All Forum Posts by: John Stoller

@Maricela Chavez

Good points! I'm working with a real estate agent who thinks it is worth ~$200,000 as is. That said, the market in the location moves very slow. I looked at Trulia and most properties in the area stay on the market for 150+ days.

As for purchasing a similar home right now? Probably about $250k for similar home in same area. 

As for getting into a rentable condition in order to make it a long term investment, that is a very good idea! I don't know if it applies to me. First, I don't have the spare cash. Second, I have  excellent credit and a decent paying job, so I don't know if I'm in the situation where it would make sense.

Those are very good tips on contacting the bank! Thank you!

@Brett -- Rents in the area are about ~1500. Currently, the morgage is ~800, but is set to go up per the terms of the modification. The bank wanted to set a short sale value of $220,000. Our agent didn't think we could get that. She thought $200,000 was the more realistic price.

@Tim -- That's my sense as well. Frankly, the reason I am bothering w/ a DIL at all is to participate in the government's relocation programs. HAFA and then California's own relocation program. 

Hello all,

I would greatly appreciate some help making a decision. My grandmother has a 3 bedroom, 2 bath, 2200 square foot home in the middle of nowhere, California. Town is called Llano for the curious, population 1200. The area is the High Desert and the town lacks even a gas station. It is the type of place you move to to disappear. Best I can tell, the market value if it were in good condition is $250,000, but the house needs a good amount of work, ~20,000 worth. Her mortgage is underwater at $270,000 ($110,000 as a deferred principal). She had an in-house modification done on the property resulting in a low payment of $800 which is ending soon--the interest rate was kept at 2% until May 2017. There is about 37 years left on the loan.

Due to her age (87), I had to move her out closer to services. The home was ~30 miles from a hospital, isolated on 3 acres. Now I have to decide what to do with the property. My initial thought was to do a short sale and get out of it. The bank didn't set a fair price on the short sale and the real estate agent suggested we go a deed in lieu of foreclosure instead. My mother's credit is shot as it is due to consumer debt, so I figured why not. I thought it was especially good since she would qualify with state and federal programs that would give her some money in relocation fees. Between 8 and $10,000.

Now I am thinking we may not want to do it. I am worried I am giving up on a decent property. In the area, similar homes rent for around $1500 a month. I imagine once the modification runs out, the mortgage will increase to about $1200, but we should also try to pay down the deferred principal as well. I live far away from this property (7 hour drive) so I would have to hire a property management company. 

What are everyone's thoughts? I still think the DIL of foreclosure is the best option as it gets her some money. Moreover, if I inherited this place tomorrow that's what I would do since managing it would be so difficult. But, let me know if you people have other thoughts!

Thanks!

- John

Also, both sides are 1/1 with small yards.

Embert!!! Yes, long time no hear from my friend! 

Thanks everyone for your input. I think the biggest draw for me is the area--I have no intention of living elsewhere in Sacramento. Maaaaybe East Sac. But as far as cash flowing properties for sale in N. Oak Park or Arden or something, count me out.

But it sounds like I'm being too hopeful in my estimations. I really appreciate everyone's input. 

I believe roof, HVAC, and water heater are all pretty new. I didn't make an estimate for vacancy because I have no idea. The neighborhood seems pretty desirable and tenants seem easy to come by. 

Also, what is your opinion of the housing/rental market here? I see you're in Fair Oaks. I simply do not understand what's driving up prices other than restoration to the mean. 

Owner pays sewer/water. Sewer is an average of $20 a month in my zip code. Water averages ~ $50 a month per local utility. Occupier pays remaining utilities in current arrangement. 

I currently live in a duplex which is now for sale. I am interested in buying it, but I cannot make up my mind. Any advice would be appreciated. Pertinent information is below:

The Property:

The duplex is listed at $400,000. Each side of the duplex is 600 sq feet. My rent is currently $1000. Rents in the area are comparable, but mostly higher. Experts in the area (Sacramento, CA) believe rental prices are going up. If Oakland is considered comparable, then I can see their point. I have my doubts due to an absent private sector.

The Neighborhood:

It is in one of the more desirable neighborhoods in Sacramento, California - specifically, Land Park. Similar homes just a few blocks away sell for 400k +, larger homes sell for 600+. At a square foot analysis, this does averagely. As a duplex, it is one of the cheapest I've seen.

Financing:

I've been preapproved for a loan at 3.75% with $0 in closing costs due to lender rebates. The rebate will even pay for a home warranty. It is an FHA loan with 3.5% down (a hair under 14k).

Monthly breakdown: PITI = $2552.78 [P&I = $1809; Hazard Ins. = $59; Mort. Ins. = $270; Taxes = 414.58]

Yearly breakdown: PITI = $30634 [P&I = $21708; Haz. Ins. = 708; Mort. Ins. = $3240; Taxes = 4974.96]

My broker estimates that tax benefits reduce the payments to $2137. 

Me:

I am 29 years old with no real estate holdings and no dependents. I make over $100k.

MY ANALYSIS SO FAR:

The way I see it, I am purchasing two homes for 200k each--one an investment property, the other a residence.

For the investment portion, I think it is a poor investment--at least short term. For one, it does not survive the various rules advocated on this: 

• One percent rule: There is no foreseeable way this place rents for $2000.
• Fifty percent rule: My cost for this property is at least $1050. I don't think it can rent for $1,500.
• Cash flow: I think it can realistically rent for $1200. (Area rental surveys range from 800 - 1700 for comparable units). Dividing insurance and taxes indicated above in half and then accounting for a bare-bones $100 in monthly maintenance Year 1 has a negative cash flow of $1884. Assuming a 4% rental increase even Year 5 has a negative cash flow; $391.

Now, if we consider tax deductions, then I see gains quicker. I expect to deduct $7201 in interest, $6512 in depreciation, $5616 in insurance and tax. Subtract $14400 from those figures and I expect a $4929 tax deduction from this unit. So my post-tax cash flow is negative $357. Assuming 4% rental increases again and I hit a positive cash flow in Year 3 (wait for it... $73).

That said, with appreciation and principal payments, I am increasing my net worth.

As for the residence portion, I think it is a decent investment. Effectively, my rent wouldn't change, but I now get tax deductions and increase my net worth through principal payments. So here, I deduct $7201 in interest and $5616 in insurance and tax. I estimate these tax savings to be $2677.

BOTTOM LINE?

So, am I right that the bottom line is that post-tax between the two properties I am looking at a net of about $2300 a year by Y-5?

Do you folks think this a good decision for me? I think my primary motivator is FOMO. Local experts expect the Sacramento area to continue rapid appreciation for the next two years and then level off. But who knows? The job market is slightly above national average in terms of growth; however, I doubt sustained growth. The recession hit the government sector hard, so this growth, in my mind, is merely restoring to the mean. We do not have an identifiable private sector outside of an Apple plant south of me (whose workers would unlikely rent my property due to distance). That said, the area has been trending up in both sales and rents. Please let me know your thoughts.