55,000
Original price: $11,000 Cost to fix property: $2,500 Total Price $13,500
Original Mortgage amount: N/A
Interest Rate: N/A
Mortgage Term: N/A
Term Remaining: N/A
Amount remaining on mortgage: N/A
Gross Rents: when fixed will be $450/mo, based on comparable rents in the market
P&I: N/A
T&I: $75/mo
HOA costs: N/A
Deferred Maintenance notes:
Cost of water and sewage is around $90/mo; Property is in a MVACTY area

Other consideration:
Looking to see what would be better, rent and hold, or Cash out to buy a better property? If I use the funds to buy next property the situation may look like this or similar to this:

Market value: $150,000
Original price: $120,000
Original Mortgage amount: $80,000
Interest Rate: 5%
Mortgage Term: 20
Term Remaining: 20
Amount remaining on mortgage: $80,000
Gross Rents: $2,000/mo
P&I: $527.96/mo
T&I: $316.67/mo
HOA costs: N/A
Deferred Maintenance notes:
Cost of water and sewage is around $200/mo
« Last Edit: May 20, 2015, 12:47:19 PM by ikea4532 »

Another Reader

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Re: Real Estate Case Study: Sell or Rent?
« Reply #1 on: May 20, 2015, 12:54:49 PM »
Generally, when you are starting out, you try to leverage the first property to buy the second property.  In your shoes, I would look into borrowing on the $55k property for the down payment on the $120k property and cash flow the repairs and upgrades.

Not familiar with the acronym MVACTY.

ShoulderThingThatGoesUp

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Re: Real Estate Case Study: Sell or Rent?
« Reply #2 on: May 20, 2015, 12:57:05 PM »
Apparently it means "minimal vacancy throughout year", or "I'm going to assume no vacancy costs".

waltworks

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Re: Real Estate Case Study: Sell or Rent?
« Reply #3 on: May 21, 2015, 12:57:12 PM »
At 50% rule, you're talking $225 a month on a $55000 property. That isn't very much money for the hassle of dealing with it. I mean, you will make some money. But I would sell this place and invest in something else.

-W

zephyr911

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Re: Real Estate Case Study: Sell or Rent?
« Reply #4 on: May 21, 2015, 01:09:32 PM »
Generally, when you are starting out, you try to leverage the first property to buy the second property.  In your shoes, I would look into borrowing on the $55k property for the down payment on the $120k property and cash flow the repairs and upgrades.

Not familiar with the acronym MVACTY.
At 50% rule, you're talking $225 a month on a $55000 property. That isn't very much money for the hassle of dealing with it. I mean, you will make some money. But I would sell this place and invest in something else.
$225/mo on $13,500 invested is still 20% cash-on-cash.
But the best rationale for leasing (vs. selling) isn't cash flow, it's the avoidance of s/t cap gain tax on $41.5K - easily $10K or more depending on your wages and location.

waltworks

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Re: Real Estate Case Study: Sell or Rent?
« Reply #5 on: May 21, 2015, 02:48:39 PM »
You know, the cash on cash thing drives me nuts. I know it makes you feel good, but it's just ludicrous. If I buy a stock for $1 in 1900 and today it's worth $100, the fact that it pays a $1 annual dividend (or appreciates 1% a year, if you want to think of it that way) doesn't make me ecstatic that I'm getting 100% cash-on-cash, right? Especially if I could sell that stock and use the $100 to buy something with better returns.

That said, yes, STCG might be a factor. Or not. Depends on the situation. No way in hell would I be involved with a $450/mo property. I don't think there is anywhere in the US where that won't be a D/F type area. If it's really worth $55k, it's been a great flip, take the money and run.

-W

ikea4532

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Re: Real Estate Case Study: Sell or Rent?
« Reply #6 on: May 22, 2015, 10:51:47 AM »
$225/mo on $13,500 invested is still 20% cash-on-cash.
But the best rationale for leasing (vs. selling) isn't cash flow, it's the avoidance of s/t cap gain tax on $41.5K - easily $10K or more depending on your wages and location.

okay so let's say I buy a house immediately with that 41.5K can I not avoid the tax on that money by investing in another property immediately, I believe the cutoff is 60 days, this is called a like-kind exchange or section 1031 exchange.

What I am seeing here is to sell and invest into a bigger better place. The property is in a coal region of Pennsylvania, all comparable prices for selling is $55,000, this month, within a mile of property in the same city.

zephyr911

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Re: Real Estate Case Study: Sell or Rent?
« Reply #7 on: May 22, 2015, 11:11:08 AM »
You know, the cash on cash thing drives me nuts. I know it makes you feel good, but it's just ludicrous. If I buy a stock for $1 in 1900 and today it's worth $100, the fact that it pays a $1 annual dividend (or appreciates 1% a year, if you want to think of it that way) doesn't make me ecstatic that I'm getting 100% cash-on-cash, right? Especially if I could sell that stock and use the $100 to buy something with better returns.

That said, yes, STCG might be a factor. Or not. Depends on the situation. No way in hell would I be involved with a $450/mo property. I don't think there is anywhere in the US where that won't be a D/F type area. If it's really worth $55k, it's been a great flip, take the money and run.

-W
Why does it drive you nuts? The equity created by the rehab is a separate type of return, and would be realized/accessed through a separate process, so it's fair to look at the two gains as two separate things. My point was that the rental cash flow - though small in absolute terms - does stand on its own, percentage-wise. And we're talking about a short rehab period, not a multi-generational holding period where the gain is primarily due to the timeline itself.

RE pricing and quality: I hold two duplexes with 3 occupied units rented at $600, $475, and $400. The vacant unit was pulling $450 but will make $600 after a huge overhaul just finished. This is a B/C area that's trending upward with major renovations and new construction everywhere.
I wouldn't want to have 50 units like this, as some people do, but they're a pretty damn good way to build an initial portfolio. The only reason we'd ever trade up is to consolidate and simplify management as growth occurs.

$225/mo on $13,500 invested is still 20% cash-on-cash.
But the best rationale for leasing (vs. selling) isn't cash flow, it's the avoidance of s/t cap gain tax on $41.5K - easily $10K or more depending on your wages and location.
okay so let's say I buy a house immediately with that 41.5K can I not avoid the tax on that money by investing in another property immediately, I believe the cutoff is 60 days, this is called a like-kind exchange or section 1031 exchange.
I hadn't thought about 1031 for a flip, but theoretically it can be done. I have no experience with them and am averse to complicated accounting, so maybe someone else can weigh in on the feasibility.