Please Help With My First Deal: Vacation Rental in Palm Desert

[David Jensen]

Hello BP!

I've very new to BP, but have lurked and engaged a couple times over the past weeks. I was hoping for some problem solving ideas and honest opinions on my potential First deal (My Parents' out-of-state vacation rental property in Palm Desert, CA).  I hope I've put the numbers in an approved format for easier analysis!

Bottom-line Up Front, this is my 80-yr old parents' winter home and I'm trying to figure out a deal that benefits both of us. The deal sounded much better initially (as always :) ) , but as i peel back the onion and determine the true numbers, I'm becoming more skeptical, but because I'm such a novice I don't want to inadvertently overlook an opportunity just because I haven't come across the right BP thread that captures the creative financing solution i may need.

Property Details:

This is a 2bd/1.75ba 1,200 sqft condo in Palm Desert, CA. approximately a 5 minute walk from popular El Paseo Drive. Built in 1973, in great condition, although does not have current upgrades.

Since I am not yet a PRO user, I based on my rental calculations using great calculators from ListenMoneyMatters.com.

SUMMARY:

ESTIMATED VALUE (Zillow): $214,714.00 (In line with averaged real estate agent's Comps but slightly more conservative, as I think he threw in a couple outlier properties to bump the average a bit to entice my folks.)

PURCHASE PRICE: $195,000.00 (price based solely on the amount left on my parents 4.25% HARP non-assumable mortgage)

UPFRONT COST: $50,587.42

RENT ESTIMATE: $1750.00

ANNUAL NOI: $11,633.00

GROSS YIELD: 10.79%

CAP RATE: 5.98%

CASH ON CASH: 5.56%

CASH FLOW:

ANNUAL: $2760.32

MONTHLY: $230.03

1ST YEAR EQUITY: $2363.49

ACQUISITION COSTS:

DOWN PAYMENT: $48,641.75 (25% )

CLOSING COSTS: $1,945.67 (1%) *anticipate only using real estate attorney (no real estate agents) for more cost effective deal and save parents 6% commission; do not know actual attorney fee costs for closing so this number is a WAG (Wild *** Guess).

MORTGAGE RATE: 4.5% *anticipated

MORTGAGE TERM: 30 years

ONGOING COSTS:

PROPERTY TAX: $1,927.00/yr

PROPERTY INSURANCE: $300.00/yr

PROPERTY MANAGER: $175.00/mo (10%)

VACANCY RATE: $350.00/mo (20% vacancy rate)

MAJOR/MINOR CAPEX: $175.00/mo (10%)

HEAT/AC: $92.00/mo (Averaged)

HOA: $420.00/mo (has remained approx. $420.00 for decades; although the HOA just hired a property manager for the first time last year, but so far no indications of changing HOA fees)

Notes:

Rent estimate: $1,750.00 (local property manager assessed realistic rents between $1600-$2000+ per month on long-term lease or as vacation rental $140-200 a night/minimum 1 week stays).

My parents are open to any type of creative financing deal, that would free them from paying mortgage (their current monthly mortgage payment is $1,000.00 (+ $420 HOA).

My thoughts:

Originally I thought they had much more equity in their home, but they do not. So now concerned their isn't enough "meat on the bone" to maintain positive cash flow to consider this a great deal.

Here are our options as i currently see them:

A) My parents hire a real estate agent and sell their house, and hopefully make enough to cover 6% commission and other costs and I run away from deal.

B) Offer $195K to pay off their loan, 25% down at 4.5%. This would be PITI of $930.41 + 420.00 (HOA) = $1350.41/mo

C) Land Trust?: We could create a land trust and have me named as beneficiary, and if i understand land trusts, it would essentially allow me to take over payments, likely could put property insurance under my name (or the trust?), but again I'm not sure if this is a solution as I understand this would not transfer ownership and I do not want to risk triggering the sub2 clause scenario by trying to do so. (I'm assuming this would be dramatically more cost efficient solution and I could ultimately gift my parents the originally intended "down payment" money over the next few years (depending on gifting limits). )

D) Parents Gift the Property to Me?: they could gift me the property, but this is the one scenario i am not familiar with enough to recognize the benefits/risks of such a deal for either side. (they do not have to worry about the $4.5 million lifetime cap),and I'm assuming my "risk" is not taking the stepped up basis on the property since they gifted the property while alive. other than that, not sure it is a scenario to consider.

E) OR a creative BP financing solution!...Anyone!? Anyone!? :)

thank you everyone in advance for your honest insight and opinions. If I am missing any needed info, just let me know and I'll hunt it down ASAP!

thanks,

David