Rental Property Investor · Winslow, ME · Member since 2008 · 826 posts · 281 votes
The cash flow purists are going to hunt me down and beat me for this one, but here it goes.
2 years ago I bought a property (foreclosure, on MLS) for 26K, put a ton of money into it but got energy rebates. Ended up costing 31k total and cash flowed 9k last year, which is about right. My projections showed 8,500. The problem is, I don't really want to own in that neighborhood. I want to own more blue collar properties that are easier to manage, easier to rent, etc. The question becomes: What do I need to sell this property for to make it worth giving up a nearly 30% COC return? I know it's probably a simple formula, but if someone can set me in the right direction, I'd greatl appreciate it. Even if its just "better questions to ask myself."
(by the way, it's a 2 unit, and even breaking down the numbers bit by bit, it still ends up at 49% expense as % of gross income, so it holds up to the 50% rule)
Investor · Louisville, KY · Member since 2011 · 1k+ posts · 1k+ votes
14y
Some people may have a formula for this, but I feel like it is an individual decision, and said formula would be individualized to some degree.
If you don't like renting in that neighborhood, find some comps and sell for as high as you can. You shouldn't just look at the COC return. If you do this, you can end up spending many many many more hours babysitting a property than the extra cash is worth. Would you rather work 4 hours for $400 or 1 hour for $200?
As a newbie I would gladly choose the $400 for 4 hours because I want the extra capital and I have loads of free time. As a wethered investor, $200 vs $400 doesn't mean anything to me, but 3 hours of my time is priceless...it's all about perspective.
Residential Real Estate Agent · Costa Mesa, CA · Member since 2008 · 1k+ posts · 380 votes
14y
Sorry... I think you lost me in all of your paragraphs.
What are the following numbers:
In Place Rent:
Existing Debt Service:
Existing Peripherals (Taxes, Insurance, Association,Maintenance, Utilities):
Property Tax Rate:
Also... when you say you "put a ton of money into it"... I would read that as you bought it for $26K and spent $31K total, so you're all in at $57K. Which means you would want to sell it for more than that.
How much more is up to you, but C on C is used to measure a cash flow property, while ROI or AROI is used to measure a flip. You seem to be confusing the two... or at least confusing me.
Flipper/Rehabber · Westchester, IL · Member since 2009 · 126 posts · 55 votes
14y
I think if you do the math, by his numbers the TOTAL into the property was 31k because 9k would be the 30% he claims. Maybe 5k is a ton of money to put into it for him.
There is no debt service because he is saying COC return.
All you can do in my opinion is put it out there for sale and see if you can sell it for what you want. If you're ok with taking break even just to get out then do that. Otherwise, you should let it cash flow and keep marketing it.
Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
14y
A duplex in a nice area with a great rehab is an oddball that can be sold potentially to an owner-occupant on a "have your neighbor pay your mortgage" basis with super low OO financing. This is likely your highest valuation, but it needs to be positioned appropriately for sale, and a good listing agent will be useful.
It is alternatively a straight investment property that would probably sell at a 9-11% cap in a "nicer" area as you describe this, but your local market will dictate this number, there is wild variability from market to market. For this purpose, just divide the annual net operating income (50% of gross rent) by .09 as the high end, divide NOI by .11 as the lower end of your potential range.
Also, ask an agent to do a BPO/CMA to provide a point of reference.
Flipper/Rehabber · Westchester, IL · Member since 2009 · 126 posts · 55 votes
14y
Wait a second Will...are you saying that if this guy makes 9k gross that's 750/month and investors would only be willing to pay 15k for this property!?
Wholesaler · Fort Worth, TX · Member since 2010 · 1k+ posts · 1k+ votes
14y
Originally posted by Ryan ODonnell:
Wait a second Will...are you saying that if this guy makes 9k gross that's 750/month and investors would only be willing to pay 15k for this property!?
Divide by .02 rather than multiply. That gives you $37,500, which seems to be in the ball park.
Residential Real Estate Agent · Costa Mesa, CA · Member since 2008 · 1k+ posts · 380 votes
14y
If it's truly the $9K/$31K calculation... wow. Obviously you're only going to be able to sell it for what the market dictates, but I'd put a premium on it because it is operating quite nicely given the status quo. As in... you probably wouldn't want to sell to somebody using the 2% rule.
Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
14y
What if you just sold it for what you put into it?
Then (I assume) you can apply that cash to a property in an area that gets your desired return for that particular area. It would basically be a trade for a possibly lower return in your preferred area.
Any thing you sell for above what you have into it would be a boon for your returns in the year that you sell it. As long as you don't take a loss, you won't change the fact that you have had great returns up to the point where you sell to trade for a different investment vehicle.
Rental Property Investor · Winslow, ME · Member since 2008 · 826 posts · 281 votes
14y
sorry for any incomplete information in my ONE sentence followed by 2 paragraphs. I won't bother listing all the expenses, as I don't think the individual itemized list would add to the discussion. But it grosses about 16,500 per year and all expenses (no debt service as it's owned free and clear) are about 8,000.
ARC was 31,000
(we put about 10k in and got 5k back from energy program here in maine)
gross rents 1,382
owned free and clear, no financing
lousy neighborhood, though it really hasn't been that bad, it's been slightly taskier than most (tenants not getting along, a couple of minor police visits, etc..) I don't really like dealing with the class of tenant there. That's really the crux of it.
I see the wisdom of 1 hour for 200 vs. 4 for 400. this is the very plan we're working on. My philosophy is this: lower income props might give you 100% of the cash flow range but also require 100% of the effort. Nice single family homes in nice neighborhoods might give you near 0% but have near 0% of the effort. Somewhere down the spectrum is a sweet spot where you can get 75% of the cash flow for 50% of the effort. That's what we want.
give the .02 formula, it looks like 69k. where we have no mortgage, we COULD owner finance it and conceivably get a better sales price, but I think I'd rather take the money and put it into another property.
Rental Property Investor · Winslow, ME · Member since 2008 · 826 posts · 281 votes
14y
The only problem i see with selling it for what I have into it Brian, is that it just yields so danged much, you know? I mean it's a 31k 2 unit that spits 9k in cash to us each year. Our "model" building may yield a little less anyway (blue collar, better neighborhoods, therefore demanding higher price) but I am hesitant to take my money OUT of something that is yielding 30% unless i can at least make a premium on the way out.
I suppose if I sell for 60K I've made 30% for 2 years then 130% for the last year. (assuming I make 30% again, and sell it for 100% more than I have into it) -- That's a pretty good run right there, and then I'd be out of the neighborhood and onto something else.
Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
14y
Well, Kenneth, I totally understand what you mean about pulling out of a good thing. I think I am more on the level of real estate hobbyist than investor at this point, haha!
Maybe its just worth keeping? I know that PM's are not always that great, but since this property cash flows so great, maybe you could have a PM handle just this property so you still get great profits but reduced headaches? I suppose that would depend on the PM. Maybe you could use it as a testing ground for potential PMs to eventually help run operations for other properties when you want to relax more? I am assuming you don't use any PMs right now...
I don't like the idea of owner financing. Whoever buys it will be free to modify the structure and not maintain it before you eventually have to foreclose - not my experience, just my prediction. Plus, you need a huge down payment to make up for loosing the long term interest in the property as well as offsetting the capital gains taxes and subsequent taxes from the payments....and you have to deal with escrow and those costs. I am not experienced with this matter, but these were the conclusions I came to when considering owner financing my own class D rental which I own cash.
Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
14y
I'm with Brian... given those cash flows simply go with a PM... maybe even pay them a premium.
I understand your philosophy of amount of work per dollar earned... but instead of dropping the property completely to reduce the workload, why not outsource some of that work at the sacrifice of some of the money??? If you can offload 90% of the work and still receive 50% of the cash, that should fit your philosophy of management PERFECTLY.
Rental Property Investor · Winslow, ME · Member since 2008 · 826 posts · 281 votes
14y
I had thought of PM and might actually go that route. I mean even with PM it will cash flow 6,800 which is 22% COC return. Still better than most of my other properties! by the way, I'm a bit novice myself (3 years this month) and am wondering what a "class D" property is? How do you classify properties?
Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
14y
Originally posted by Kenneth LaVoie:
I had thought of PM and might actually go that route. I mean even with PM it will cash flow 6,800 which is 22% COC return. Still better than most of my other properties! by the way, I'm a bit novice myself (3 years this month) and am wondering what a "class D" property is? How do you classify properties?
You could also do a cash out refi to vastly improve that CoC return depending on your mortgage numbers, etc.
Rental Property Investor · Winslow, ME · Member since 2008 · 826 posts · 281 votes
14y
got it!
My target property is "C" -- yes, that's another possibility. Cash out PLUS delegate to PM, though cash outs seem to be tough. several banks around here won't do them at all, but they will take them as partial or full collateral on another property.
Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
14y
Originally posted by Nathan Emmert:
Area they're in... age... amenities.
Donald Trump new = A
Donald Trump Old or Middle Class New = B
Blue Collar = C
Ghetto = D
Well, by this matrix I guess I consider mine a C-. :)
One thing on the cash out refi, your cash flow would be less. Combine that wit a PM and now the property looks less attractive even though you theoretically increase your CoC.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
14y
What I don't get here is that if you are cash flowing so nicely, why sell?
You also stated you wanted to invest in better areas which leads me to believe this is a lower end area. However, by your numbers now provided, looks like each unit has a gross rent of $687 per month which is not that terrible (although it would be super ghetto in So CAL). With $16,500 in gross anual rents, your 2% rule value would be $68k which should yield you a nice flip profit.
Looks like there are some things to consider here.
As to the cash out refi - how about a private investor looking for better returns than 1% in their CD account?
Rental Property Investor · Winslow, ME · Member since 2008 · 826 posts · 281 votes
14y
Will
thanks for your thoughts. I'm keeping this thread moving because I feel like I might be missing something terribly simple! You're right that it does cash flow like a stuck pig. In fact this great cash flow is the ONLY thing that makes the decision tough. If it was "average" cash flow, I'd dump it in a heartbeat and move on.
The problem is, I don't like BEING there. I don't like having to warn the tenants about trash, about cleaning their litter box, etc. etc. Expanding on that a little, what I really mean is that I don't like doing those things as OFTEN as I have to do them in this property. I have all sorts of unpleasant chores, etc that I have to do at all my properties, if I can't handle that then I should do something else, right? But this one .... it's just more often. It's also a small town, so everyone KNOWS it's the bad section.
So for every phone call I get (when there's a vacancy), 7 aren't interesetd when they find out where it is, 2 are being evicted from somewhere else, and the final one has to jump through several hoops to get the first month's and security deposit together. It's sort of like "you wouldn't want someone for a tenant that would consider living there!"
So in other words, there's just too much ... "ugh! factor" (is that a scientific term?) -- so that's the real question: How much do I accept in exchange for giving up that wonderful cash flow. And I thought maybe there was a semi simple math equation. I think there is, I just haven't come up with it yet. I know it's there!! It's the same with selling a business, "future discounted value" or some such thing. I do like the 2% as a starting point though. That would MORE than double my money on the investment, plus I've gotten 30% for nearly 2 years now.
Rental Property Investor · Winslow, ME · Member since 2008 · 826 posts · 281 votes
14y
I wanted to follow up here. I realized my "dislike" was largely emotional. Looking back, the property really didn't generate any more headaches than typical. I just dread dealing with they type of people that tend to live in that neighborhood, that's all. My thought will probably be manage it, keep it, and if I really don't like dealing with anymore, have someone manage it for us. Meanwhile, keep it for sale at a profitable "no brainer to sell" price in case anyone bites. It do like the idea though of cashing out refi
to an investeor. Are the documentation needs onerous? i.e. do I need to be a registered investment advisor (I actually am!) or anything "off the radar" documentation wise to allow me to accept investment money from people??
Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
14y
No, documentation is not onerous. As long as you have some sort of personal or professional connection to the lender (i.e. you didn't solicit them through advertising), and it's just a straight 1st mortgage, then you don't need any credentials or regulatory filings. Any good RE attorney can guide you in drawing up the note, mortgage/DOT, handling escrow, etc. There are 3rd party loan administration companies that will also "professionalize" the loan transaction, and give the lender more peace of mind.
Many advise, for the security of the lender, that you execute a couple of additional documents: (1) document permitting the lender to deed the property to themselves if you are more than xx days late on the payment (often 30 days), and (2) an assignment of rents, allowing the lender to intercede with the tenants and begin collecting the rent directly if you are more than xx days late on the payment (again, 30 days is common).