Author Topic: Rental property suggestions  (Read 5346 times)

dadof4

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Rental property suggestions
« on: November 05, 2013, 04:54:20 PM »
Our old home was converted to a rental property a few years ago when we bought the new place. I am considering my options. Here are the numbers:

Current Zillow value is $260k. Just made my last mortgage payment, so it's ours free and clear.
Property tax is $3k, insurance another $500.
Rent is $900, but going up to $1100. Zillow claims it should be $1600.
Tenants are great, haven't had one day of vacancy, they do a good job maintaining it, pay rent on time. We pay $47 in home warranty a month, tenants cover the technician fee ($75) if anything breaks down. They could not handle $1600 rent, $1100 was stretch.

I'm not very fond of land lording, but these tenants are headache free. However, with a management company I'm sure I can get more per month, with some overhead.

I like owning real estate as a hedge against the stock market. There is some emotional security from owning a house free and clear (IE if the fit hits the shan, we'll always have a house).

Options:
1. Keep things as is
2. Sell off property. Slew of options with proceeds (REITs? More stocks/Bonds? Pay off personal mortgage? A little of each?)
3. Evict tenants (or raise the rent), spend a little to update it (carpets need to be replaced, ouch!) and re-rent via a management company.


Any thoughts would be appreciated.

arebelspy

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Re: Rental property suggestions
« Reply #1 on: November 05, 2013, 08:19:16 PM »
1100 rent on 260k is a pretty bad return.  Even if you got 1600 it'd be a bad return.

If you want real estate (for the inflation hedge/hard asset), I'd recommend selling and investing where the numbers make sense.

For 260k you could own 2-3 properties that rent for 1100 each, rather than one, and at least double or triple your return and hedge.

I can't see a situation where keeping this as a rental makes sense.

YMMV, and I'm speaking from a real estate investor's perspective.  If you're just keeping it, it's for inertia's sake, IMO, which is not a good reason to keep any investment.
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dadof4

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Re: Rental property suggestions
« Reply #2 on: November 06, 2013, 12:26:53 AM »
Thanks for the reply!

1100 rent on 260k is a pretty bad return.  Even if you got 1600 it'd be a bad return.
I figured as much, especially hearing some stories around here about properties with much better ratios.
My premise for keeping it was this: At $1600, if you guestimate that taxes, insurance, repairs and maintenance, property management and vacancies drop it by half to $800 net, we're looking at around 3.7% annual return. Add in property appreciation at 3% (around inflation), and you nearly have 7% return. I'm not sure I'd get much better with stocks or REITs (but they are much easier to "manage", and are easily liquidated). That's probably the reason I'm dragging my feet. I have a feeling the real estate market will do better than 3% in the next year as well.

Your points about there being better real estate options, and that keeping it for inertia's sake being a bad idea are well taken. I agree. Inertia is a powerful force though*...



* I'm sure my old physics teachers would have a collective facepalm after reading that statement.
« Last Edit: November 06, 2013, 12:32:32 AM by dadof4 »

arebelspy

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Re: Rental property suggestions
« Reply #3 on: November 06, 2013, 08:03:26 AM »
I figured as much, especially hearing some stories around here about properties with much better ratios.
My premise for keeping it was this: At $1600, if you guestimate that taxes, insurance, repairs and maintenance, property management and vacancies drop it by half to $800 net, we're looking at around 3.7% annual return. Add in property appreciation at 3% (around inflation), and you nearly have 7% return. I'm not sure I'd get much better with stocks or REITs (but they are much easier to "manage", and are easily liquidated). That's probably the reason I'm dragging my feet. I have a feeling the real estate market will do better than 3% in the next year as well.

A 3.7% real return with all the stress, hassles, etc. of real estate?  Meh.  There's a reason most real estate returns double that, at least.  And that's when you're assuming rents $700 more than currently (and $500 more than you'll be getting soon)!  At your current and new rent rates, your return is much lower.

Your points about there being better real estate options, and that keeping it for inertia's sake being a bad idea are well taken. I agree. Inertia is a powerful force though*...

Indeed.  And a large force, it seems, when it comes to real estate.  First decide if you want RE as part of your AA, then if you do, decide which would be the best RE to hold.  I'm betting it won't be this property.

In other words, if you had 240k cash (what you might net after fees for selling this*) and were looking at all your investment options, would you buy this property that rents for 1100?  I hope not.  So sell, take the 240, and decide what the best thing to do with it is.  That may include buying a few pieces of real estate that rent for ~2500+/mo, or it may be stocks, or whatever.

(Although taxes will be an important figure in the calculation, so be sure to think about that, but the numbers are so bad on this it's probably a clear sell anyways.)
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Nords

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Re: Rental property suggestions
« Reply #4 on: November 06, 2013, 09:10:36 AM »
A 3.7% real return with all the stress, hassles, etc. of real estate?  Meh. 
That pretty much describes Hawaii rental real estate.  The rationale is that 3.7% with rental hassles is less emotionally frustrating than 3.7% with stock-market volatility, or the challenge of building an equivalent investment of an inflation-fighting portfolio of TIPS/I bonds.

An alternate definition of "inertia" is "Our adult child might want to live there someday, or she might want to live in our residence for the better schools and we'd want to live in the rental because it's age-in-place friendly"...

dadof4

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Re: Rental property suggestions
« Reply #5 on: November 07, 2013, 11:13:46 AM »
Pretty much as I thought. I was hoping someone would find a good excuse for me to do nothing. Sometimes you need a little reality check/face punch to get off your lazy bum though :)

DW is working on her Realtor license, and prices tend to be higher in the summer around here. So current plan is to hold on for another 5 months then sell.

Thanks for the input!

Johnny Aloha

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Re: Rental property suggestions
« Reply #6 on: November 09, 2013, 10:48:52 PM »
A 3.7% real return with all the stress, hassles, etc. of real estate?  Meh. 
That pretty much describes Hawaii rental real estate. 

There are exceptions to every stereotype! 

We were able to raise the rent on our duplex and are netting almost 8% cash on cash after assuming vacancy and allowing for repairs.  Actual returns are higher since we haven't had a single day of vacancy yet*.  Add in mortgage paydown and modest 3% appreciation** and we're around 33% ROI.

Not sure the trends will continue though...

*knock on wood.

**actual 12-month appreciation is around 10%

arebelspy

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Re: Rental property suggestions
« Reply #7 on: November 10, 2013, 08:49:51 AM »
And you're looking to invest elsewhere why?  ;)
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 three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

honobob

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Re: Rental property suggestions
« Reply #8 on: November 10, 2013, 08:56:14 AM »


In other words, if you had 240k cash (what you might net after fees for selling this*) and were looking at all your investment options, would you buy this property that rents for 1100?  I hope not. 

But you're not looking at the MOST important pieces of profitability, rent growth AND appreciation.  If the area has been experiencing 30+ years of 6=7% rent growth and 9+11% appreciation then this looks like a pretty good investment. 

Also as Johnny Aloha has stated if you can lower your vacancy you're dollars ahead.  I've been landlording for over 30 years and have had 0% unplanned vacancy!!  When I read people here utilizing 15% vacancy or complain about a property sitting vacant for 5-6 months I just don't understand.

honobob

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Re: Rental property suggestions
« Reply #9 on: November 10, 2013, 08:59:38 AM »
And you're looking to invest elsewhere why?  ;)
I assumed it was because he was being paid $30,000 upfront to invest.  I would question what the catch was.  Also a little diversification never is a bad idea.

Nords

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Re: Rental property suggestions
« Reply #10 on: November 10, 2013, 11:35:47 AM »
There are exceptions to every stereotype! 
We were able to raise the rent on our duplex and are netting almost 8% cash on cash after assuming vacancy and allowing for repairs.  Actual returns are higher since we haven't had a single day of vacancy yet*.  Add in mortgage paydown and modest 3% appreciation** and we're around 33% ROI.
Not sure the trends will continue though...
*knock on wood.
**actual 12-month appreciation is around 10%
Very nice!

Over the last 19 years of renting, our place has returned 3-4% APY (cash on cash) and appreciated at about the CPI.  A new neighborhood is being planned for 2015 and is only a couple of miles away, so we'll have to see how that works out.  I'd be surprised if it raises local property values.

Johnny Aloha

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Re: Rental property suggestions
« Reply #11 on: November 10, 2013, 02:43:11 PM »
And you're looking to invest elsewhere why?  ;)

This deal is very rare in my area and actually I didn't even know it was a great deal until I got serious about REI by reading here and BP...

Also there's a lower cost of entry and better job market in Texas than in my area.  Plus some diversification is a bonus.

SunshineGirl

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Re: Rental property suggestions
« Reply #12 on: November 10, 2013, 05:18:48 PM »
Is there a way you can turn this into a better-returning investment? i.e. adding a studio or something?