Take it or not?

Question

So I am renting out my first property in Phoenix. It is a house I lived in for 6 years so after my wife and I were just married we naturally bought another home. The mortage and impounds come to $1175/month and the area comps for the home are between $1250-$1350. I am asking $1300/month and receiving on average 1.5 contacts per day for the past 2 weeks although I have only had one applicant. . . until yesterday.

An older retired gentlemen and his wife made a CASH offer of $7k up front for 6 months. That comes out to $1166/month which will obviously incur a loss since that will not even pay for the mortgage. However, it is a cash offer which has some incentive but that is where it gets cloudy as a beginner investor.

Should I even consider this offer?

Having the cash up front would be nice so I won't have to worry about tenants making rent for 6 months, but I will incur a loss. So what advantages and disadvantages should I be considering with this proposition? Thanks!

Steve Babiak · Answer

The other thread that Jon gave has good discussions about this.  I posted on that thread regarding my experiences.

The question is: Why is this applicant offering you that much cash?  Do they pass your application process (screening and background checks), or are they trying to get you to circumvent that process?  "Pacific Heights" also had the tenant (from HELL) offering cash (if I recall correctly) ...

If you would otherwise take them as a tenant, then the cash offer could benefit you.  If you would otherwise reject them as a tenant, then you should think long and hard about taking them at all.  Even though I agree with the posts that say that the one month extra you keep it vacant is lost income, you still have to be certain that you are getting a tenant that meets your screening criteria.

D D · Answer

I have not screened them yet but I will certainly will even if they are a retired couple haha. I just wanted to see what everyones' opinions are of an upfront all cash offer and what advantages/disadvantages I should be aware of. Looks like most are in favor if the tenant passes the screening process.

Thanks everyone.

Bobby Casey · Answer

Understood.  This was merely an example to illustrate the opportunity cost.  Either you use it to pay down the debt at 5.75%/year or earn interest at 5.75%/year.

Either way, if you don't take the cash, there is lost opportunity.

D D · Answer

Right. There is a mortgage on the house that will need to be paid so the $7k will be used towards that.

I thought about refinancing since my rate is 5.75% now, however, since it is considered an investment I probably won't find much lower than that.

D D · Answer

All good points. I have another party that is going through the evaluation process but it is not an ideal situation so cash does sound better.

Thanks for the input!

Billy Soloe · Answer

Hi DD...I am in property management...take the money. ..here is why!

If you let the property set 1 more month...that is a loss of $1100. Do the math. You will NEVER recover that lost revenue.

Now, after you lease it out for this period. PUT yourself in a position to have this baby rented out for more long BEFORE the lease expires so you can get this back on the plus side for positive cash flow. IS refinancing an option to bring those payments down in the next 6 months? Rule of thumb is if you cant get the revenue up, then find a way to bring down the expenses out..

KEEP this house generating cash and you will end up on top if you do your work. and not wait until the last minute. TAKE the cash now.

peace.

D D · Answer

Excellent point. Obviously this is not an optimal rental but I think it would be a great learning experience before taking the dive.

As far as the accounting aspects, I had another investor advise me to take the cash but claim the property as not being rented for the 6 months. That sounds terrific but I am wondering how you account for the $7k cash that just appeared in the bank. I suppose it's ok unless you get audited.

Bobby Casey · Answer

I would take the cash personally.

Look at this.  If you invest the $7k at 10% for 6 months (obvioiusly an arbitrary figure, but certainly possible), then you end up with $7341.66 or $1223.61/month.

This covers your cost plus a little.  And you get a guaranteed upfront payment.  You eliminate the necessity of collection payments and the hassles that entails.

Also consider, how long are you going to sit on this house waiting for an extra $100/month?  If it takes one more month to find a tenant, you are obligated for the $1175 in monthly costs.

So if you wait one month to find a tenant for an extra $200/month it will take you 6 months to recover the loss.

As my dad used to always tell me, "a quick nickel is always better than a slow dime."

D D · Answer

I bought the house 6 years ago for 173k and owe $149k now. As an agent the comps I pull for the house are around 163k so I would like to hold it if I can.

I am trying to find the advantage of a low cash offer as opposed to a respectable month-to-month payment offer.

Take it or not?

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