should I buy this rental

Question

I co-own a rental property with family.   It's a single family home with 2 rooms, 1 bath in Grants Pass Oregon that rents for $1225/month. I am 1/3 owner of the property.  One of the other 1/3 owners is willing to sell his 1/3 for $54,000.  I'm trying to figure out whether to buy in light of the income stream.  Would this be worthwhile to buy the 1/3 share?  Zillow says the house is worth $220,000, so the $54,000 is already potentially below what the market would pay.  I would only get 1/3 more on the rent going forward if I buy the share.  The house is paid off and expenses are $1600/year taxes + $439/year insurance + 80/month property manager + maintenance, so that would need to be deducted from rental proceeds.   Should I buy the extra 1/3 share at $54,000?  If not, what should I offer to make it profitable, but still a reasonable offer?

Account Closed · Answer

Hello  again  Cynthia!  Cash flow is figured usually on a monthly factor.  It's the total income less all expenses including anthing that is due once a year or seasonal plus any debt payment.

Good luck to you!

Account Closed · Answer

Hello  Cinthya!  I would certainly not believe any thing that is by Zillow. If buying 1/3 share had a positive cash flow that meets your plan or goals would lean me towards "yes" but there are other things to consider like positive cash flow, demand, job growth, population growth, its location, etc..  I do not know where Grant's Pass, Oregon is but I am in Dallas, Texas and do not believe in out of state property unless it's a turnkey.

Good luck to you!

Jason Johnson · Answer

Hi Cynthia,

You are on the right track with your analysis.  Here are a few other things to consider:

1.  Leverage.  Often you'll see COC after debt service is subtracted.  If you are unlevered as shown above, the COC will equal to the cap rate.

2.  Other benefits.  Rental property has a few other benefits that are not accounted for in COC.  For example capital appreciation & taxes.  This is something to consider when comparing another investment options.

3.  Risk. In the various rental markets across the country there is a wide spectrum of risk profiles and you have to figure out what suits you.  In general, areas that produce higher "paper" returns, will have a higher risk profile.  ...A 5 cap in southern Oregon is not necessarily inferior to a 12% COC in St Louis depending on your investment goal.

Zoey Inda · Answer

Thanks everyone--what an incredible resource you are!  I researched some of the terms of art you've all used, and crunched numbers.  Quick question:  is the cash on return the percentage that I should compare what I would get if I instead used that money in another investment.  For example, I calculated a 6.2% cash on cash return.  So if that number is right, and I could instead get, say, 7% from another investment like stocks, then that tells me that the Grants Pass house is not a great investment.  Is that how you would lack at it, in a market like Oregon?

Also, to figure out operating costs, I allotted $600 for vacancies and $1000 for repairs per year.  Does that seem reasonable to you?

For those who are curious, here are all the operating costs for the year:

$1600 taxes

$439 insurance

$960 property manager

$600 vacancies

$1000 repairs.

Total: $4599 for the year.

Your insights would be appreciated!

Josh Norell · Answer

And to illustrate the other extreme, the zestimate for my primary is 145k. It just appraised at 420k. I live in a rural area, with few comps. And zillow's has incorrect data for beds/baths and sq ft.

Mike Smith · Answer

Oregon is a different market than much of the country, so metrics like ROI and cash on cash come down to your personal preferences and goals. They cannot guide you on what the value of the property is in this market. If you're concerned with what it's worth to you and how it will help you achieve your goals, then analyze the metrics that are important to you. If you're wondering if the offer is a fair market price, consider having an appraisal done.

If you don't want to pay for an appraisal you could create your own estimate by using an average of online estimates that are available. I use Zillow, Redfin, Realtor.com, and the county assessor's website. Don't use Trulia because it's exactly the same as Zillow.

Lots of people will tell you to ignore estimates from Zillow and other sites, but if the property is a typical house on a typical lot in a city with lots of comps, it'll be in the ballpark. My personal residence has a Zestimate of $252,000 and I just had an appraisal done that came in at $259,000, less than 3% off.

Lynnette E. · Answer

Have a real estate agent do a cost comparison.  They will do it for free if you tell them that 3 people own it and you are thinking of selling it, what would she recommend listing it for.

Then you can see if $54k is the right price to buy 1/3 and also if maybe selling it is a better option.

Jason Johnson · Answer

Hi Cynthia,

assuming 5% vacancy and $200 per month is set aside for reserves and maintenance, this property will produce about $711/mo in income.  1/3 will work out to about $2827 per year.  @ $54k that will be a 5.2% return (cash on cash).

Jacob Sampson · Answer

no invest your money elsewhere.  And ignore Zillow.  it's crap.  For buy and hold the value of the property is entirely dependent on the rent it generates.  To that end, IMO $1225/month in rent makes the property worth $75k-$100k.  So I would offer 33% of that range.

Zoey Inda · Answer

How do I calculate whether there is cash flow?  I apologize, I know this is a basic question.