Inherited House w/ Mortgage. Rental Property?

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Inherited House w/ Mortgage. Rental Property?

Postby dx41 » Sun Sep 01, 2013 2:46 am

My sibling and I have inherited a single family home from our deceased parent.

The property currently has a mortgage, but is in what seems to be a very desirable area. We have relatives who work as realtors, and also a number of family friends, who strongly believe it is in our best interest to keep the home as a rental property for as long as humanly possible, due to the potential return on the investment.

However, I just don't see the evidence to support that recommendation, which could be due to my lack of familiarity with investment properties and rentals.

Here are the figures we are working with:

Cost Basis of Home (Based on date of parent's death) : ~$940,000
Current Estimated Value: $1,145,000

Land Value: $599,830
Building Value: $227,933.00

Loan 1: $578,950.00
- 3.0% Interest rate, 288 months remaining, Rate adjusts yearly

Loan 2: $19,000
- 3.24% Interest rate, Variable Rate, No apparent term

Loans currently held in my deceased parent's name. Deed has been revised and recorded to reflect the shared ownership of myself and my sibling, as beneficiaries of our parent's estate. The lenders seem to be comfortable that they are receiving the necessary payments on time, as we have not heard otherwise from them so far. (Edit: Here I meant we are paying the loans on time, and the lenders have not complained about the fact that the loans are in the name of our deceased parent. They are just accepting our payments.)

Homeowner's Insurance: ~$1,500/yr
Property Taxes: ~$11,000/yr

Appreciation of the neighborhood:
Since 1990: Up 166%
Avg. Annual Rate: 4.35%
(According to http://www.neighborhoodscout.com )

We are planning to rent the home for $3,400/month, if we decide to go this route. As Loan 1's rate will adjust on a yearly basis, it does not appear we will be able to do anything more than a yearly rental agreement with our potential tenants. I would hate to be locked in with a renter in the event the numbers change to a point where our returns deteriorate significantly. I am also a little concerned with the potential liability associated with a rental contract in the event our lender decides to call in our loan, which seems like it would necessitate the immediate sale of the house.

My sibling and I are also pursuing graduate school in the future, which means it is extremely unlikely we will have the income necessary to refinance the mortgage for the next 6-8 years. Our supporters think that we will be able to manage the property without issue, and can simply sell it if it clearly becomes more trouble than it is worth based on where we end up for grad school and what we have going on that the time. However, they still stand by the belief that this is a property that should be retained through all possible effort.

All major appliances also seem to be old enough that they have fully appreciated, based on the 5-year window the IRS depreciation schedule gives.
With all this information, my relatives think I am foolish to even hesitate on transitioning our property into a rental immediately.

As my initial experience with our forum has me anxious of the illiquidity and lack of diversification of a such a large single investment, am I simply too risk averse for my own good?

My sibling is willing to go with the consensus of our friends and relatives, but their arguments are that this is simple common sense in such a great neighborhood. Thus, I am hoping that I can get a bit more of an evidence-based opinion from our community.

In the event anyone shares the view that this is an excellent idea, I would love to hear about any strategies you would recommend going forward.

Thank you in advance for any feedback you can provide. Please have an amazing day.
Last edited by dx41 on Mon Sep 02, 2013 4:18 am, edited 1 time in total.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby Boglemama » Sun Sep 01, 2013 5:56 am

Having a rental property is a job unto itself and can be time consuming. You would need to know rental laws, building code, and many other details. Then, deal with tenants. Is this something that you want to do? Property taxes, maintenance, etc.

Your supporters. Do they have rental property and know how consuming it can be? Just because they are in real estate, doesn't mean that they know rentals. Is your market even a good rental market? Some markets are better for purchasing.

If I were your relative, I'd recommend selling. You have a lot going on in your lives and just had a loss. Starting a new business at the same time seems a bit much.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby SnapShots » Sun Sep 01, 2013 9:56 am

Just looking at the current value of the house, I would say it would not make a good rental property. I would not want to rent almost a million dollar home.

Sell it.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby YttriumNitrate » Sun Sep 01, 2013 10:42 am

dx41 wrote:Loan 1: $578,950.00
Loan 2: $19,000
Homeowner's Insurance: ~$1,500/yr
Property Taxes: ~$11,000/yr

My sibling and I are also pursuing graduate school in the future, which means it is extremely unlikely we will have the income necessary to refinance the mortgage for the next 6-8 years.


Based on my rough estimates, if the house is vacant for 6 months you'd be on the hook for about $20,000 in taxes, mortgage payments, and insurance during that time. Do you have sufficient cash reserves to handle that now or while you're in graduate school?

Edit, found this in your 2012 post:

dx41 wrote:Portfolios: ~$600,000 Total Assets The estate also has a house that, once sold, will create another windfall of approximately $125,000 to each beneficiary. Please let me know if you have any advice on how to handle those assets. My assumption is they would be invested in a taxable account.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby dx41 » Sun Sep 01, 2013 6:51 pm

Thanks so much for the feedback.

The rental market for the neighborhood seems to be very strong. According to the 2010 US Census: ~60% of housing is owner-occupied, ~40% is renter-occupied. The homeowner vacancy rate was 0.9%; the rental vacancy rate was 4.8%.

Having a rental property is a job unto itself and can be time consuming. You would need to know rental laws, building code, and many other details. Then, deal with tenants. Is this something that you want to do? Property taxes, maintenance, etc.


In the event it turns out to be a good financial decision for myself and my family, I would be willing to invest the effort. Landlord-Tenant laws seem readily available. The family feedback is also that if things get to be too much, we can just hire property management. They also seem to believe it is not going to be that difficult to manage.

My supporters who are most familiar with our figures are realtors. Those with rental property in the area have not seen our numbers, but still strongly encourage keeping the house as a rental. It also appears the census data supports that the house is in a good rental market.

In a quick review of our data, which I shared in the first post of this thread, it appears that in an ideal situation, we would be making about $800 per month, assuming no vacancies and no major fixes. The main value of the property therefore seems to be appreciation. I am wondering if selling the house and simply investing the proceeds in a three-fund portfolio or even 100% REIT would yield similar gains with far less cost and risk. However, as some of the threads on this board seem to suggest in real estate vs. portfolio gains, the loan amount means we can have much more money invested in the house than we can in a portfolio. Yet since it is still a loan, it appears we are simply hoping the benefits of the investment outweigh the costs of the loan.

Additionally, I am concerned on the ethical front based on the loan situation. If the bank decides to call in the loan held in the name of our deceased parent, it appears that we would be forced to sell the house out from under any tenant. I would also think the tenant would be able to hold us legally accountable for breach of contract, in the event we have a year-long lease.

Unfortunately, despite these misgivings, my support team still thinks I would be crazy to sell such an incredible property. For those who have recommended selling, could you please share a bit more of your reasoning? In the event a sale is our best option based on the evidence of our situation, I would like to be able to present the evidence in a way that keeps my support team intact. At this point, my supporters seem to believe I am simply overemphasizing the negatives and overlooking the incredible rewards of this home. I am still somewhat concerned that their strong beliefs are more faith-based than evidence-based, but as I said, I have little experience and awareness of how I should be reviewing my figures and the neighborhood data to make such evidence-based decisions.

As I am ultimately planning to assume approximately $200K of student debt to complete medical school, I feel somewhat inconsistent when I try to push back on the financial feasibility of this property in light of the incredible financial gamble I will be assuming for my education.

I look forward to any additional feedback you could provide, and please let me know if I can provide any additional information.
Last edited by dx41 on Sun Sep 01, 2013 7:32 pm, edited 1 time in total.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby clevername » Sun Sep 01, 2013 6:57 pm

If you and your sibling inherited about $500k, would you two run out and buy a million dollar house together to rent? If the answer is no then you should probably sell it.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby livesoft » Sun Sep 01, 2013 7:20 pm

Sell the house to the folks who would want you to rent it. They can then rent it if they want to.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby Texas hold em71 » Sun Sep 01, 2013 7:36 pm

If the house is in such a great market you ought to be able to easily sell it for a great price. If you and your sibling are going into debt to go to school that tells me you do not have the cash to suffer an extended vacancy or major repair.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby dx41 » Sun Sep 01, 2013 7:46 pm

Thanks for the additional feedback.

Can I ask what so clearly makes this a "sell" situation? My supporters, who know I am familiar with the Bogleheads philosophy, seem to think I am simply suffering from "Boglehead Bias," which they feel is a strong preference for liquid, diverse assets. I brought up the REIT vs. physical real estate argument with them, and the feedback I received was, "Why would we want to invest in an REIT with holdings in Detroit when we can have physical real estate in a consistently positive location?" Due to my lack of experience in investment properties, I still have no real rebuttal.

Based on my personal misgivings, which seems to be supported by your incredible advice, I do plan to present the option of having my family buy out my interest in the property in the event they want to try to retain it. Since I am not too sure how I should be evaluating the situation financially, I wonder if I will be regretting this situation in the future. On the other hand, I would hate to think I am delivering a poor investment to my family. However, a common theme among many threads on our forums seems to be that we really cannot those who disagree with the evidence-based perspective from themselves, and that attempts to do so are often very detrimental to our relationships. This may be a similar situation.

Thanks again for all the feedback and support. I feel very fortunate to have been able to discover our community, and you do an amazing job making it a wonderful place to learn. Please have a great day.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby Watty » Sun Sep 01, 2013 8:05 pm

Loan 1: $578,950.00
- 3.0% Interest rate, 288 months remaining, Rate adjusts yearly



So if (when?) the rates go up by 2% over the next few years you will be paying about $12,000 a year more in interest.

For that reason alone I would sell it. You can't plan on being able to raise the rent to keep up with this.

There is sometimes a lot of emotion involved in selling a family home that you need to set aside.

If you will be keeping it as a rental you will be running a business that is worth a million dollars so to do it right you should have a firm business plan that includes professional tax advice and several possible exit strategies. The reason that you need the exit plans is that it might make sense today(probably doubtful) but it is likely that sometime in the future you will want to sell it and get out of the house rental business and that can be tricky.

Your sibling and you would also each need to gat a lawyer to help draw up a business agreement in how to handle the property and how it would work if one of you want to sell their interest in the property.

The lawyer should also review the situation in the mortgage. You might be able to get it transferred to your name but if not then one problem will be that the mortgage interest will still be reported in the deceased persons name. This might be usable as a deduction by the estate while it is being settled but after that I would not assume that you could automatically used it as a deduction on the rental property taxes since it is in your parents name. I am not a tax expert but this would be one thing to look into when you are doing the business plan.

You should really plan on using a property management company if you keep it as a rental. One big problem that people have posted about with shared rentals like this is that most of the work ends up being done by one person without any additional compensation.

Having a two person equal partnership is also problem because when an important decision needs to be made there is no clear way to resolve a difference of opinion.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby Watty » Sun Sep 01, 2013 8:30 pm

I still have no real rebuttal.


Other than your sibling it is really none of their friggin business anymore than how you invest your other money.


Just tell them you have decided to sell it since you to not feel that it is appropriate for you - end of discussion. It isn't like it is a family business and I would assume that the house has not been in your family for 200 years either.


Ten or twenty years from now it might turn out that the house would have been profitable or not but there is no way of know that but if you sell it then you will have had your share ($250K ?) invested for the same time so you will have done well enough. As long as you invest it wisely then it isn't like you are going to go out an blow the money
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Re: Inherited House w/ Mortgage. Rental Property?

Postby SuzyC » Sun Sep 01, 2013 8:32 pm

Well, you've inherited an illiquid asset that you can't pull equity out of (because you've got insufficient income to qualify for a mortgage) and which you don't have the cash to manage (and rental properties need maintenance, especially high-end ones where renters are paying for and going to expect more).Why not sell the house so you and your sibling can put the money towards school and/or taxable investment accounts? Why not invest in your career? You can always become a landlord later when you've actually got the savings and the income to get into that business (which, if you avoid massive student loans, you'll be able to get into sooner).

As an aside, I wonder how much more appreciation the home's sales price would see if mortgage rates finally do start going up significantly. Personally I'd sell now, while the selling is good.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby Texas hold em71 » Sun Sep 01, 2013 8:43 pm

dx41 wrote:Thanks for the additional feedback.

Can I ask what so clearly makes this a "sell" situation? you can't afford the inevitable bump in the road nor will you have the time to manage it while in medical school

My supporters, who know I am familiar with the Bogleheads philosophy, seem to think I am simply suffering from "Boglehead Bias," which they feel is a strong preference for liquid, diverse assets. that is not a Bogleheads thing. All investors prefer diversity and liquidity to a lesser degree, but you should not tie up all of your net worth in illiquid assets. This is a NOT a Bogleheads thing, I repeat.

I brought up the REIT vs. physical real estate argument with them, and the feedback I received was, "Why would we want to invest in an REIT with holdings in Detroit when we can have physical real estate in a consistently positive location?" Due to my lack of experience in investment properties, I still have no real rebuttal. Consistently up until now. No guarantee it will last.

Based on my personal misgivings, which seems to be supported by your incredible advice, I do plan to present the option of having my family buy out my interest in the property in the event they want to try to retain it. Since I am not too sure how I should be evaluating the situation financially, I wonder if I will be regretting this situation in the future. you may regret that you were not older with the ability to take on this type of investment, but it is what it is. If you keep it and HAVE to sell later, you will regret that too

On the other hand, I would hate to think I am delivering a poor investment to my family. However, a common theme among many threads on our forums seems to be that we really cannot those who disagree with the evidence-based perspective from themselves, and that attempts to do so are often very detrimental to our relationships. This may be a similar situation.

Thanks again for all the feedback and support. I feel very fortunate to have been able to discover our community, and you do an amazing job making it a wonderful place to learn. Please have a great day.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby rnitz » Sun Sep 01, 2013 9:12 pm

dx41, I feel for your situation. My siblings and I are in the process of selling my Mom's home after her passing. It can be an emotional situation, especially with other (non inheriting family members) pressures.

If you believe that residential real estate as a market is even slightly efficient then you will get essentially the same value selling the property as you will by renting it. There is a case that renting out the property will be somewhat more advantageous than selling it only because being a landlord is WORK (not an investment). Given you and your sibling don't have either the time or the money for this part time job, I have no idea why you are even considering this work (note the word "work" and not the word "investment"). We've had investment residential real estate and spent our time as landlords and it can be a good investment, but it's not passive. Consider this: you're studying for critical tests (boards, finals, whatever) and you get a call that the plumbing has burst and is flooding the property destroying the tenants property and asking what are you going to do about it? (Yes, that happened to us, but I was working in a startup rather than in graduate school).

If I was you (and I sort of am) I would recommend three things: sell, sell, sell (and to heck with your relatives that want you to keep the property for their sentimental reasons). Anyway, I wish you the best whatever you decide.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby dx41 » Sun Sep 01, 2013 9:50 pm

I just glanced at the computer, and I will need to take time to read through these incredible responses in more detail and respond appropriately. However, I wanted to take a moment to thank you again for the incredible support. I definitely feel more rational in my concern against retaining the property, and I appreciate the additional insight and potential strategies to consider going forward. Thanks again for taking the time to make my day better and much more informed. I hope that you feel as fantastic as I believe you should for doing so :)
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Re: Inherited House w/ Mortgage. Rental Property?

Postby widestance » Sun Sep 01, 2013 10:39 pm

DX, i think you made a good remark early on.
If your friends and family think it's such a great investment, have them buy out your interest.
Otherwise, i would sell it in a heartbeat and move on mainly because 1-2% increase in interest rate can't be offset with rent increases.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby donall » Mon Sep 02, 2013 12:21 am

Looks like the house rental will net about 1.7% each year fully rented and no major expenses. If you have read about being a landlord, then you know to count on 11 months of rent and always put aside funds for repairs and capital improvements. Professional management costs 8-10% of the monthly gross. Including those expenses will decrease your net to less than 1%. I think you can do better with a CD and no work.

If you are planning to attend medical school, time will be scarce. Money for school is more important than a possible future gain.

I can't think of a reason to keep the property, but perhaps you know more about local real estate. Perhaps the property may appreciate 20% and you and your sibling will have realized a $200,000 gain by keeping the house..
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Re: Inherited House w/ Mortgage. Rental Property?

Postby dx41 » Mon Sep 02, 2013 1:57 am

Thanks to Watty for the excellent point about mortgage interest deductions. I had done research on this in the past, and I wanted to share my findings in the event anyone can benefit from the information.

http://www.taxalmanac.org/index.php/Equ ... _Ownership

"
For example, a mother with her own home buys (in her name) another residence through a lender. Her son lives in this residence. The mother never sets foot in the residence she purchased - well, maybe to visit now and then. Her son makes all mortgage payments directly to the lender. He also pays utilities, taxes, and all other expenses associated with the home. They have an understanding, perhaps in writing to solidify it, that should the son default on the payments, she has recourse to him. In this case, the mother is the legal owner and the son is the equitable or beneficial owner.
...
Conclusion:

True, deductible interest must arise from a debtor-creditor relationship which is enforceable. Although Reg. 1.163-1(b) makes it clear the interest on non-recourse debt is deductible, the mother and son have created a debtor-creditor relationship.

Now the question arises, is either the mother or the son entitled to take the interest and property tax deductions for federal income tax. The mother could not because she is not a beneficial owner and did not make the payments. The son would be entitled to the interest and property tax deductions because of his beneficial ownership."
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Re: Inherited House w/ Mortgage. Rental Property?

Postby Raymond » Mon Sep 02, 2013 2:23 am

widestance wrote:...If your friends and family think it's such a great investment, have them buy out your interest...


And there it is :happy

I'd bet some of them would backtrack: "Uhh, I would, but I'm so busy already/don't have the money for the upkeep and management/blah-blah"
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Re: Inherited House w/ Mortgage. Rental Property?

Postby rkatz0 » Mon Sep 02, 2013 3:14 am

sell, reasons?

1. Mortgage situation - I couldn't sleep with that, if you can then you are either numb or have enough so it doesn't matter?!
2. Rental during school and so forth - You don't need the stress, I have been a landlord before, sometimes it can be demanding work.
3. I believe those in that area who are advising you not to sell don't want you to because when you do it will lower the comparable prices! They
are clearly not looking out for your best interest!
4. You can invest the difference in a tax account or whatever with much less worry, yield is potentially lower but way higher given the risk level.
5. This statement seems strange: "The lenders seem to be comfortable that they are receiving the necessary payments on time, as we have not heard otherwise from them so far." Does that mean the mortgage is being paid for automagically or what? I wouldn't like this over my head, if I were me!

Best regards,
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Re: Inherited House w/ Mortgage. Rental Property?

Postby dx41 » Mon Sep 02, 2013 3:36 am

To RKatz: We are paying the mortgage, and they are automatically withdrawing the interest-only payment from a trust account we designated when our parent passed away. As trustee of the trust, I pay the second loan directly via a mailed check from the trust account. I have been paying about $100 a month, and the interest-only payment is about $55. As the lender has not complained so far, it seems unlikely they will demand full payment on the loan even though it is in the name of our deceased parent. However, I am somewhat uncomfortable depending on this in the event we have a renter with an extended lease. My family does not seem to be concerned, but none of us know the legal implications of this violation of contract. However, it seems like breaches of contract usually end up with some legal ramifications...

So the family and supporters think I am crazy at this point, and some are looking into buying me out. They still would like to know why I think this is a bad investment, and I am still trying to come up with a well-reasoned argument. The counterpoints they make are that the appreciation rate of the property alone is worth hanging onto, as the home is located in a coveted school district in the Silicon Valley. I bring up vacancy rate, but they seem to believe vacancy is almost nonexistent in our area. (As I previously posted from the 2010 Census: "The homeowner vacancy rate was 0.9%; the rental vacancy rate was 4.8%.")

If anyone is investment property savvy, how would you go about evaluating a property like this?

I am looking through Bogleheads threads right now, and I will let you know if I come up with a reason. I do like to make informed decisions, and I definitely don't want to leave whichever friend or family member that buys me out in a less than desirable situation. I am from a very supportive social network, and I want to do everything I can to make sure our reunions are as pleasant as possible. If I can present a more evidence-based case to the interested family member, I would at least feel a bit better by giving him full disclosure of the situation.

Thanks again for all the feedback and support.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby dx41 » Mon Sep 02, 2013 3:57 am

I was also looking at this thread on evaluating rental property, too: viewtopic.php?f=1&t=116251&p=1694029

Cap rate from my calculations using an AARP calculator were: 2.4%

(Here is the AARP calculator: http://www.aarp.org/money/investing/inv ... lator.html )

The thread above says we should shoot for a cap rate of 8-10%.

Cash-on-Cash return (which seems based on the amount of money we have paid into the investment) (All expressed as a %):

1.53 (With no Loan 2 ("Paid off" before calculator was run"))
1.44 (Interest only Both Loans for as long as the calculator could handle)
-65.22 (Pay off loan 2 in 1 month)
-4.04 (Pay off Loan 2 in 12 months)
1.33 (Interest only Loan 1, Pay off Loan 2 in 360 months)

Those were the cash-on-cash returns for each situation. I am still looking into what they mean. As I said, even if I sell out of this situation, I would like to have enough information to know that I let the family/friends willing to hang onto this situation the fullest disclosure possible. Knowing how to evaluate investment properties may also be something that can help those involved in real estate on my support team, too. Thanks again for furthering my knowledge, and making the information available to the rest of our community.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby XtremeSki2001 » Mon Sep 02, 2013 7:31 am

SnapShots wrote:Just looking at the current value of the house, I would say it would not make a good rental property. I would not want to rent almost a million dollar home.

Sell it.


+1

Not worth the headache to make a few $$.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby YttriumNitrate » Mon Sep 02, 2013 9:20 am

dx41 wrote:In a quick review of our data, which I shared in the first post of this thread, it appears that in an ideal situation, we would be making about $800 per month, assuming no vacancies and no major fixes.


dx41 wrote:Since I am not too sure how I should be evaluating the situation financially, I wonder if I will be regretting this situation in the future. On the other hand, I would hate to think I am delivering a poor investment to my family.


You might regret it, big leveraged bets in a single area sometimes pay off big. Sometimes they do not. With vacancies, major repairs, tenants from hell and rising interest rates there are a lot of different ways you can lose that bet. Either way win or lose, you'll get to hear about it at family gatherings for years to come. :D

By the way, are you old enough to remember your family's general track record of investing? At least for mine, Thanksgiving dinners in the late 90s frequently involved discussions of how much everyone making on tech stocks. In the mid 2000s that changed to how much the value of everyone's house had gone up. Their financial advice is still good to listen to...just as an early warning of what to avoid...
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Re: Inherited House w/ Mortgage. Rental Property?

Postby SnapShots » Mon Sep 02, 2013 10:36 am

Take my advice as a long time landlord. You do not want to rent a million dollar home. Plus, you've got the baggage of a good size mortgage and property taxes.

If you are going to be in the rental business you need multiple properties and smaller homes are better because they are cheaper to maintain.

One property is more of a problem than ten, because you are not in the business. Multiple properties generate income to cover losses on other properties.

Never hire a management company. They'll put anyone in the home to rent it. If the home is torn up, you pay the price, not the management company.

Sell it while it is in good shape, before you have to remodel to sell it after renting it.

Edit: And, I see you're involved in an interest only loan. Oh My!!!

Good Luck!
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Re: Inherited House w/ Mortgage. Rental Property?

Postby magneto » Mon Sep 02, 2013 11:03 am

SnapShots wrote:
If you are going to be in the rental business you need multiple properties and smaller homes are better because they are cheaper to maintain.

One property is more of a problem than ten, because you are not in the business. Multiple properties generate income to cover losses on other properties.



We are also long term landlords. Agree totally with SnapShots.

Inherited situation is not one would seek starting from scratch.

Would also suggest minimising or getting rid of debt if after selling the inherited property you decide the rental business is for you and smaller property(ies) bought.

All Best
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Re: Inherited House w/ Mortgage. Rental Property?

Postby macchiato » Mon Sep 02, 2013 11:18 am

I'm going to post one tidbit that may be of use if you are moving forward with the rental scenario.

If you are truly in the heart of Silicon Valley in a coveted school district, you might want to strike up friendships with real estate agents in the area. There seem to be a constant stream of people renovating their homes, or moving to the area, who need shorter-term rentals of million dollar homes. Very often a real estate agent is in prime position to need rental inventory on behalf of their clients. My Realtor friend picked up the scent when I was considering renting out my house and within days had a few families lined up interested for 9-12 months lease and willing to pay a huge premium over average rents. It was a head-smacking obvious insight at the time. I ended up not going this route, but filed that away.

All that said, I did the ROI calculator for my rental scenario (you can do this, there are tools) and it seemed nuts to do it for the reasons already mentioned here. The ROI just can't compare to having a portfolio of much cheaper homes in inexpensive areas.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby Ricola » Mon Sep 02, 2013 11:21 am

You could hire a property management company but you will still be responsible for expenses. From everything I have read so far, my vote would be to sell it.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby tractorguy » Mon Sep 02, 2013 12:12 pm

From my understanding of your situation, it doesn't matter whether or not this home is a great financial investment as a rental. The issue is your ability to afford it. It looks like you'll have a positive cash flow if and only if nothing goes wrong with any of your assumptions. Even a minor hiccup (losing a tenant, unexpected repair bills, higher than expected interest rate increase, etc.) is going to turn this into a money pit. Since you'll be in medical school with low income, you'll not have the income from other sources to allow you to ride out even a small problem with the house finances before you go underwater. In the worst case, the risk is that you have something happen to the house (fire flood, earthquake), you don't have the money to repair it quickly and you don't have any tenant income while you're waiting for the insurance. How long could you afford to pay the mortgage and taxes in this case??? You'd have to do a short sale or foreclosure to get out from under this catastrophe and probably would have to declare bankruptcy. Do you really want to sign up for this risk?

I'd sell the house today while you have the flexibility to wait for a good price and never look back. Just tell the doubters that you're going to use the proceeds from the sale to invest in yourself (eg medical school) and don't have the time or finances to be a real estate mogul.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby Watty » Mon Sep 02, 2013 12:24 pm

You seem to think that you need to be able to justify a decision to sell the house. Selling the house should be the default choice that requires no explanation. Deciding to keep the house would be the choice that would take extensive research and compelling numbers show that it was a better choice.

One thing to watch out for is that if the friends and relatives that you are talking to own real estate in the Bay Area then likely do not have an objective opinion since they likely bought their house based on the assumption that prices would keep increasing.

It is probably not a good idea to sell it to someone you know. Not only will it be awkward if the house price goes up or down in value a lot but they are unlikely to pay up top dollar for the house. It is was such a great purchase then they would have already bought the house next door as an investment.

The counterpoints they make are that the appreciation rate of the property alone is worth hanging onto, ........



The current appreciation rate is already currently factored built into the price of the house which is one of the reasons that it is priced so high.

There is a phrase in investing; "the trees do not grow up into the sky", which is a way of saying that there is a limit to how high any investment can grow.

For example with a million dollar house there are a limited number of people who can afford it. If it increases in value to 1.5 million dollars there will be a lot fewer people who can afford it and the high it goes the fewer an fewer people will be able to afford it.

This is also impacted by increasing mortgage rates which are unusually low right now due to all the federal stimulus. As recently at 2008 they were well over 6% so you really have to ask yourself how many people will be able to qualify for a mortgage to buy a million dollar+ house with a 6% or higher mortgage.

http://www.freddiemac.com/pmms/pmms30.htm

Mortgage interest rates have gone up from the 3 to 4 percent range already and that is already hurting the less robust housing markets.


A few more things;

Back in the 1980's I lived in Sunnyvale and I was thinking of buying my first house there. One of the things that I looked into was the odds of there being an earthquake while I lived in the house. As best as I could figure it was that I could expect significant damage to the house maybe once in 200 years. That does not sound too bad but what this means is that if I owned a house there for 20 years then there would be a 10% chance that it would have significant earthquake damage while I owned it. Be sure to include getting earthquake insurance into your calculations. If it is a rental property then you would likely lose the non-recourse qualification on the mortgage so that if the house is destroyed in an earthquake then you might still have to pay pack the mortgage.

Do not underestimate the impact of the property taxes. If you keep it for a rental you will no likely longer qualify to the homeowner property tax limitations.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby zebrafish » Mon Sep 02, 2013 12:52 pm

First off, OP, sorry about the loss of a parent. Selling a family home can be difficult. A couple comments to re-inerate previous points (and a couple new ones):

1. Agree completely (from personal experience) that entering medical school/residency etc. is a VERY busy time in your life and you will want as FEW distractions and outside commitments as possible; real estate can be a lot of hassle (I didn't have a rental, but I wouldn't have had the time to deal with one).

2. You will likely move around during the next 10 years of your life (and make some major purchases), and I would not want to be a long-distance landlord; I especially wouldn't want to be financially linked to a family member in a real-estate partnership (you're already disagreeing-- wait until something really messy comes up)

3. Unless you have the cash to pay for medical school outright, I would sell your share in this house and use the money to fund medical school and exit debt free. I bet this would honor your parents' wishes and would satisfy the legacy wishes for an inheritance for most people I know.

4. Advice from people "in the business" can be helpful; however, just as these family members criticize Bogleheads for "groupthink"-- you can make the same argument about realtors; sometimes if you're a hammer, all you see are nails

5. Be wary of allowing your family to strongly influence your investment decisions; I keep family and finances 100% separate

6. This is a large amount of your net worth to have invested in a single asset; this involves risk (remember that real estate crash?); and if you inherited cash you probably wouldn't have gone out and bought a rental property with your sibling

7. Doctors sometimes make really stupid investment decisions. I've had a couple near-misses. Be conservative. There is a tendency to think you're smarter than everyone else. It doesn't necessarily translate into special "investment knowledge".

8. If you can sell your "share" of the property to a family member for market rate and get cash out, I would do this in a second.

Good luck
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Re: Inherited House w/ Mortgage. Rental Property?

Postby G12 » Mon Sep 02, 2013 2:02 pm

dx41 wrote:As my initial experience with our forum has me anxious of the illiquidity and lack of diversification of a such a large single investment, am I simply too risk averse for my own good?

My sibling is willing to go with the consensus of our friends and relatives, but their arguments are that this is simple common sense in such a great neighborhood. Thus, I am hoping that I can get a bit more of an evidence-based opinion from our community.


Outside your sister and self, the other relatives have no bearing on the decision the two of you make. I have been involved with 3 siblings in inherited property matters and would much rather have been involved in the RE as a sole owner. Currently I have interests in 3 commercial properties and 2 residential rentals that are not related to any form of inheritance. The numbers posted do not make economic sense and the longer term risks are significant. Great value can be derived from owning assets one can sell at the click of a mouse compared to what is often a drawn out and expensive scenario to sell individual residential properties. The Detroit comment from the relative regarding REITs is off base.

One item you may be overlooking is the step-up tax treatment of the property for you and your sister receive. Given that, and current low mortgage rates, I would sell pronto given all the factors indicated in the initial post and not put much weight into extended relatives commentary nor trying to placate them, it is you and your sister's property, not theirs. Good luck, sometimes dealing with "well meaning" relatives can be a PITA.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby island » Mon Sep 02, 2013 4:10 pm

My condolences. I'm sure this is a difficult time for you and your sibling.
Just from what you presented, I too would vote to sell it.

Lets say you didn't inherit this home, but were offered the same terms as an investment opportunity, would you jump on it?
Would you take over that large loan for a home you aren't going to live in, can't afford, but hope to cover all expenses by rental income? Go for it even though you admit it goes against your personal investment philosophy, you have no experience with and obviously don't completely understand? Take it on at a time in your life when your time and energy will be limited because you're focused on furthering your education for your career?

Nope. If not inherited, I think you'd pass on it.

I also question the motives of your "support team". Why are they pushing so hard on this; do they have a vested interest? They think you're crazy? Sounds like they are because I can't see why they blow off your opinion and think it's a good fit for you. It must be based on emotion or the assumption that you can't go wrong with property in the Bay Area, even if it's too expensive. Did they miss what happened in the real estate market the past several years?
Also why do you feel you need to justify your decision or wrap it up in a package that's acceptable to them? Your parent left it to you and your sibling, not them and from what you've said so far it sounds like your sibling is leaving it up to you and I would anticipate that might be the same when it comes to the workload and responsibilities that come with owning rental property.

Sell it and split the profits so you can both move on unencumbered and invest as you each see fit. Good luck.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby WhyNotUs » Mon Sep 02, 2013 4:30 pm

There are lots of threads on this topic of evaluating homes for rental. One would need to know your payment info in order to run the numbers but almost anyone who looks at such things would tell you to sell.


If you take your 3400 a month and multiply by 11 (8% vacancy)= $37400 Operating Income

Cleaning & Maintenance 0.5% of basis (edited to correct math error)
+ Insurance 1500
+ Taxes 11,000
= Operating Expenses

Operating Income - Operating Expenses= Net Operating Income

Net Operating Income - Mortgage Payments = Cash Flow

Cash on cash in your situation (no cash invested so the metric could be market value - mortgages). Assuming no need for investment prior to rental.
Cash Flow/Cash Investment= cash on cash

P.S. a lower than desired cap rate say 5-6% could be justified in a market with supply constraint and proven track record. This will not make that but just to clarify that 8-10% is not possible in all markets, particularly those with proven record of appreciation.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby dx41 » Fri Sep 06, 2013 4:32 am

Thank you all again for your incredible insight. The time you have taken to evaluate my situation and respond with your educated opinions and experience has helped me a great deal. Thank you very much for helping me make a more informed choice about my situation. I sincerely appreciate the compassion and support. This forum has a wonderful community, and I have difficulty adequately describing just how thankful I am for the effort you all put in to make it that way. Please have an amazing day.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby Twins Fan » Fri Sep 06, 2013 1:15 pm

zebrafish wrote:3. Unless you have the cash to pay for medical school outright, I would sell your share in this house and use the money to fund medical school and exit debt free. I bet this would honor your parents' wishes and would satisfy the legacy wishes for an inheritance for most people I know.


This...

Good thing I read through the posts and didn't just spout off. :D But, this is what I was thinking all along.

The relatives recommending keeping the house and all the "investment" talk. Yes, I see that side, but.... OP, you use the word "inherited" right in the title of this thread. What have you and your sibling invested in this home? Nothing, right? You inherited it after the passing of your parents.

What would your parents want you to do with this inheritance? Would they want you stuck with a large debt that was theirs? Would they want you to take on more large debt to get through school? Or, might they want you and your sibling to be taken care of/set up well for school, and then move on free and clear and in a great position after school?

I'm kind of thinking that all the numbers and investment talk needs to be thrown out the window here, and that the wants of the deceased parents should be considered a lot more. Whatever those may have been. Was it ever discussed what they wanted done with the home after they passed? I just have to doubt that they wanted you to be in debt when you're basically starting out in life with the hope that the rental home deal works out.

Sorry for your loss also.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby clemrick » Sat Sep 07, 2013 3:59 pm

I hope I am not too late. If you are still looking for good, solid, financial reasons for selling the house - school loan interest!

Ask your advisers if they can GUARANTEE you will make more than 6% per year on your "investment." That is the minimum I would consider if I had to take out loans for my education. Especially when the education could easily be paid for with the sale of the house. Also point out that you will not actually be making any money on this investment until you sell it. How much would the sale of the house bring you at the end of your schooling? Subtract taxes, realtor fees, and other costs. Will you really be making any money at all an compare that to what you will owe at the end of school. Is that $200K you mentioned just what you will borrow or does that also cover the interest that will accrue while you are in school and are paying off the loans. And how long will it take you to pay it off? What will the house be worth at that time and how much would you actually clear? Will it still be more than the total you pay on your school loans.

What happens if you can't finish school but still have over $100K in loans to payoff? What happens if your sibling gets in an accident and has a judgement against them? What if, what if, what if. There are too many what if possible that make the idea of holding onto the house precarious.

Take the money from the sale of the house and pay for your education. When you graduate, you will have so much freedom to choose what you want to do that any appreciation on the house will not make a difference.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby dx41 » Wed Oct 23, 2013 11:51 pm

Thanks for providing some more excellent feedback, Twins Fan.

My main reason for coming to our forum has been to try to keep any emotions or personal biases out this decision, as my relatives' own biases toward real estate seem to be contributing significantly to their advice. Thus, I sincerely appreciate the investment and numbers advice that people have been giving. Not only does the evidence-based advice help me in making an informed decision in this situation, but I hope it also helps anyone else who comes across this thread facing a similar scenario. I also appreciate the education I have received in making an informed decision about real estate in general. The feedback has been wonderful, and I thank you all again for making that possible.

Divining the wishes of our deceased parent has been a bit more difficult. While I would agree that he/she would have liked us to remain free of bad debt, the location and character of this real estate made me wonder if it would be considered a positive investment, and qualify for the category of "good debt" that seems to include things like educational loans.

Thank you for the sympathy and support, too. Not only is all this feedback helping me make an informed decision about this situation, but it has also been very informative about how I may look to set up my own estate in the future. *smiles* I think a link to the Bogleheads Forum will need to be included in any will or trust I create, as you have all created an invaluable resource for any who stumble across this forum. Thank you for the continued effort and for your dedication to making this such an incredible place.

Please have a wonderful day.

Also, for anyone interested, it appears that lenders cannot legally call loans on inherited property, unless this law has been changed:

"12 USC § 1701j–3 - Preemption of due-on-sale prohibitions
...

(d) Exemption of specified transfers or dispositions
With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon—
...

(6) a transfer where the spouse or children of the borrower become an owner of the property;
..."

As reported here. (viewtopic.php?f=2&t=108592)

Thanks again to everyone for the amazing insight.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby rogermexico » Thu Oct 24, 2013 2:49 pm

Evaluating a rental property:
1) Add up total operating expenses (prop tax + insurance + repairs estimate + any utilities + management fees)
If self-managed include a little salary for your time and troubles in this calculation. I’d guess-timate 18k/ yr total for your case.
2) Take monthly rent * vacancy rate * 12 = gross operating income … maybe 38.5k/yr in your case
3) Net operating income (NOI) = gross operating income – total operating expenses … that’s about 21k.
After this, cashflows and investment returns depend on whether you’re working with borrowed money or not. So consider some scenarios.
If you borrowed the 1,145,000 estimated market value at 3.0% that would be P&I of 58k/year (interest alone on this would be 34k/yr). So since net operating income is only 21k, one would lose 13k/yr for the privilege of buying this house no money down and renting it out. So you’d have to be betting on house price appreciation big time (since cashflow in the fully financed scenario is bad). Realtors tend to bet on price appreciation, but as we’ve seen that’s not always a great bet.
Now since you have 550k in equity (based on your reported market value and outstanding loan balances), cashflow situation is not as bad but you should ask yourself why you’d agree to get such a low cashflow return on your money.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby Honobob » Thu Oct 24, 2013 4:29 pm

Silicon Valley!

This is the strongest argument for keeping the property. Well that and the fact it has increased in value $195,000 since your parents death.
Have your support Realtors show you the increase in value over say the last 40 years. That should convince you not to cash in your “cash cow”! Also why are the taxes so high? Was this a recent purchase by your parents or have you not filed for the Prop 58 parent/child exclusion from reassessment?
Keep the property! $195, 000 appreciation already! Bay Area real estate is a gold mine.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby dx41 » Thu Oct 24, 2013 7:31 pm

Thanks to rogermexico for the evaluation calculations. They helped me gain a much better sense of how to understand the numbers.

The property was purchased in 2002, which would probably explain why the property taxes are so high. The appeal of a home in Cupertino with some of the best schools in the Bay Area has been the main argument for keeping the house as a rental. However, my numbers, calculations, and the fact that we cannot refinance as students, seem to tilt the equation toward selling.

I still need to look more into cap rate and cash-on-cash return, as the terminology is definitely beyond my limited knowledge of real estate. The results of the AARP calculator seemed very odd, and I would think a better understanding of the basis of their calculations would help decipher them.

Thanks again for all the support. Please have a fantastic day.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby john94549 » Thu Oct 24, 2013 8:41 pm

The note (aka mortgage) is not callable per Garn-StGermain.* That said, it's not a terribly attractive loan, in any event. Now, had the parents obtained a fixed 30-year at 3.4% or thereabouts, with many years to run, it would be a different story. Then, I would recommend keeping the house. Re-financing into a low-rate fixed mortgage is a common estate planning option for folks planning to leave potentially rentable property to heirs. Since that option was not chosen,

Sell it.

*Garn-StGermain Depository Institutions Act of 1982. Due-on-Sale inapplicable to inherited, encumbered, property.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby goldeneye9655 » Fri Oct 25, 2013 12:56 pm

We are planning to rent the home for $3,400/month, if we decide to go this route. As Loan 1's rate will adjust on a yearly basis, it does not appear we will be able to do anything more than a yearly rental agreement with our potential tenants. I would hate to be locked in with a renter in the event the numbers change to a point where our returns deteriorate significantly.


This paragraph scares me. Renters don't care what your mortgage is. The most they will pay is market value. Check what current market value is on the rent instead of looking at what you need to "break even" on the mortgage. This variable rate mortgage is very likely to end up as an anchor around your neck.

I love rentals and have quite a few myself, but would never do this deal. When you analyze the investment reverse the numbers; if you had $550k in cash, would you go and buy this investment. I know I would not. This is a ridiculously low cap rate. That means you are banking on appreciation of the property, which could continue, or could stagnate. Either way, appreciation is not cash in your hand until you sell the property. You have to have enough cash reserves to weather the storms that will come up between now and when you do sell the property.

Overall as a real estate investor myself, every angle of this deal makes me nervous. I think you have a medium upside with a bankrupt downside. The quick numbers I ran on it put it severely negative. Don't forget the vacancy and maintenance in the equation. Also realize that CoC return can be deceptive. Expenses come in bursts and really hurt if you don't plan for them. If you end up with a $15,000 expense 6 months into the rental how are you going to handle it?

Best of luck on your decision.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby Honobob » Fri Oct 25, 2013 1:26 pm

dx41 You are getting a lot of really bad information here. I afraid your inexperience with real estate makes you an easy target. Also I get the feeling that you don't care what the "numbers" are you just want to get you hands on your share of the equity. Nothing wrong with that but be honest with yourself, us and your supporters. Git your big girl panties on and say what YOU want to do. Instead of us trying to convince you to do something you don't want to do maybe your better question would be "What excuse can I give to people for NOT doing what they want me to do?".

But, if you are really looking at this from a financial perspective...

1. There is no such thing as a "cap rate" for a single family house.
2. There is no such thing as a "cap rate" for a single family house. Don't believe me, call your Assessor office and ask for your area/district appraiser and ask them what "cap rate" they use for a SFH. Depending on your definition of Silicon Valley you are in Santa Clara, San Mateo or Alameda County. The answer will either be laughter, there is no cap rate for sfh it is used for commercial properties, or they'll say 9 just to get you off the phone.
3. Cash on cash? Based on your land and improvement value I'm guessing the 2002 purchase price was around $700,000. Now it is worth over 60% more for a total of almost half a million dollars. So in your coc figgering what will you use for amount invested? The probably $140,000 your parents put down....the equity at time of death ...or the current equity...or the NOTHING you have invested? see the problem there?
4. As far as the adjustable mortgage...How can anyone make a decision on it without knowing the cap terms (how often and how much and the max amount) of increases OR decreases?

I'd be happy to help you figger out the numbers but prefer not to waste my time trying to convince you to change your mind.
Good luck either way.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby bungalow10 » Fri Oct 25, 2013 2:19 pm

If OP refi'd into a fixed rate 15 year - his monthly PITI would be ~$5,600. A 30-year-fixed would be ~$4200. Neither takes into account maintenance. Also, I think OP's property tax rate might be low - does your insurance co know it's a rental?

Either way, OP would be losing money renting it at $3400/month.

If OP does rent and keep the current mortgage he runs the risk of a skyrocketing payment combined with plummeting home value if interest rates rise. I would not want to be left holding the bag in that case.

For comparison, I have a pretty decent rental property. It's value is less than $300k and monthly rents are $2870 (takes are 6k/year, insurance is 1k/year). A property that is worth a million $$ is not worth renting if you can only get $3400/month.
An elephant for a dime is only a good deal if you need an elephant and have a dime.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby goldeneye9655 » Fri Oct 25, 2013 6:23 pm

There is no such thing as a "cap rate" for a single family house.


Cap rate is a mathematical concept used in real estate investing. Single family to commercial real estate, the mathematical concept does not change.

Cash on cash? Based on your land and improvement value I'm guessing the 2002 purchase price was around $700,000. Now it is worth over 60% more for a total of almost half a million dollars. So in your coc figgering what will you use for amount invested? The probably $140,000 your parents put down....the equity at time of death ...or the current equity...or the NOTHING you have invested? see the problem there?


The OP does have money invested in the property. They have inherited the property and have the option of keeping it or selling it and cashing out the equity. For investing purposes it is generally proper to use current equity in the property in your CoC computations. It is used as a metric to compare the opportunity cost of the investment vs other potential uses of the money.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby Honobob » Fri Oct 25, 2013 6:35 pm

goldeneye9655 wrote:
There is no such thing as a "cap rate" for a single family house.


Cap rate is a mathematical concept used in real estate investing. Single family to commercial real estate, the mathematical concept does not change.

Cash on cash? Based on your land and improvement value I'm guessing the 2002 purchase price was around $700,000. Now it is worth over 60% more for a total of almost half a million dollars. So in your coc figgering what will you use for amount invested? The probably $140,000 your parents put down....the equity at time of death ...or the current equity...or the NOTHING you have invested? see the problem there?


The OP does have money invested in the property. They have inherited the property and have the option of keeping it or selling it and cashing out the equity. For investing purposes it is generally proper to use current equity in the property in your CoC computations. It is used as a metric to compare the opportunity cost of the investment vs other potential uses of the money.

I'm waiting anxiously for you to explain how this mathematical concept is used in BOTH commercial AND SFH's. What is the SFH cap rate in your area? CoC? What equity number would you use? Current equity? How would you account for the $195,000 equity increase since the date of death? Kinda skews the result, huh? Hell if they don't sell quick before the property increases another couple of hundred of thousand they could end up losing money :oops: .

What's your taxing authority. I'll be happy to call and see what they say about SFH cap rates in your area. :twisted:
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Re: Inherited House w/ Mortgage. Rental Property?

Postby curmudgeon » Fri Oct 25, 2013 6:58 pm

For the OP to keep this property is to invest in a very narrow RE speculation. Not as speculative as, say, buying raw land, but definitely RE speculation. Lots of people have made good money in RE, but lots have lost it as well. I'm being a bit arbitrary, but I'm defining holding RE for the purposes of price appreciation as speculation, while holding it for for rental return as investment. In this case, you obviously have both components, but the prime driver is price appreciation.

Cupertino has some unique risks. The houses and lots themselves have very little to distinquish themselves from the substantially lower priced areas a few miles away. The prices depend on two, maybe three pillars. Apple, schools, and low mortgage rates. If Apple stumbles badly (like they did the last time Steve Jobs was gone), Cupertino house prices will take a hit. Similarly, if some scandal or taint hits the school system (like cheating on the standardized tests), there would be a hit (would need to be more than a "one-day wonder" scandal, though). Higher mortgage rates are a bit trickier to judge, but I think a lot of the recent price gain was from buyers being willing to overpay a bit on price to be able to lock in low long-term mortgage rates.

Of course, if Apple builds their new campus and keeps packing more highly paid people into the area, that will keep pushing prices up. The record of SV companies after building "statement" campuses isn't all that great, though.

I've put 25% of my investable assets into a single stock before and done OK, but it was risky. I'd view this as a similarly risky investment, *especially* with the variable rate mortgage.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby goldeneye9655 » Fri Oct 25, 2013 9:51 pm

For the OP to keep this property is to invest in a very narrow RE speculation. Not as speculative as, say, buying raw land, but definitely RE speculation. Lots of people have made good money in RE, but lots have lost it as well. I'm being a bit arbitrary, but I'm defining holding RE for the purposes of price appreciation as speculation, while holding it for for rental return as investment. In this case, you obviously have both components, but the prime driver is price appreciation.


+1. Houses fluctuate in the short term but generally appreciate in the long-term. Unless you have a ton of money to secure the investment, you need to back up that bet on appreciation with solid CoC returns or there is a very high risk of getting bit.

How would you account for the $195,000 equity increase since the date of death? Kinda skews the result, huh?


Past performance /= future. Betting on appreciation in the short term in an isolated piece of the real estate market is speculative.
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Re: Inherited House w/ Mortgage. Rental Property?

Postby Honobob » Fri Oct 25, 2013 10:44 pm

goldeneye9655 wrote:+1. Houses fluctuate in the short term but generally appreciate in the long-term. Unless you have a ton of money to secure the investment, you need to back up that bet on appreciation with solid CoC returns or there is a very high risk of getting bit.

How would you account for the $195,000 equity increase since the date of death? Kinda skews the result, huh?


Past performance /= future. Betting on appreciation in the short term in an isolated piece of the real estate market is speculative.

OK except the $195,000 appreciation HAPPENED! That's not speculative. My point was that in doing a CoC calculation on this specific property that your CoC would not be very indicative of returns based on the timing (purchase date vs. DoD vs. now).
It's slowly dawned on me that we won the real estate lottery!
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