Sell, Lease or Vacation Rental Property in Northern Texas?

Question

Hello BP community! Hoping I can pick your brilliant minds on a first-time investment property. I'm green and have been learning a ton from you guys. I'd love your help evaluating some numbers and a few scenarios.

My partner's grandmother sadly passed away and we are in the midst of figuring out what we should do with the property - invest as a vacation rental, lease or sell. She took out a reverse mortgage in the amount of $273,000 which needs to be paid off within six months.

In short, it's a beautiful 17 acre property with a 3 bed 3.5 ba log cabin built in 2012 with a barn suitable for horses/cattle. It's about 2500 square feet, has a wrap around porch that overlooks a pond where I personally just caught a 5 lb large mouth bass this past week. The property is located in Holland, Texas which is a small town 10 minutes from the historic town of Saledo, TX, 45/60 minutes from Austin, 2 1/2 hours from Houston and 2 1/2 hours from Dallas.

The property was last appraised for $400,000 (land + homestead) and we have the opportunity to purchase for what is owed on the loan. We can put 17%-18% down with 2% closing costs. Upfront costs and minor repairs will be taken care of prior to us purchasing.

POTENTIAL SCENARIOS

Scenario A

- Vacation rental targeting Austin, Dallas and Houston. We would need to hit around 50% occupancy rate. Realize this option is extremely volatile especially since we would still need to maintain and upkeep the property.

Scenario B

- We lease the property. This would have to be hyper targeted to higher income renters who have interest in the ranch lifestyle. We need to hit anywhere from $2900-$3000 a month in rent to get anywhere near 8% coc annually. This will be challenging since the going rate for 3 bed 3 ba is $1500 in the area. But because this is such a unique property, it could be a special case.

Scenario C

- Her parents sell, we do not assume the loan and they receive the revenue from sale. We've met with numerous realtors who have told us the property could list from $415k-$550k.

I would love your point of view and expertise here. The COC return is small for the first 5 years but we could realize a lot of equity in a short window.

Please be help keep me honest! This is a big decision and want to make sure I am asking the right questions and being as diligent as I can.  Looking forward to hearing your thoughts.

Best,

Kim

Account Closed · Answer

@Kimberly Young  Well...  I wish I had some better news for you but I would absolutely not attempt to rent the property out.  If you rented it, chances are you would lose your agricultural use exemption on the property taxes.   Without that exemption or a homestead exemption in Texas I would expect to pay at least $12,500 in property taxes on a $500,000 property.

Not having a state income tax is just great... LOL

There is also zero chance of a 50% vacation rental occupancy rate.

Because of the location and the potential appreciation (or lack there of) I would not consider it a good investment unless you could rent it for about $6000 a month.  There is no chance of that happening.

PS...  You should expect a certified letter from that central appraisal district.  It might not happen until after the next transfer of title of the property but I would be watching for it.  They will be asking lots of questions about agricultural use.  Failure to reply in a timely manner will cause the loss of the agricultural exemption.

Bruce Lynn · Answer

This does not sound like a good rental or vacation rental to me.   I would maybe flip this back at you and say....if you had the money is this the investment property you would buy?   Probably not ...if that's the case it is not the right property because it came from your family.   If you want to AirBnB or buy a rental, take the cash and reinvest it in something that makes more sense.

Jim Cummings · Answer

@Kimberly Young. Totally Agree with @Thomas S from Canada. Doesn't sound like a viable Rental Property based on the details you posted.

Thomas S. · Answer

My advice would be to sell. It sounds as though it will be a difficult property to rent and manage. Rental income will not cover the come close to covering expenses of maintaining the property. Definatly potential of negative cash flow. Return is simply not going to be worth the trouble.

Best option would be to sell immediately and off load the responsibility. This sounds like the perfect property for a home buyer not a tenant.

Bart H. · Answer

To echo everyone else's thoughts on this, I think you have gotten ownership of this property and are trying to turn it into a rental.  From your brief description, I think its going to be tough to get high enough rent as either a rural rental or an Air B&B to make a decent return.

As was previously mentioned, if you had the money in hand and no property, would you go out and buy it again?

from your posts, I suspect the answer is no, therefore I wouldn't try and hold onto it as a rental, and  would sell it and look for more cost effective rentals.

Best of luck to you.

Jeffrey Nordin · Answer

Kim, I applaud you and your partner going through the hard numbers objectively, not just taking an opinion poll.

I'd have to agree with Thomas and Jim: have her parents sell. It sounds like although they hold controlling interest in this property, they are allowing your partner some input into decision, perhaps based on her real estate knowledge?

If that is the case, they might be willing to go in with her/you to take that sales profit and use towards other cash flowing property as a partnership.

Good luck either way, sorry to hear about the loss of family near the holidays :(

Sell, Lease or Vacation Rental Property in Northern Texas?

Most Popular Reply