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Thoughts on a Hypothetical Investment
Old 08-12-2012, 10:17 PM   #1
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Thoughts on a Hypothetical Investment

Background: Property appraised at $120k being passed as part of an estate, half to me and half to a sibling, currently rented using professional mgt. and netting $9k/yr positive cash flow.

Hypothetical: Should I buy sibling's half ($60k) and retain as a rental; $9k/$120k = 7.5% inflation adjusted, tax deferred annual return. Or, should I sell with sibling and invest my half elsewhere?

Comments welcome.
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Old 08-12-2012, 11:13 PM   #2
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Depending on your situation and the stability of the property as a rental I would consider buying the sibling out. The 7.5% is a good return not including any tax deductions you can get thru renting the property. Also, Depending on the state of the property, current renters, and your available time, I would also consider ditching the property management company.
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Old 08-12-2012, 11:17 PM   #3
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Sorry for your loss.

Depends... what does your sibling want to do? have you been a landlord? good location? good rental area? is the property in good shape or is there deferred maint? would current tenant sign a multi-year lease or buy it with seller finance? how close to FI or RE are you and how is it part of your long term plan?

Personally, I would buy it from sibling and maintain as a rental, but I've been looking for ways to grow my RE holdings. I've been a part time landlord for a long time, so I'm biased. I also spent part of the day painting and carpeting a foyer to save a few bucks. YMMV
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Old 08-13-2012, 11:11 AM   #4
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While the 7.5% return on equity is great. Did you include a vacancy factor? Also houses need periodic maintenance. Sometimes expensive things happen to houses.

Based on maintenance and periodic vacancies your real return may be less than was quoted.
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Old 08-13-2012, 08:42 PM   #5
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Quote:
Originally Posted by Aiming_4_55 View Post
Sorry for your loss.

Depends... what does your sibling want to do? have you been a landlord? good location? good rental area? is the property in good shape or is there deferred maint? would current tenant sign a multi-year lease or buy it with seller finance? how close to FI or RE are you and how is it part of your long term plan?

Personally, I would buy it from sibling and maintain as a rental, but I've been looking for ways to grow my RE holdings. I've been a part time landlord for a long time, so I'm biased. I also spent part of the day painting and carpeting a foyer to save a few bucks. YMMV
- Don't know about sibling's preferences yet.
- I have been a landlord.
- Rentals have been and are currently good in this area.
- Property is in decent shape.
- Current renter has signed 2 yr lease.
- I'm close to FIRE, and am considering that this could become a source of income during retirement.

Quote:
Originally Posted by MasterBlaster View Post
While the 7.5% return on equity is great. Did you include a vacancy factor? Also houses need periodic maintenance. Sometimes expensive things happen to houses.

Based on maintenance and periodic vacancies your real return may be less than was quoted.
The 7.5% factors in 10% for vacancy and maintenance. This could be a little low but, it's currently rented for 2 years and all deferred maintenance was done within the last 6 mos. So, this allowance is probably good short term.
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Old 08-13-2012, 10:39 PM   #6
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Because you apparently know this property and the local market well, that reduces the risk compared to purchasing a new-to-you rental property. The numbers look good. Two considerations:
- Does it "fit in" with your other investments? If you're already 100% real estate, maybe you'd want to diversify.
- Family relations: Would your sibling resent it if you bought him out and this proved to be a fantastic long-term investment? Conversely, would co-owning it with your sibling as an investment likely lead to squabbles down the road ("It needs a new roof!" "No, the roof can last 5 more years with a little tar." etc)

Also-the appraisal sounds like it might be low, at least when we look at this home's value as a rental. Clearing $9K per year on such a house after doing all maintenance (including reserves for roof, furnace, etc), property taxes, allowing for vacancies, and paying a professional property manager is pretty good. If the numbers really work out like that, I wouldn't be surprised if my sibling concluded the house was worth a bit more than $120K regardless of what the appraiser said.
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Old 08-14-2012, 04:37 AM   #7
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Quote:
Originally Posted by samclem View Post
Because you apparently know this property and the local market well, that reduces the risk compared to purchasing a new-to-you rental property. The numbers look good. Two considerations:
- Does it "fit in" with your other investments? If you're already 100% real estate, maybe you'd want to diversify.
- Family relations: Would your sibling resent it if you bought him out and this proved to be a fantastic long-term investment? Conversely, would co-owning it with your sibling as an investment likely lead to squabbles down the road ("It needs a new roof!" "No, the roof can last 5 more years with a little tar." etc)

Also-the appraisal sounds like it might be low, at least when we look at this home's value as a rental. Clearing $9K per year on such a house after doing all maintenance (including reserves for roof, furnace, etc), property taxes, allowing for vacancies, and paying a professional property manager is pretty good. If the numbers really work out like that, I wouldn't be surprised if my sibling concluded the house was worth a bit more than $120K regardless of what the appraiser said.
Samclem-

All good points. I think sibling is more interested in the cash than steady income, due to age and circumstances (younger and still in accumulation phase). I think this would likely be a win-win. You could very well be right about the appraised value. I got $120k from Zillow, which is just an estimate based on recent comps but, probably +/-20%.
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