2 possible deals on our SoCal rental prop - options?

Question

So we had an under market tenant for a few years and finally the lease is up and we can get closer to market value. We are out of state so house hacking unfortunately isn't an option. It's a 5 bedroom 4 bath fairly newly built. It's in a desirable area, gated pool, I don't anticipate problems renting. We have some equity.

On deal #1 a neighbor has offered to catch up our arrears, move in, pay rent and wants an option to buy in 6 months at a substantially lower than market rate. I'm considering this but I'm not there so difficult to vet. Also, would have to have someone draw up a lease and option to buy. The main con with this is we would be dependent on this one person.

Option #2: get caught up ourselves and since it's 5 bedroom find a way to rent out to college students (it's near a college) each bedroom. I'm not exactly sure how to go about this because the property management company only seems to be geared towards families.

The property has a main level in-law suite with a full bath so it's a popular feature of our home.

Any thoughts! I'd love to rent it out to 5 college students around $700 - $1000 each! That would be great but I don't know how to go about it from another state!

John Woodrich · Answer

@Ann North

Option 1 is a no-go, you have no reason to sell under market rate.  You could just list it for sale.

Option 2 - If you want to go down this path you will want to find a PM who specializes in student housing.  Your current PM may want to rent it to families as it is easier or because they don't have experience in student housing.  As mentioned, this can cause more wear and tear and it may be hard to manage if you are out of state.

There are a lot of options in MN, unless you have reasons to keep the house in CA or if you think the appreciation will outweigh negative cash flow you may be best selling and investing locally.  Plus, if you lived there 2 out of the last 5 years there is a gain exclusion you could use to avoid a lot of tax.

Greg Scott · Answer

Ann:

I've owned property in several states and managed it from afar so please understand I am not coming from a place of fear from my comments.

Your property is a landlord unfriendly state with high taxes.  You didn't mention how much equity you have in the deal, if anything, but the fact that you are in arrears suggest it has negative cash flow which is also not a surprise in CA.  In my opinion the best strategy is to get out of that as fast and as cleanly as possible.

Option #2 sounds like an absolute disaster.  You are drooling over $5K per month rent but do you know what college students can do to a house?   If you are in a student housing neighborhood you can make minor cosmetic repairs and keep it in service.  If you are in an owner-occupied neighborhood and students are rough on the house, you are basically talking about gutting it and a full rehab before you sell.  Are your prepared to deal with late night phone calls from neighbors or police on the parties?

The market is hot right now.  Sell and take your cash.  I see that Wayzata is in MN.  There are much better investment options in MN that cash flow like crazy.  Take the cash and invest in a cashflowing asset.  You will be much safer and make a lot more money going that route.

My 2 cents.  I hope it helps.

Kevyn Miyata · Answer

Look into bungalow. They lease from you and sublease rooms to young professionals...and property manage their subtenants. My friend leased to them. 24 month lease. I'm not sure how close to market rate since the house has no rental comps.

John Woodrich · Answer

@Ann North I am pretty sure it is an investor.  I am going to send you a DM.

Ann North · Answer

@John Woodrich Great points! Thank you. That makes sense. How would I find a PM specializing in college students? I know there are a few online websites. Has anyone had luck with these internet listing companies for selling? I'm thinking of trying a discount broker. One sucked but I could try another one. There are several homes in the neighborhood in So. California that are using these Internet sites.

For some reason this house, and the fact we're not there, has been really really difficult because of neg cash flow. The tenants have been great but the realtors have ALL been awful. It's appreciating but in order to pull out $100,000 it will be about 5 years, maybe 8-9. In 3 years it's gone up minimum $35,000. That's pretty good! It's just our mortgage sucks and we can't refi! We lived there for the first year and a half with an FHA and the PMI is killing us. Seems like it's time to cut bait but hard when attached to it and we want to get more out of it!!!

How could I tell if #1 was an investor or something? It's so strange they approached and talked to me for about a month and claim they're ready but we will see. I guess I don't care if it's an investor! We are motivated so are willing to make a deal because it would be win-win.

Ann North · Answer

@Greg Scott thanks for your honesty. It's appreciated. I think that makes sense. I am drooling, of course, but we got $3100 a month for 3 years. We can expect to get about $3500 now. Alas, we need to be more to positive cash flow. Yes, I agree with you although the college near where it is - is private and extremely expensive. Still, I hear what you're saying. We had a property management company in place so they would handle the calls but no that doesn't sound like fun. Our equity is there but when agents are charging $30k+ commission, it eats into it. And yes on MN! I want to learn how to cash flow! Thanks again for the realistic advice!

2 possible deals on our SoCal rental prop - options?

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