High-end rentals questions

General Landlording & Rental Properties
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High-end rentals questions

Glenn R.
Cornelius, NC · Member since 2016 · 104 posts · 51 votes

I was reading the "Who pays $1300 for rent" thread and many of the replies mention ultra high rents in NYC & SF, etc.  It made me wonder about "the numbers" that make high end rentals work for the owners.  

How much rent should a $2+ million place rent for?  What's the rough formula, or rule of thumb to determine what works financially for the owner?

The reason I'm asking is I was given a waterfront property that is surrounded by an expensive golf course / country club / lake development.  My place has an old double wide mobile home, that is on a lot which is large enough to divide into 2 lots.  Neighboring lots have recently sold for $1.2 million & most of the waterfront homes are worth $2-3 million (a few of the larger ones are close to $5 m ).

Since it was a gift I'll have to pay capital gains if I sell it, so I'm considering different options.  I've grown up here, so there is some sentimental value here.  I'm wondering if it might make financial sense to build a couple of homes here and rent them.  (The city bans short term rentals, so I'd need to confirm what that means.)

Can you guys give me some "blanks to fill in" & a formula to help decide what makes financial sense?   I guess I should ask some local realtors about the demand & rates for rentals here.  I don't think there are many rentals around, but that doesn't necessarily mean there isn't demand for them.  

Does this scenario scale up well?  If I had more lakefront rental homes available nearby would it be easier to manage?  

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Diane G.
CA · Member since 2016 · 1k+ posts · 1k+ votes
9y

@Glenn R.

I have a couple of 2/2 condo in San Francisco that I am renting $4500 EACH now... In the past 10 years of renting, I have a CEO, a JP morgan analyst, high tech marking director, so on and so forth....They tend to stay 3-5 years, so I only had 3-4 tenants for the two properties combined in 10 years..... And I usually hear from my tenant once or twice a year, because they are always travelling or busy otherwise...

BUT you can only get these tenants easily if the property is in a urban core, very close to LOTS of high paying jobs....

I am not familiar with your local market, but if it is NOT a big urban core, you are probably going to hard time finding someone willing to pay $5K in rent.....EXPECT long vacancy

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  • Jassem A.
    Investor · PA · Member since 2013 · 1k+ posts · 602 votes
    9y

    There might be some demand for high-end rentals but I would think the safer option would be to sell or to build a couple homes and then sell if you can afford to and if you are able to determine that it would be more profitable.

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  • Diane G.
    CA · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Glenn R.

    I have a couple of 2/2 condo in San Francisco that I am renting $4500 EACH now... In the past 10 years of renting, I have a CEO, a JP morgan analyst, high tech marking director, so on and so forth....They tend to stay 3-5 years, so I only had 3-4 tenants for the two properties combined in 10 years..... And I usually hear from my tenant once or twice a year, because they are always travelling or busy otherwise...

    BUT you can only get these tenants easily if the property is in a urban core, very close to LOTS of high paying jobs....

    I am not familiar with your local market, but if it is NOT a big urban core, you are probably going to hard time finding someone willing to pay $5K in rent.....EXPECT long vacancy

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  • Kim Meredith HamptonBusiness Member
    Real Estate Broker · St Petersburg · Member since 2014 · 2k+ posts · 2k+ votes
    9y

    @Glenn R. the high end rents all depend on the area, community, market etc... for example, I have a home in Windermere, Fl that is gated 5 bed, 5000+ sq. ft with a pool that is worth a million and rents for $5800, I also have one that is in the guard/ gated community of windermere/Isleworth that is a 2/2 furnished for $5000. Both of these are great areas that are known for higher rent prices. We advertise online and network with other realtors that sell high end homes, so usually don't have a problem getting them rented, although ti does take longer than the typical 30 days

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  • Andrew Johnson
    Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    9y
    Glenn R. I might be misreading your post but it looks like you'd have to build the 1-2 homes on the lot that you have. Have you looked into what it would cost to build the home that sells for $2MM? Does it cost $300K or $800K? If you're "out of pocket" $300K vs. $800K it certainly makes a huge difference when to comes to ROI given your lot was a gift. And it's worth looking around and seeing what does a 2,000 sq ft home rent for vs. a 4,000 sq ft home. Since you're potentially building to rent (eventually sell) you want to ensure you build what that market wants.
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  • Glenn R.
    OP
    Cornelius, NC · Member since 2016 · 104 posts · 51 votes
    9y

    Thanks for all the replies.  You've given me a lot to think about.  

    From looking on Zillow I'm seeing that lots are selling for almost as much, or sometimes more than the neighboring homes.  That makes it hard to justify building anything, to rent or sell here.  People want to build their dream homes, and are willing to pay a premium for lots. 

    I'll probably just rent out the mobile home for a year or so, so it will be considered investment property, then do a 1031 exchange for less expensive properties to broaden my portfolio.  

    There are a few more mobile homes left on the street, so as each one sells the remaining ones seem to appreciate incrementally.  That's a good incentive to take my time.  

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Glenn R., good choice.  Builders make money.  People who hire builders get nice homes at retail.  All your profit is in the land so don't complicate it.  Plus, selling the land allows you to 1031.  If you build a house it becomes inventory unless you then rent it for a while.  And then you'd be selling a used house.

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  • Hersh M.
    Engineer · Carlsbad/San Diego · Member since 2014 · 285 posts · 97 votes
    9y

    @Diane G. How are the expenses like for SF condos? 

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  • Diane G.
    CA · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Hersh M.

    In my case, $700 a month for tax, $350 for HOA, $50 Insurance.... zero vacancy, tenant rotation every 3-5 years, vacancy time during turn over is like 3 days to 2 weeks.... maybe $500 ish a year in repair.... for $4500 monthly rent....

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  • Diane G.
    CA · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Hersh M.

    Also, in case you have not heard, in SF, tenant starts to pay rent NOT on move-in date, but from lease sign date.....

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  • Rene Remington
    Auburn, CA · Member since 2016 · 26 posts · 9 votes
    9y

    Hi Glenn, @Glenn R.

    The money is in the land, not in a house.  You have a premium piece of property with two great assets, golf course, country club and lake.  The money is always in the land and it is a lot less hassle.  You could divide it and keep a parcel for yourself and sell the other parcel.

     As for rentals, your not in the SF or NY market, those are high demand crowded places, where there is a sort of monopoly on the rental market as homes here in CA are outrageously priced.  

    Keep it real for your market.  Take your time do your research independent or realtors. Even if you sell it, no need to give away your profits.  Lots of ways to sell are available to you.

     Wishing you the best.

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  • Andrew Cameron
    Developer · Amherst, NS · Member since 2017 · 49 posts · 23 votes
    9y

    One thing I am slightly concerned about is your comment that you don't want to sell because you'll have to pay capital gains tax.  My Dad always says, "you never go broke paying taxes."  Yes, you'll have to pay capital gains tax, so you'll pay a percentage of your sale price.  But, you'll still end up much further ahead than where you are now.  (I'm Canadian and don't know the tax rates in the US.)

    Now, if you build the rentals will you have to pay tax on the income you make from renting them?  And will that be at a higher rate than the capital gains taxes?

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  • Glenn R.
    OP
    Cornelius, NC · Member since 2016 · 104 posts · 51 votes
    9y

    Your dad is right.  I think the capital gains is 15%, which isn't to bad as a percentage, but my dad purchased a long time ago.  The tax would probably be around $300K, but I need to check with the accountant to be sure.  

    I'm just trying to figure out what makes the most sense about what I should do with the place.  

    Real estate offers a lot of options, so I'm also considering a 1031 exchange that allows you to reinvest in real estate without paying the capital gains tax.  I think it's just required to be any type of income producing property, which I'd assume covers rentals, timber land, farm land, etc.   

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