Rental Property Investor · MI · Member since 2019 · 113 posts · 39 votes
Ok, here's the situation. I own a 3/2 free and clear in an up and coming hipster market. I had a tenant buyer in the place but he defaulted on the taxes. The only debt I have on the property is the 30k I had to pay in taxes, plus about 7k in rehab costs once he leaves (2 weeks.) The rehab is paint and carpet plus a bit of landscaping so not much at all.
The market is super hot still and I know I could get top dollar for it as a sale. (About 220-230k. Don't laugh, it's not San Francisco or New York! :) Rent should be around $2k per month but a range of 1800-2100 is what I'm looking at. Taxes are pretty high at 9k non homestead.
Would you:
A. Sell the property and use the funds to reinvest elsewhere
B. Rent the property and take out a heloc to fund more brrrrs
C. Rent the property and take out a 30 year fixed
I'm looking for a mix of cash flow and portfolio growth. I've got 4 years left in my w2 job before I retire.
One way to surely lose money is to be constantly in search of the perfect or better deal. Owning assets that generate positive cash free and clear is the goal. You have won. Never, ever sell unless at gun point. Using a portion of equity through a HELOC to make additional investments is a smart strategy provided you do not tank the initial investment through this tool.
@Mike M. Thanks for the input. I am a little shy about the lease option, as I’m just coming off a failed land contract on the property. I did learn some valuable lessons from that so I suppose it’s not out of the question.
@Mike M. Thanks for the input. I am a little shy about the lease option, as I’m just coming off a failed land contract on the property. I did learn some valuable lessons from that so I suppose it’s not out of the question.
I’m a lot shy on the red 32 option. :-)
I just had one "fall apart" on me, too. A Tenant Buyer gave me $20,000 for an Option fee about a year ago. They upgraded the kitchen and bathroom. I cash flowed it at $650 for 11 months and they decided to move out of state for personal reasons. I kept the $20k as per contract, and found another Tenant Buyer who gave me $25,000 and same cash flow. I used $3,000 to fix a few things and clean up the mess of the previous Tenant Buyer. The new Tenant Buyer is doing he heavy lifting on more upgrades. So, I guess $20k + $25K - $3k for a profit of $42,000 in 12 months was an "okay" "fall part" deal.
This is not an uncommon experience with the Turnkeys I provide for my CA and SD county investors. Take a chance, do the Tenant Buyer again, it's worth it.
@Account Closed my mistake was in not keeping close tabs on the tax payments for the property. The tenant buyer paid 17.5k down and paid on the land contract but then never paid the taxes. He walked away from the property leaving that debt for me to cover and kindly told me to use his 17.5k down payment to help cover them. He trashed the place but I wasn't paying attention because he was purchasing it and I wasn't going to have to worry about it. Like I said I learned some valuable lessons.
Would you care to share the agreement you use via PM? I could have my attorney look it over to adjust for Michigan laws.
That is a generic goal so drill down to how much you need to gross/net per month to replace the income. It will be difficult to replace a full time w2's income in 4-5 years unless you have a lot of assets to throw at the project or unless you are in a very friendly investor market.
The formula should look something like this:
Gross investment income per month - expenses (mgt/taxes/ins/maint/assumed vacancies)= Net business revenue to you on 1099/w2 - real personal business expenses/deductions= net taxable revenue (outside of personal deductions)
If the final net taxable revenue matches your teachers salary then you are good. Keep in mind that part of your plan should be reduce expenses to almost nothing as well. (house/car/credit cards, etc.)
Do the math and come up with a number then make that your goals. Remember to adjust for inflation.
This isn't a perfect formula but you get the picture.
@Account Closed what about the tenant that neglects the property? Our tenant buyer deferred all of the maintenance and I didn't have a say in the matter. It's 2 years late for a decent paint job (historic district) and the roof is next. Also nothing good going on inside, nor landscaping outside. I washed my hands of the mess knowing that he was on the hook for the balloon payment after 5 years, but then he went and defaulted. Not sure how to protect against that other than screen the tenant buyer better. (school of hard knocks)
@Account Closed what about the tenant that neglects the property? Our tenant buyer deferred all of the maintenance and I didn't have a say in the matter. It's 2 years late for a decent paint job (historic district) and the roof is next. Also nothing good going on inside, nor landscaping outside. I washed my hands of the mess knowing that he was on the hook for the balloon payment after 5 years, but then he went and defaulted. Not sure how to protect against that other than screen the tenant buyer better. (school of hard knocks)
Why didn't you have any say in the matter? If he is a tenant that means you still own the property and you have legal obligations. You are still responsible for any citations from the city. I just saw that you sold on Land Contract. Within that agreement you should have that you "as the lender have the right to repair and bill him in the event he neglects the property to the extent that it reduces the value of the secured property" or something like that. No bank will allow "waste" of the asset protecting their loan.
Well, it seems we do things a little differently.
1. The way I calculate rent is principal, interest, insurance and taxes plus it has to cash flow by a few hundred dollars above that. If the numbers don't work it isn't a decent Lease Option to a Tenant Buyer.
2. The Tenant Buyer has to send the rent payment to me. I pay the property taxes. Obviously if they start missing payments I am aware of it and we have a discussion immediately.
3. I stay away from areas that are restrictive like Historic Districts and overly zealous HOAs. Some areas in Scottsdale have HOAs within HOAs and they are darn particular about things. So, I don't buy in those HOAs and put a Tenant Buyer in.
4. I always get a substantial down of about 10% (Option fee) of $20k to $25k. It sorts out people who plan ahead (save) and people who live month to month. People who plan ahead usually take better care of things.
5. The Tenant Buyer is responsible for all maintenance and repairs.
6. The amount I get down covers any costs that occasionally arise when a Tenant Buyer doesn't complete his Option agreement and moves. That happens on occasion. I simply clean things up and collect another $20k to $25k with a new Tenant Buyer.