All Forum Posts by: David Jensen

@James C., 

thank you for your insight and sorry in the delay in saying thank you!  Just FYI, I re-submitted this thread prior to your response, to another forum, feeling i might in the wrong forum. the link is: https://www.biggerpockets.com/forums/12/topics/498519-when-to-begin-rei-calculations-from-primary-residence-to-rental

I'm putting together my numbers and will hopefully post them in the other forum soon.  As you mentioned tho' I don't anticipate i can force any appreciation but costs are currently fairly low...(but i usually formulate for costs (even if unrealized) in my projections.

As far as the refi...i didn't take any cash out.  I was underwater and obtained a HARP loan to push the interest and monthly payment down (at that time the only math i conducted was to ensure average rent payments in the area would be larger than my mortgage payment. Real Estate Investing was EASY!!   : ) ).

thanks again,

David

@Dan H. Thanks for the comments and thoughts. I don't want to risk high-jacking this thread so I've moved/created my follow up question to the "starting out" forum...feel free to provide any thoughts! Here is the link:  https://www.biggerpockets.com/forums/12/topics/498519-when-to-begin-rei-calculations-from-primary-residence-to-rental

Hello BP!

[I originally posted this question in another forum, but think it might have been slightly off-topic as I didn't receive any replies.  I am trying again here.

@Dan Heuschele, i didn't want to risk high-jacking the other post, so wanted to say thanks for your previous comments and start the conversation here. Feel free to provide any thoughts you wish.]

 I'm in the process of determining the best course of action on my rental property, but to make the most informed decision I need to know how/when to calculate my ROI, Cash on Cash Return, etc. I am utilizing Frank Gallinelli’s “What Every Real Estate Investor Needs to Know About Cash Flow... And 36 Other Key Financial Measures” GREAT book, especially for the math challenged like myself.

However I'm struggling with the start point of doing the math. I don't want to inadvertently skew the numbers.

As background, my rental property was originally my primary residence. I bought at the peak in 2006, immediately became underwater on my mortgage with the rest of America after the crash. I was assigned overseas in 2012, so refinanced my house before I left, and ultimately converted it into a rental property, figuring, naively, as long as the rental payment was larger than my mortgage payment I was good to go!

So when doing the math…Do I consider the original 2006 down payment costs and years of primary residence as part of the calculus on current ROI/ Cash on Cash return, etc…or ONLY the numbers associated with the REFI in 2012 when I converted the primary residence to rental property?

I can provide the actual numbers, but think the fundamental question doesn't require the actual numbers..if i'm wrong i will provide the numbers ASAP.

I anticipate providing all the numbers under another topic as i am currently barely breaking even on rental payments to mortgage payments and am deciding what to do with my rental property to potentially make a silk purse out of this sow’s ear.

Thanks in advance if you can help me with what i'm assuming is a pretty fundamental question.

Hello BP!

I'm in the process of determining the best course of action on my rental property, but to make the most informed decision I need to know how/when to calculate my ROI, Cash on Cash Return, etc. I am utilizing Frank Gallinelli’s “What Every Real Estate Investor Needs to Know About Cash Flow... And 36 Other Key Financial Measures” GREAT book, especially for the math challenged like myself.

However I'm struggling with the start point of doing the math.  I don't want to inadvertently skew the numbers.

As background, my rental property was originally my primary residence. I bought at the peak in 2006, immediately became underwater on my mortgage with the rest of America after the crash. I was assigned overseas in 2012, so refinanced my house before I left, and ultimately converted it into a rental property, figuring, naively, as long as the rental payment was larger than my mortgage payment I was good to go!

So when doing the math…Do I consider the original 2006 down payment costs and years of primary residence as part of the calculus on current ROI/ Cash on Cash return, etc…or ONLY the numbers associated with the REFI in 2012 when I converted the primary residence to rental property?

I can provide the actual numbers, but think the fundamental question doesn't require the actual numbers..if i'm wrong i will provide the numbers ASAP.   

I anticipate providing all the numbers under another topic as i am currently barely breaking even on rental payments to mortgage payments and am deciding what to do with my rental property to potentially make a silk purse out of this sow’s ear.

Thanks in advance if you can help me with what i'm assuming is a pretty fundamental question.

@Dan H., your statement "...The issue is will the home make a good rental? My ex-home is by far my worse performing REI. This is because it was purchased to be a good home and not a good REI....My criteria for purchasing my home was would it make a good home for my family. No analysis of cash flow. No analysis of forced appreciation opportunities. No analysis on maintenance ease (but in this one regard the home is pretty good)." is spot on. I switched my current previous primary residence into a rental property, since I had been assigned overseas, and was upside down on my residence, and ultimately felt it was my only option.

Fast forward 6 years, and after many recent nights of reading BP posts and blogs, I've realized how incredibly naive I was.  I'm still learning and developing a better understanding of RE property analysis,  but definitely have a sense of direction thanks to BP!

I'm still unsure whether i should continue to hold this property as a rental or sell.  (the rent covers the mortgage payment by literally a few dollars, but the property has also appreciated a bit since i originally purchased it.)  I will likely put together  a post once i collate my numbers and ask the BP community for their thoughts and insight.

I just wanted to chime in and concur with @Dan H.  that the key factor when deciding to convert your personal residence into a rental property is "Will the home make a good rental?"

@John D., per the CC&R, "...This provision shall not be construed to limit the right of an owner to rent or lease his entire lot...so long as the lot is not leased for transient or hotel purposes or for a period of time of less than 30 days..."

thoughts?

I believe Palm Desert has a 10% tax for short rentals less than 30 days. the HOA, I believe is in line with minimum 30-day rental. Is that what you meant by short term? Plus, even if weekend rentals were allowed, I would also need to realistically balance the rental tempo with the patience of the other condo residents/HOA Board members, who are also mostly senior citizens. Yes, there is a small pool on the condo grounds.

@John D. you are correct, after conferring with @Darlene Harwick (THANK YOU DARLENE!) I obtained some much more realistic rental numbers ($1,200.00 -$1,300.00/mo ) and Comps for selling an older condo (circa $210K).

So obviously, and unfortunately, the numbers no longer look close.

So final question to creative financing BP'ers out there,  is there ANYTHING that can save this deal?

for example based on @Nathan Diones suggestion, If this becomes a "no money down" deal (hey look everybody, free house!), and I simply assume payments via a land trust (with Bank lenders written blessing?), does this still remain an attractive deal to experienced REI? I'm assuming at this point, based on my new lower numbers, I would simply be moving from RE investor to speculator/gambler on property value appreciation...as i would likely only breaking even or taking negative cash flow until significant appreciation occurs.

looking forward to any creative ideas!

@Nathan Diones, thank you for the great idea and congrats on what sounds like a MUCH sweeter title transfer deal than my scenario. I'll research the transfer of title with regards to triggering a Sub2 clause with a 99%-1% split. It is the potential ability to help my folks out with little out-of-pocket money, that has me still considering this opportunity...as @Account Closed I would love to discuss this opportunity further.  Feel free to PM me or would you prefer I PM you?

I would also love to hear if any others in the BP Nation has had any problems with a title transfer split as mentioned in the thread, as triggering the Sub2 clause or causing any other legal headaches. Once i determine potentially more accurate numbers I will re-post to potentially help others in a similar situation.

thanks for the great responses so far, this is REALLY helpful!

David

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