The rental I bought while my son was attending college for $170K cash flowed while he was in school and managing the property. Now that he's long graduated and married we would like to sell it. However, it is only worth $124K. I refinanced it (for $124K) at a better rate to lower my monthly payment and paid off a second for $13K. To sell it on the retail market I would have to spend another $5K+ for paint, carpet and repairs. My total out of pocket expense would be $13K + $5K + $11K (settlement expenses) = $29K. The realtor told me that it might take up to 6 mos to sell, so add another $4,800 in mortgage payments. My thought is to spend the $5K, fix it up and offer it "Rent to Own" at $140K. Take 5% non-refundable down payment ($7K) and rent it at $1200/mo (current mortgage pmts are $825/mo) for 5 years (the option period). Once the house is occupied, assign the contract to a cash buyer for $135K. I would then recover my $18K ($13k+$5K), the buyer would collect $1200 mo x 60 = $72,000 in gross rent and sell it for $140K to the tenant at the end of the term. Plus he/she would take the full depreciation during the option period.
Is that a good enough deal for the cash buyer?
Of course I could keep the property myself for 5 years as well.
What would you do?
Thanks for helping out...
Is the property making you money?
Right now it is empty, waiting for the rehab to start next week. So, no.
The first question I would have is: would someone accept a lease/option with the above terms and would a cash buyer accept the above offer.
The cost of the option is $7,000. For that he gets to purchase the house any time in the next 5 years at a price of $140,000 which is $16,000 more than the current price. If the house were to appreciate by 3% per year the price in 5 years should be $143,750. The option is not worth $7,000 in my opinion. I am assuming that $1,200 per month is market rent.
What about the cash buyer. He is buying a house worth $124,000 for $135,000. Using the 1% rule the house is worth $120,000. Using the 50% rule the cap rate is 5.3%. Plus he can only sell the house at $140,000 less the cost of the sale.
In my opinion, these numbers don't work.
I would put someone in their and start generating some cash. It seems like it is going to be a big money loser if you try to sell it right now. More power to you if you can get someone to take it off your hands as a primary residence, but I doubt an investor is going to touch it.
Where did your $124,000 valuation come from?
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