Inherited House w/ Mortgage. Rental Property?

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goldeneye9655
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Re: Inherited House w/ Mortgage. Rental Property?

Post by goldeneye9655 »

Honobob wrote: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).
Yes sir. When doing ROI for a property you use current equity for your numbers. Can't use original investment or pre $195,000 appreciation. You are comparing opportunity cost on your money.
Honobob
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Re: Inherited House w/ Mortgage. Rental Property?

Post by Honobob »

goldeneye9655 wrote:
Honobob wrote: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).
Yes sir. When doing ROI for a property you use current equity for your numbers. Can't use original investment or pre $195,000 appreciation. You are comparing opportunity cost on your money.
Yes sir. When doing ROI for a property you use current equity for your numbers. Can't use original investment or pre $195,000 appreciation. You are comparing opportunity cost on your money.[/quote]
See, that is a major FLAW with CoC figgering...oh no, now you are figgering ROI. What about ROE? see that is a problem when people keep changing the WHAT of what they're calculating. Soon someone will say "I'm a gitting 3.5 on a CD at my credit union so that beats your OOMA figgering". So what is the potential returns on the investment that you want me to give up my cash cow for?
It's slowly dawned on me that we won the real estate lottery!
goldeneye9655
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Re: Inherited House w/ Mortgage. Rental Property?

Post by goldeneye9655 »

OP, ran some numbers now that I have my spreadsheets in front of me:

Code: Select all

Value:     1,145,000
Mortgages:   597,950
Equity:      547,050

Annual Rent (3,400 / mo): 40,800

Annual Expenses (not including mortgage):
Taxes:        11,000
Insurance:     1,500
Maintenance:   4,000
Vacancy:       2,519
Prop Manager:  ?,???

NOI (Income - Expenses):       $21,781
Loan (Debt service):           $33,869 / year
Cashflow (NOI - Debt service): $-12,088 / year

ROI (Cashflow / Equity): -2.2% (very bad)
Cap Rate (NOI / Market Value): 1.9% (bad)
LTV (Mortgage Balance / Value): 50.6% (excellent)
Debt Coverage (NOI / Annual Mortgage Payment): 64% (very bad)
These numbers don't include the second mortgage. You can modify the above numbers with any new information you get. As they stand, though, you are going to be paying money into the house to keep it rented out rather than having a positive cashflow. As a previous poster mentioned, check what your insurance on the house would be for having a renter in it. This is called a Fire Policy, it is similar to homeowner's insurance only it does not cover the personal belongings inside the house.

Hopefully the above numbers give you a better feel for how this looks as an investment property. Sorry for your loss and best of luck to you and your sibling.
Honobob
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Re: Inherited House w/ Mortgage. Rental Property?

Post by Honobob »

duplicate post.
Last edited by Honobob on Sat Oct 26, 2013 1:31 am, edited 1 time in total.
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Honobob
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Re: Inherited House w/ Mortgage. Rental Property?

Post by Honobob »

Wow goldendude, it is all so clear now that I see actual numbers. So, about $40, 000 in rents then say 50 per cent in expenses resulting in. $20, 000 NOI Right so far? So a very very good cap rate would be 10 percent resulting in a value of about $200, 000. Is my math still good? Big numbers make me dizy.
It's slowly dawned on me that we won the real estate lottery!
Honobob
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Re: Inherited House w/ Mortgage. Rental Property?

Post by Honobob »

Dang, these kids have been thru enough. I'm making an all cash offer of $300, 000. What good is having allthese millions in real estate profits if I can't help people that have been victimized by the info.ercial real estate scam.
It's slowly dawned on me that we won the real estate lottery!
travellight
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Re: Inherited House w/ Mortgage. Rental Property?

Post by travellight »

I would also sell this house, and I am a real estate enthusiast and own/manage 6 properties. To compare numbers, I have a house I bought for 381K and it is now worth 440k and I get $2550/month rent on it. I would not be satisfied with $3400/month rent on your property; it does not perform on rental return and you are betting on appreciation. I am amazed the poster above has a property for less than 300k and gets over 2800/month! What location is that in?
364
goldeneye9655
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Re: Inherited House w/ Mortgage. Rental Property?

Post by goldeneye9655 »

Honobob wrote:Wow goldendude, it is all so clear now that I see actual numbers. So, about $40, 000 in rents then say 50 per cent in expenses resulting in. $20, 000 NOI Right so far? So a very very good cap rate would be 10 percent resulting in a value of about $200, 000. Is my math still good? Big numbers make me dizy.
Honobob, I am glad that you have done well in your real estate investing, however you do not need to scoff other real estate investors who run numbers and treat it as an actual investment. Investing purely for appreciation is a speculative and a dangerous prospect. Ask the investors back in the middle of the last decade. I understand that you do not think it is possible to find good cap rates in Single Family homes, however, investors across the country are doing it every day.

I have a significant investment in real estate upper-middle level homes in the area and have averaged a 6.2% cap rate with CoC average of 8%. When including renter principal payments that raises to 17.3%. Once you add inflation/appreciation the returns are 25% and greater. My current LTV ratio is 70%, and I am done investing in more properties until I have that down to 0%. The leverage magnifies my return a bit, but also adds more risk than I want to take long-term.

I am able to comfortably hang on to all of my real estate to realize the appreciation and paid down principal because I have solid cashflow to support my investments. I run my real estate as a business and run the same numbers I would run if I were to buy Multi-million dollar apartment complexes, because eventually I plan to be doing just that. I recommend to new real estate investors that they look for at least a 20%-25% total return on their real estate investment to compensate them for the risk that is involved in the business.

You may have enough income to handle speculative, negative cash flow investments in order to get appreciation, but not everyone can handle that. Even investors (like myself) that can handle negative cash flow would be wise not to accept it.
travellight wrote:I would also sell this house, and I am a real estate enthusiast and own/manage 6 properties. To compare numbers, I have a house I bought for 381K and it is now worth 440k and I get $2550/month rent on it.
Congrats travellight, sounds like you are doing well!
zagyzebra
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Re: Inherited House w/ Mortgage. Rental Property?

Post by zagyzebra »

Once you pay your annual property taxes and homeowners insurance, you will probably be left with around 5% annual return -- maybe. And if there are maintenance issues, unexpected large repairs, or vacancies -- even less. Good dividend producing stocks could perform almost, if not equally as well. Real estate and stocks go up and down. Rents go up marginally. It might be too much trouble for the return. That said, I do consider real estate to be my most solid investment and worth the headaches over the long haul. If the rent you earn could be used to pay off the mortgage, in the long run -- and after school when you are earning money -- you will be able to refinance it. Paying down the mortgage in combination with refinancing will earn you a greater return on investment. In the meantime, with luck property values will continue to rise. Investment in properties has to be viewed with a long-range lens. Otherwise, the numbers will almost never be compelling enough to consider it a worthwhile investment.
Honobob
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Re: Inherited House w/ Mortgage. Rental Property?

Post by Honobob »

goldeneye9655 wrote:
Honobob wrote:Wow goldendude, it is all so clear now that I see actual numbers. So, about $40, 000 in rents then say 50 per cent in expenses resulting in. $20, 000 NOI Right so far? So a very very good cap rate would be 10 percent resulting in a value of about $200, 000. Is my math still good? Big numbers make me dizy.
Honobob, I am glad that you have done well in your real estate investing, however you do not need to scoff other real estate investors who run numbers and treat it as an actual investment. Investing purely for appreciation is a speculative and a dangerous prospect. Ask the investors back in the middle of the last decade. I understand that you do not think it is possible to find good cap rates in Single Family homes, however, investors across the country are doing it every day.

I have a significant investment in real estate upper-middle level homes in the area and have averaged a 6.2% cap rate with CoC average of 8%. When including renter principal payments that raises to 17.3%. Once you add inflation/appreciation the returns are 25% and greater. My current LTV ratio is 70%, and I am done investing in more properties until I have that down to 0%. The leverage magnifies my return a bit, but also adds more risk than I want to take long-term.

I am able to comfortably hang on to all of my real estate to realize the appreciation and paid down principal because I have solid cashflow to support my investments. I run my real estate as a business and run the same numbers I would run if I were to buy Multi-million dollar apartment complexes, because eventually I plan to be doing just that. I recommend to new real estate investors that they look for at least a 20%-25% total return on their real estate investment to compensate them for the risk that is involved in the business.

You may have enough income to handle speculative, negative cash flow investments in order to get appreciation, but not everyone can handle that. Even investors (like myself) that can handle negative cash flow would be wise not to accept it.
travellight wrote:I would also sell this house, and I am a real estate enthusiast and own/manage 6 properties. To compare numbers, I have a house I bought for 381K and it is now worth 440k and I get $2550/month rent on it.
Congrats travellight, sounds like you are doing well!
I use numbers, real numbers and concepts that are appropriate for single unit residential properties. In the example above your 6.2% cap rate would result in a value for the property of about $325,000. Yet the market says the value is $1,145,000. My numbers EXPLAIN why that valuation is. Your made up numbers only show the flaw of trying to use inappropriate concepts and quesstimated numbers.

You've evaded the question about what SFH "cap rate" your local taxing authority uses. Now I do understand "investors" taking 50% off rents and dividing that by a value and coming up with a number to screen properties. Fine, if that works for them BUT IT IS NOT A CAP RATE. Why not just use the ratio of rents to the value, a GRM? I say people do this because they think it makes them look more "investorly" and they also think they can use that % to directly compare to other financial returns when in fact it DOES not compare.
It's slowly dawned on me that we won the real estate lottery!
goldeneye9655
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Re: Inherited House w/ Mortgage. Rental Property?

Post by goldeneye9655 »

Honobob wrote: I use numbers, real numbers and concepts that are appropriate for single unit residential properties. In the example above your 6.2% cap rate would result in a value for the property of about $325,000. Yet the market says the value is $1,145,000. My numbers EXPLAIN why that valuation is. Your made up numbers only show the flaw of trying to use inappropriate concepts and quesstimated numbers.

You've evaded the question about what SFH "cap rate" your local taxing authority uses. Now I do understand "investors" taking 50% off rents and dividing that by a value and coming up with a number to screen properties. Fine, if that works for them BUT IT IS NOT A CAP RATE. Why not just use the ratio of rents to the value, a GRM? I say people do this because they think it makes them look more "investorly" and they also think they can use that % to directly compare to other financial returns when in fact it DOES not compare.
Everything I quoted you were the real numbers from my properties I own. And this will be my last post to you, no sense debating your "reasoning."
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Re: Inherited House w/ Mortgage. Rental Property?

Post by LadyGeek »

I removed one off-topic post. As a reminder: Forum Policy
We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones.
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dx41
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Re: Inherited House w/ Mortgage. Rental Property?

Post by dx41 »

Thanks so much for the incredible discussion. I am sure your thoughtful posts took some effort, and I thank you very much for being so generous with your time.

Goldeneye: I really appreciate the spreadsheet, as it helped significantly in getting a better sense of what real estate investors can use to evaluate a property. It also gave me more tangible information to work with in making and supporting my decision on this property.

We have reviewed changing the homeowner's policy to a rental policy, and our insurance provider said the rental policy would only be $30-100 more annually. However, it would also cover a smaller percentage of the value of major appliances, and personal property for the landlord would be covered at a much lower rate. (10% toward personal property for landlords, vs. what seemed like 60% for homeowners. We obtained these numbers from Farmers Insurance.) That made me think that the added expenses would be primarily seen in assuming greater risk of the cost to replace appliances and personal property, should that ever be necessary in an event that would trigger an insurance claim.

nimo956 also PM'd me a link to an excellent discussion on the evaluation of real estate properties for rent:
"If you read this thread and scroll down to the long post by "Lumpr" you will find a very useful guide about how to evaluate rental real estate properties:

http://www.bogleheads.org/forum/viewtop ... =2&t=68979"

I wanted to share it here in the event anyone is in a similar situation and would benefit from the information.

Thanks again for all the support. I am awed by the wealth of compassion in this community, and I am continuously grateful for all your efforts to cultivate such an altruistic atmosphere. :sharebeer
Last edited by dx41 on Fri Feb 13, 2015 2:05 pm, edited 1 time in total.
goldeneye9655
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Re: Inherited House w/ Mortgage. Rental Property?

Post by goldeneye9655 »

Any time. Best of luck on your decision. Thanks for the link to that post. It was well written.
zagyzebra
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Re: Inherited House w/ Mortgage. Rental Property?

Post by zagyzebra »

I second thanking you for the link to that post!
Honobob
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Re: Inherited House w/ Mortgage. Rental Property?

Post by Honobob »

http://www.mortgage-investments.com/res ... al-estate/

dx41 sounds like you are now leaning towards keeping this property despite all the incorrect information you've been given about valuations. Here's a very good analysis spreadsheet that takes in ALL the numbers. If your parents bought for $700,000 in 2002 that puts the appreciation rate at about 5% but depending when in 2002 the market was still pretty strong so your parents probably bought at the top of the market. No big deal if they also sold the previous home at the top but skews the appreciation rate. I like looking over a 40 year period and seeing if it matches up in about 10 year increments.

Your realtor support should be able to give you more accurate information for any inputs.
It's slowly dawned on me that we won the real estate lottery!
Honobob
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Re: Inherited House w/ Mortgage. Rental Property?

Post by Honobob »

I hope you looked at todays paper. In todays San Francisco Chronicle "The median monthly rent in San Francisco hit $3,398 in the third quarter, up 21% from the previous year.......The biggest increases were in economically disadvantaged neighborhoods, like Hunters Point, where rents shot up 46 percent."

I thought your rent was low and it is at a 28 GRM which is not unusual for the Bay area but on the higher side. Looking through Craigslist I saw way higher rents and even a 700sf guest cottage at $3,400. Maybe you're looking at last year rents.
It's slowly dawned on me that we won the real estate lottery!
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