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Does this rental have good numbers?

Posted: Sat Dec 22, 2018 9:25 pm
by Bongleur
Moved mom into assisted living & rented the house a few years ago.
Its in an A Trust and B Trust.
If sold now, my mother would get the Exclusion on her half but the B would be fully taxed.
When I inherit, I will get a step up in basis on the A, but NOT on the B -- I don't quite understand that, but my accountant is on vacation until after Christmas so I can't get a clarification. I'm confused on this point.
What is the basis when you convert a fully paid for house into a rental?
Need to decide to keep or sell, and now or later.

And I'm wondering if paying 9% to the management agency is excessive? I live too far away to go & supervise fixing stuff, & don't want to do it myself.
I plugged in 10% maintenance and I know its supposed to be about half a month's rent annually, but I've had unrented months & HVAC drain line breaking & flooding the living room this year. So worst case.

Is this actually a good looking return? It could be sold for about $525,000.

RENT 29880 (net 2266/mo after Mgmt fee)
minus 9% MGMT FEE 224.10 -2689
minus MAINT COSTS 10% ?? -2988
minus TAXES -5885
minus INSURANCE 905
TOTAL EXPENSE -12467
NET INCOME 17413

expenses total 9509 so income 17413
17/525 = 3.368 % of market value based on opportunity cost of cashing it in...
but after tax cash would be less, so the % is actually more.
or
rent gross/net = 58% if that's the way to do it.

Re: Does this rental have good numbers?

Posted: Sun Dec 23, 2018 11:36 am
by jminv
No, it's not a good rental.

Since your mother is still living, you could first look into whether you can modify the trust to fix your tax issues.
See, for example: https://www.calcpa.org/news/2018/02/22/ ... pass-trust

Re: Does this rental have good numbers?

Posted: Sun Dec 23, 2018 11:39 am
by k3vb0t
If you had a $525,000 investment, would you accept a 3.368% yield on it for an asset that was highly illiquid, requires your time/energy to deal with, etc?

Re: Does this rental have good numbers?

Posted: Sun Dec 23, 2018 11:57 am
by GibsonL6s
We’re these numbers provided by a management company and do they include any utilities customarily provided in your area? If you were looking at investment property you would want the unleavened return which is called the capitilaztion rate to be higher than this is providing. The management fee does sound high but they are on smaller deals. Also some will charge a leasing commission to find tenants.

As a comparison your yield is about equal to that of owning an apartment reit which would provide you a diverse portfolio and professional management. Reits however are leveraged so a different risk. Good luck

Re: Does this rental have good numbers?

Posted: Sun Dec 23, 2018 12:02 pm
by Sandtrap
1. Sell
2. Expenses are high.
3. Mgt' fees are high.
4. Poor net returns.
5. Take after tax funds and invest in another rental that is near to you, has at least a 6% CAP, and that you can self manage if you are inclined.
6. Or, take after tax funds and invest in short and mid term fixed if you are inclined.

Re: Does this rental have good numbers?

Posted: Sun Dec 23, 2018 12:50 pm
by Nate79
Not even close to a good rental.

Re: Does this rental have good numbers?

Posted: Mon Feb 11, 2019 1:31 am
by Bongleur
Numbers from the 2018 summary:
TOI 29,880
TOE 02,500 after excluding extraordinary expense
Tax & Ins 06,790 I pay these, not the mgmt co, so not on their TOE list
NOI 20,590

So what exactly causes this to be such a bad earner. Its getting market rent in the DC area.

IF BYPASS TRUST NOT IN EFFECT
$525,000 current listing price est
$36,750 less 6% broker & 1% misc (sitting empty, lawyer...)
$488,250 Net proceeds, no tax due to Once in Lifetime rule
$- Is there any State tax ?
4.10% annual rate of return to equal $20,000 rental NOI

IF BYPASS TRUST IS IN EFFECT
$30,000 original purchase price
$- allowable improvements (acct mentioned a figure...)
$458,250 appreciation above Net Proceeds

TAXABLE HALF OF BYPASS TRUST
$229,125 Half of Net proceeds
$(46,628) FED taxed at 35% 2019 single bracket
$(8,759) FED taxed at 35% 2019 single bracket
$(720) STATE taxed at 5.75% 2018 single bracket
$(12,197) STATE taxed at 5.75% 2018 single bracket
$161,541 Net Proceeds that half

$390,666 AFTER TAX AMOUNT
5.12% annual rate of return to equal $20,000 rental NOI


***
The suggestion to break the bypass trust is interesting. Dunno how much California law applies to Virginia.
What kind of specialty should the lawyer have, to look at this?

Re: Does this rental have good numbers?

Posted: Mon Feb 11, 2019 6:35 am
by Smorgasbord
Bongleur wrote:
Sat Dec 22, 2018 9:25 pm
Is this actually a good looking return? It could be sold for about $525,000.

RENT 29880 (net 2266/mo after Mgmt fee)
minus 9% MGMT FEE 224.10 -2689
minus MAINT COSTS 10% ?? -2988
minus TAXES -5885
minus INSURANCE 905
TOTAL EXPENSE -12467
NET INCOME 17413
At slightly more than 0.5% of value of house, your maintenance estimation is probably a bit low. Also, you are not accounting for vacancies. Upping maintenance to 1%, and adding a month of vacancy, your rate of return drops to the 2.5% range.

Re: Does this rental have good numbers?

Posted: Mon Feb 11, 2019 7:39 am
by Wiggums
Duplicate

Re: Does this rental have good numbers?

Posted: Mon Feb 11, 2019 7:53 am
by Wiggums
If that is all the rent you can get for the house, I would sell it. The management fee maybe reasonable for your area but is another drag on the profits. You need to get a better return on your asset to make this worth while.

Re: Does this rental have good numbers?

Posted: Mon Feb 11, 2019 8:24 am
by Leemiller
What is the cost basis for the home? Why is there some complicated trust in place? How is your mother set for assets to pay for her care? Also, this one is though but I think you may wish to consider how her health is now. I would get some professional advice but agree that selling seems like a good move.

Re: Does this rental have good numbers?

Posted: Mon Feb 11, 2019 9:26 am
by Veni Vidi Decessi
My wife's family was in a near-exact situation as you, with the exception of the trusts (had a house in the Arlington area that we rented out after my wife's grandmother, 91 and in good health, moved to assisted living). The numbers were close to yours as well - the house (yet to be sold) is priced near $750,000, while gross rent was ~$37,000/yr. As a pure rental option, this was a pretty terrible return. You would never purchase a property at these numbers, so you should want to sell yours.

In the two years they rented the house out, I think my wife's family made ~$40,000 (profit, including paying maintenance, taxes, and property manager). This is roughly a 2.6% return. The Arlington/DC area is a low risk area for rentals (being the nations capital means a steady supply of renters), but that is a very low return for the headache of dealing with the property, the illiquidity of the asset, and the relatively high risk of loss of principle. By the last, I mean a recession causing a sharp decline in the sales price of the house is, in my mind, more risk than an asset returning 2.6% should have.

Why did we do it? The house was purchased at a cost basis of $20,000 nigh upon 50 years ago, and the grandmother had ~4 years of money left before we would need to sell the house (in 2017). Renting the house out was an attempt to extend her money without incurring the huge tax burden of selling the house (it would have extended her money by another 2 years). As it turns out the extra time was sadly not needed (she died last year), and the rental agreement is going to expire this year. I expect my wife's family to sell the house after this.

Re: Does this rental have good numbers?

Posted: Mon Feb 11, 2019 9:36 am
by jakehefty17
No, this rental doesn't have good numbers. 3-5% return is really not worth your effort IMO. I don't know anything about trusts so I can't really help beyond chipping in and saying the numbers aren't good.

I wouldn't settle for less than 7% return (Ideally 10%+) when you are carrying the concentrated risks and effort of managing/maintaining a rental.

Best of luck.

Re: Does this rental have good numbers?

Posted: Mon Feb 11, 2019 2:39 pm
by riverguy
Not sure why some folks are saying the management fee is high. Typically it is somewhere between 1 month or 10%. You are right in that range.

What causes it to be a bad rental? Just not getting enough rent for the value of the house. Expenses seem reasonable but you need a strong property to be able to pay for property management and still make money.

Utlimately, poor cap rate. Not a good rental. Sell.

Re: Does this rental have good numbers?

Posted: Mon Feb 11, 2019 3:07 pm
by knpstr
As it stands, no. The numbers are very poor from a return on asset value standpoint. I'm assuming DC has high property appreciation so all in all one likely wouldn't do "terrible" with holding it, but I'd sell it if I were you.

That being said, if you are interested, I'd be willing to sell my 2 properties at a valuation of 3.3% ROA. :moneybag

Re: Does this rental have good numbers?

Posted: Mon Feb 11, 2019 5:35 pm
by Bongleur
Other than asking a real estate agent, are there good online sources that can tell me the average rental rate for a comparable property?

Selling would mean I need a 5% interest rate to generate the same 20K. Don't want to do anything other than bonds since this $$ helps pay Mom's $60,000 a year medical bill. And doesn't the math of rental depreciation also increase her income since some of the taxes are pushed to when the house is sold (basis adjustment). And when I inherit I will get the step-up in basis for her half of the trust, so some tax-free money there.

Basis? Price when bought in 1960's was $30,000. Accountant said there's a $$ per year the IRS will accept for improvements, don't recall what it is.