All Forum Posts by: Richard Chover

Thanks for the feedback here. After researching it further... our area has put restrictions in place that limit what properties qualify and for those that do qualify only 300 STR permits will be issued. Our property doesn't meet the zoning requirements, so the decision has been made for us.

STRs do seem like a lot of extra work, with higher risk/volatility, when compared to LTRs. The most sense I can make of it is that if I wanted a vacation home, but didn't want the burden of the entire cost, then I could use it as a STR so I can make some money from it when I am not using it. I wouldn't consider it an investment in this scenario.

We are considering getting into STR with one of our properties in the Murrieta/Temecula area of southern California.  Our experience is with LTRs so we are a little hesitant to do a STR given the uncertainty of the monthly revenue.  

The property is a 5 bedroom that should sleep 8-10, with a pool, kids playset, and pickleball/basketball court. Our research says that we should be able to rent on a STR basis for about $350-450 per night. Without boring you with our analysis, at a 50% occupancy rate it would net us about the same as renting it out long-term.

Every time I have analyzed converting one of our LTR into a STR the numbers have always looked better as a LTR. Have any of you found the same to be true, or are the STRs incredibly profitable and I am just not understanding the economics of STRs?

@Dustin Owens

Where to start...

Why are you selling your house? You should be taking out a HELOC or doing a cash-out refi(depending on your interest rate). Take out as much as you can while still being able to rent the property at least at breakeven. Or, get the HELOC and do some house hacking by bringing in roommates.

But, let's say you do the HELOC, rent out your house, and then go buy a small multi-family that you can also live in. The concept here is to get to the point where your tenants pay for your housing expenses, which should give you some excess income to save and invest.

These initial steps could get you to a point where you have a few doors and maybe even have your tenants covering your own housing expenses.

Think carefully about selling, it seems counter-productive if you want to be an investor.

@Barbara Berta

Doing a 30 min. consult with a Real Estate Attorney will probably be well worth the cost.  There may be some legal and title complexities that arise if there is an open escrow and they sell the property to someone else after you.

Personally, when faced with a similar situation regarding the release of an EMD I made it clear I would not budge, even if it meant the money sat in an escrow account for years... they eventually conceded.
 

Rather than selling the property right now, you could consider doing a lease option.  Benefits:

-Beneficial tax implication since you won't be realizing your gain.

-You remain on title.

-Charge an option fee 3-5% to get some cash-in-hand.

-Collect rent that is similar to what their payment would be; which will be much higher than your current mortgage. (This is probably what you are interested in here.)

-Most leasees never exercise so 3 to 5 years from now... you keep the option fee, and had the benefit of rent that was probably above the market rate for your area.

The drawback is that you don't get the ~$250k(after selling expenses) to play with. 

You mention that you don't qualify for traditional financing.  If that is your biggest concern, then buy something that is <$500k put 50% down and you will have loan options, just not conventional.

There are so many caveats and unknowns here that this is just an attempt at an idea...

Option 1, the four grandchildren living in the property buy out the other two:
-Estimate your PITI payments based on the expected payout to the 2 grandchildren being bought out. If we knew the approximate value of the home we could get an idea of whether this would work. Confirm the Family that is remaining can afford the payment. I have a good feeling they will be able to. Remember that the family that is remaining only need a loan with an LTV of 33%. This will also help you understand the max that the family can afford to pay for the home.

-Agree market value of the home; appraisal, average of 3 appraisals, maybe put it on the market with the 4 grandchildren having a first-rigth-of-refusal at the highest bid price,...whatever is agreeable.

-Consult with a real estate and/or estate planning attorney.  This will be critical so that you know how the title will vest.  This will impact what lender you may need to speak with.

-Find a lender. This could be easy, or not, but there will be a lender who will do this even if it has to be some uncommon non-recourse loan.  Someone will lend at a 33% LTV.

All of this said, it sounds like the Trustee would actually like to say invested somehow.

Option 2, put the house in a trust or LLC and let the rent be divided amongst the grandchildren:

-All grandchildren remain owners of the property and the monthly income of $1,500(minus expenses) is split amongst the 6 grandchildren.

I will warn that option 2 is more likely to result in long-term drama and likely some anamosity among the family members.  Typical issues that will cause friction: rent not being at market rate, how/when to do updates and repairs, late payments/missed payments, and plenty of other potential pitfalls.

Quote from @Ruchit Patel:

I am with you Richard. I agree with all the people here in this thread. 

I will learn more about reverse mortgages and propose to them. Also, I have heard about companies that give out cash for partial equity in the house, is that a property route to consider? 

I think you are referring to companies that do equity sharing.  Those could be an option.  I know when I looked into it, out of curiosity, there were many restrictions/rules/conditions.  Best of luck to your friend!

Almost no lender will allow you to sell the lots separately if all three were pledged as collateral.  

He will need to take a reverse mortgage or face the reality of his situation.  His options are limited, but clear.  He just doesn't like the options.

This is actually an interesting situation that is highly educational for anyone who reads it.  The people involved have a particular amount of assets(equity) and no or negative monthly cash flow.  This is simple math to figure out when they become destitute unless they change their cash flow.  

I would strongly recommend not consigning any loan/HELOC for this property. You would only be putting yourself at risk while having no control of the property itself.

Quote from @Steve Vaughan:

Quote from @Richard Chover:

What does everyone think about lease options?

I used to do lease options 20 years ago, and it seems like a great way to wrap around without trigger a sale or breaking any terms of common notes.

I have a $1.3M property with a 1st of about $850k at 3.25%(or somewhere around there). My current PITI is around $5,500. I am thinking I could offer a lease option 10% down, plus 3% option fee, and structure the deal so I am cashflowing $3k positive per month.

LO's are my favorite slow exit strategy and have been for a long time.  I also like to purchase options.

I'm just confused by your language of wrap around and down payment in addition to option fee.  

Wrap around and down describe a sale now.  How can you have both of those and an option which describes a sale at a later date? 

I did mix my language... that is what happens when you write posts late at night.

The structure would be a long-term lease with an option fee on the right to purchase.

What does everyone think about lease options?

I used to do lease options 20 years ago, and it seems like a great way to wrap around without trigger a sale or breaking any terms of common notes.

I have a $1.3M property with a 1st of about $850k at 3.25%(or somewhere around there). My current PITI is around $5,500. I am thinking I could offer a lease option 10% down, plus 3% option fee, and structure the deal so I am cashflowing $3k positive per month.

What would you think of a deal like this?