Should I Pay Cash, Sell Stocks or Pass on this Real Estate Deal?

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Should I Pay Cash, Sell Stocks or Pass on this Real Estate Deal?

Sherrie P.
Florence, AL · Member since 2013 · 21 posts · 2 votes

I am considering buying a beach condo. Our family will probably enjoy it a couple weeks out of the year. (when we don't have paying customers).

Most of our money is tied up in Mutal Funds. If we buy the property, we will have to sell stocks and pay cash. (held long enough to pay Cap. Gain tax) .. Financing is not an option because we are retired so we don't have the income to support a loan. I cannot figure out how you decide which is a better return on your investment. On one hand, the stock market is doing well the past several months but no crystal ball for the future. Here are the numbers on the condo unit.

Cost of condo 260,000.00 (fully furnished)

Average annual rental income 20,000.00 (past two years)

Annual carrying costs 13,000.00 (untilites, insurance, cable etc. everyone except a mortgage if you have one)

If we use a local management company, that is an additional 25% commission.

I guess I don't know how to figure ROI on investment property. I could really use any advice. Thank you in advance.

Sherrie

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Patrick L.
Real Estate Investor · Saint Petersburg, FL · Member since 2013 · 1k+ posts · 951 votes
12y
Originally posted by Frank Romine:
Who knows the stock market might collapse.

So might the real estate market.

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  • Franklin Romine
    Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes
    12y

    Looks like your net after expenses is 7K per year... 7K/$260,000 = 2.7% yearly return. If you use the local mgmt company that would be an additional $5k expense.

    I would say go for it depending on this...

    Did you sell all or a significant amount of your stock portfolio to purchase the property?

    What percent is your net worth tied up in the condo?

    If the property was vacant for a couple years would it affect your life style?

    What is the real estate market like in this market.. up or down?

    0Reply
  • Mark Ferguson
    Flipper/Rehabber · Greeley, CO · Member since 2013 · 2k+ posts · 1k+ votes
    12y

    I think you also need to ask if you want to be tied in to staying in the same place every year for vacations. Some people do and some people like to go to different places. Vacation rental income is very up

    and down and you will have a lot if vacancies.

    0Reply
  • Sherrie P.
    OP
    Florence, AL · Member since 2013 · 21 posts · 2 votes
    12y

    Good Morning Frank,

    Thank you for jumping in. I will answer your questions in order.

    Have not sold the stock yet. We are still negoiating sale price. Selling the stock, would take 25% of our stock portfolio.

    17% of our net worth would be tied up in the condo

    If property sat empty for a couple years.. hmm, I would not be a happy camper because I would be eating carrying costs, but it would not effect my day to day life.

    The real estate market in this area is slowly coming back. This unit originally sold for 410,000.00. I personally think "inflated".. I believe it is worth 280,000.00 now. If real estate continues to climb, I believe worth 300,000.00 in 5 years. This opinion is purely based on my instincts! lol

    Frank, I am new at this. I am educating myself as I go. I read, read, and read all the time about investments. And ask LOTS of questions to people with more experience. I really appreciate your questions.

    0Reply
  • Patrick L.
    Real Estate Investor · Saint Petersburg, FL · Member since 2013 · 1k+ posts · 951 votes
    12y

    Once you add in the management fee you're not making anything on the property really. You'd have a free place to stay when it's vacant but other than that your income would be almost none. If it's a place you really want to vacation to then you could consider it but as Frank said it would depend on how much of your portfolio you're selling to buy it. If you have $300k in stocks it would probably be a terrible decision, if you have $2M and you really want to vacation there several times a year then go for it.

    0Reply
  • Bill Jacobsen
    Salem, OR · Member since 2013 · 701 posts · 159 votes
    12y

    As an investment I see $2,000 per year on a $260,000 investment. That is only .77% per year on your money. We don't know where the stock market is going but if I project 6% per year that is $15,600 on your money. $15,600 - $2,000 is $13,600. If you would stay 2 weeks per year the cost of the stay is $6,800 per week.

    Two items. one, you did not mentioned HOA fees. Are they part of the $13,000 expense? I did not count appreciation, if any.

    I own 4 vacation condo's including two on the beach. I pay HOA fees of $250 per month to $750 per month. They are one and two bedrooms. Having purchased one two years ago I have enjoyed 10% to 15% appreciation.

    Good Luck.

    Bill

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  • Franklin Romine
    Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes
    12y

    I would say go with the deal. It pays for itself, you want to enjoy retirement and you will own it free and clear. This would be better than money sitting in a bank account. Who knows the stock market might collapse.

    0Reply
  • Charles Morgan
    Investor · El Paso/Socorro, TX · Member since 2012 · 365 posts · 75 votes
    12y

    If you don't have a mortgage then you won't be required to carry flood insurance at the new high rates. That would be a huge cost.

    0Reply
  • Sherrie P.
    OP
    Florence, AL · Member since 2013 · 21 posts · 2 votes
    12y

    Hey Bill,

    Good question about HOA.. I should have mentioned it. The carrying costs DOES include the HOA fees. The HOA fees on the 3 bedroom we are interested in purchasing is 600.00 a month. Other fees in carrying costs include other operating costs. (utilities, cable, taxes etc-- everything excluding mortgage payment if you have one)

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  • Dana R.
    Investor · Bellingham, WA · Member since 2013 · 50 posts · 28 votes
    12y

    Sherrie,

    I own a couple of vacation rental condos in Hawaii that provide a monthly cash flow. The property is also appreciating in value so that’s a plus.

    When you came up with the $13,000 carrying costs, did you factor in maintenance costs such as new furniture, paint, toilets, bathroom/kitchen faucets, etc? Vacation rentals get a lot of wear and tear so money needs to be set aside to keep your unit looking as good as possible.

    As for return on investment…. Given your numbers, you will be getting a very low or negative return on investment.

    If you did not include maintenance wear and tear costs and will be hiring a private management company, then you’d be losing money on your investment.

    $20,000 (income) - $13,000 (carrying costs) - $5,000 (management fees) - $2,400 (maintenance costs for wear and tear) = -$400 net income

    If you did include maintenance wear and tear in that $13,000 and did not hire a private manager, then your return on investment would be 2.7%.

    $20,000 (income) - $13,000 (carrying costs) = $7,000 net income

    $7,000/$260,000 = 2.7% return on investment

    If you did include maintenance wear and tear in that $13,000 but decided to hire a private manager for an extra $5,000, then your return on investment would be

    $20,000 (income) - $13,000 (carrying costs) - $5,000 (management fees) = $2,000 net income

    $2,000/$260,000 = .77% return on investment

    You’ll have to decide what kind of return on investment is acceptable to you. One thing you could do to get a better return on your investment is to increase rents or try to get the unit more fully occupied.

    0Reply
  • Pat L.
    Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
    12y

    @Sherrie P.

    I had the same retirement issue. So we approached a local bank & by depositing the monies in one of their managed equity accounts, we were able to secure a mortgage. Admittedly is was a 15yr term & some years ago.

    That way they had control of the cash if you fail to pay the mortgage so we qualified for a mortgage 70% LTV. The only killer may be the fact that yours is not going to be OO, whereas my mother resided in ours so it was considered OO.

    Unfortunately, that bank has since been bought out but it still may be an option that's worth exploring with one of the other banks down there.

    0Reply
  • Xing Zhu
    Durham, NC · Member since 2012 · 498 posts · 48 votes
    12y

    The following are a few points I'd like to make:

    (1) Hard to compare it with your stock return in the future as you don't even know the latter.

    (2) How did you get the average annual rental income for the past two years? If it was daily rental, it might be quite accurate in my experience. If it was weekly, I'd guess it was OK. But if it was monthly rental, it would not be reliable and you need to assume a worse case.

    (3) When you quoted 25% for management fee, I'd guess it was for weekly rental. Can you get it down to 20%? Longer term rental should have much lower management fee (10%?)

    (4) Did you consider maintenance costs such as replacing appliances, furniture, etc., and special assessments from HOA?

    (5) It is quite possible you will have a negative cash flow if you use a PM. Your bet would be on the appreciation (as you invest in stocks). In my opinion, some of the ultra modern condos on beach finished right after the housing crisis have more potential in appreciation as many of them are currently selling way below the construction costs. New constructions of the same category will not take place until the prices rise a distance above the costs.

    (6) Buying a beach condo is an investment on life style more than on financial returns. Beach is 1D and inland is 2D. As baby boomers are retiring, the demand will be high.

    (7) For a beach condo, the view is extremely important. If you can get a condo with the best view in the area, the rental becomes very easy. In my experience, it is worth extra money to buy a direct oceanfront unit than an ocean view unit. Glass building are better as they have floor to ceiling windows. A corner unit with larger view angle is more preferable as not only you see the ocean but also the coastline. Remember, a night view of ocean could just be profound darkness, and it is then the light from the coastline that brings the night to live.

    0Reply
  • Patrick L.
    Real Estate Investor · Saint Petersburg, FL · Member since 2013 · 1k+ posts · 951 votes
    12y
    Originally posted by Frank Romine:
    Who knows the stock market might collapse.

    So might the real estate market.

    1Reply
  • Marcus Johnson
    Investor · Apple Valley, MN · Member since 2013 · 281 posts · 94 votes
    12y

    Do you not have any investements in Roth IRA's? You can withdrawl the principal amount with no taxes. IMO, I wouldn't want to pay 25% in taxes on investments if I don't have to. How will you make that back on a home?

    0Reply
  • Sherrie P.
    OP
    Florence, AL · Member since 2013 · 21 posts · 2 votes
    12y

    Hello Xing Zhu,

    Here are the answers to your questions.

    How did I come up the Avg. annual rental income? The realtor gave me the report from 3 units exactly like the one I would like to purchase. (of course, different furnishings, but otherwise identical.) I took the last two years myself for an average. This is a beach rental. Your money is made from April-Labor Day and hopefully monthly rentals from Snowbirds :)

    No on reducing Management fees. I have already discussed with them. Personally, I think 25% is way too high. If I move forward, I don't think I have any choice but to handle the property myself.

    In regards to maintenance. I did not include:( Hopefully, I can get through the first year with minimal costs in that area because all appliances, carpet, hot water heater etc are brand new. All furnishings will be new as well.

    Good news, this is oceanfront~!

    thank you for advice and help

    0Reply
  • Sherrie P.
    OP
    Florence, AL · Member since 2013 · 21 posts · 2 votes
    12y

    HI Marcus,

    Spoke to financial advisor and they said we cannot use Roth unless it is on your first home?? This would be not be our primary residence or first home. This is a vacation rental investment ..

    0Reply
  • Kevin Yeats
    Lender · Fort Pierce, FL · Member since 2009 · 825 posts · 486 votes
    12y

    Sherrie, go talk with a different financial adviser.

    Please don't take this as financial. It is my understanding that retirees can withdraw funds from Roth IRAs tax free as long as those funds have been in the account for a certain number of years. Those funds can be used for any purpose.

    Talk with a different adviser or an accountant.

    0Reply
  • Sherrie P.
    OP
    Florence, AL · Member since 2013 · 21 posts · 2 votes
    12y

    Thank you Kevin! Will do :) and again, I appreciate your advice and suggestion. I will post my findings!

    0Reply
  • Justin Case
    Real Estate Investor · Seattle, WA · Member since 2009 · 308 posts · 61 votes
    12y

    I have looked at similar ideas of a vacation condo.

    I would pass and just rent the few weeks a year. At least for a few years.

    Get out of the mutual funds and learn how to manage your own money.

    0Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    12y

    You have used the word "investment" several times. Many have provided the opinion to "go for it" and I would take the opposite approach. From an "investment" standpoint, this deal is terrible. Even factoring in your own personal usage, you are better off just paying to rent somewhere/anywhere and have the luxury of changing that location each and every time with no managerial headaches at all. If your options are to keep the stock or sell and but this, I choose keep the stocks hands down.

    Now, if you can sell the stocks and find some rental income property with real cash flow (forget about vacation or personal usage), you could use said cash flow to pay for your vacations each year! That makes more sense to me to invest in the best yield possible.

    Podcast Guest on Show #130
    1Reply
  • Sherrie P.
    OP
    Florence, AL · Member since 2013 · 21 posts · 2 votes
    12y

    Hey Will and Kevin,

    What if the property is a foreclosure and can purchased below market price? I can see the math proves it will not very profitable on the front end.. More of a "break even" deal. We use it with our family a couple weeks out of the year.

    I guess I am thinking of the appreciation. How do you figure that into the equation? I guess it comes down to what I have faith in.. The market or real estate.. Right?

    I checked this morning and our investments resulted in a 9% return this year.. If that continues, I would be a fool to move forward on this. But, like I said -- no one has the crystal ball.. :( Each is a gamble..

    0Reply
  • Sherrie P.
    OP
    Florence, AL · Member since 2013 · 21 posts · 2 votes
    12y

    One more question, why does anyone ever buy a condo on the beach as an investment? Do they just have the cash laying around? I feel like I am hearing beach condo investments are not smart compared to stock market.

    0Reply
  • Xing Zhu
    Durham, NC · Member since 2012 · 498 posts · 48 votes
    12y

    Whether buying a resort condo or a stock, from a security trader's point of view, timing is very important.

    0Reply
  • Xing Zhu
    Durham, NC · Member since 2012 · 498 posts · 48 votes
    12y

    I saw in the last a couple of years, some resort condo buyers have made way above 100%, but such a chance has gone, maybe forever with wind.

    The best I had for a beach condo that closed (a short sale) last year is over 60% up now according to my realtor. My own estimate is 50% . A few days ago, an unsolicited caller (a realtor) asked me whether I wanted to sell it. Some of the best are just not available any more.

    Things are clearly slowing down now. I am not sure if this is the time to buy.

    0Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    12y
    Originally posted by @Sherrie P.:

    I guess I am thinking of the appreciation. How do you figure that into the equation? I guess it comes down to what I have faith in.. The market or real estate.. Right?

    Any projected appreciation is going to be speculative. So, you would have to plug in an annual % number and add that to any cash flow and get a total annual return, but again, that is speculative.

    Podcast Guest on Show #130
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  • Dawn AnastasiPro Member
    Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
    12y
    Originally posted by @Sherrie P.:
    I checked this morning and our investments resulted in a 9% return this year.. If that continues, I would be a fool to move forward on this. But, like I said -- no one has the crystal ball.. :( Each is a gamble..

    If your investments are currently at 9% return, if you are investing in real estate, why not shoot for 10% or higher?

    Podcast Guest on Show #29
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