Please Help With My First Deal: Vacation Rental in Palm Desert

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Please Help With My First Deal: Vacation Rental in Palm Desert

David Jensen
Alexandria, VA · Member since 2016 · 17 posts · 6 votes

Hello BP!

I've very new to BP, but have lurked and engaged a couple times over the past weeks. I was hoping for some problem solving ideas and honest opinions on my potential First deal (My Parents' out-of-state vacation rental property in Palm Desert, CA).  I hope I've put the numbers in an approved format for easier analysis!

Bottom-line Up Front, this is my 80-yr old parents' winter home and I'm trying to figure out a deal that benefits both of us. The deal sounded much better initially (as always :) ) , but as i peel back the onion and determine the true numbers, I'm becoming more skeptical, but because I'm such a novice I don't want to inadvertently overlook an opportunity just because I haven't come across the right BP thread that captures the creative financing solution i may need.

Property Details:

This is a 2bd/1.75ba 1,200 sqft condo in Palm Desert, CA. approximately a 5 minute walk from popular El Paseo Drive. Built in 1973, in great condition, although does not have current upgrades.

Since I am not yet a PRO user, I based on my rental calculations using great calculators from ListenMoneyMatters.com.

SUMMARY:

ESTIMATED VALUE (Zillow): $214,714.00 (In line with averaged real estate agent's Comps but slightly more conservative, as I think he threw in a couple outlier properties to bump the average a bit to entice my folks.)

PURCHASE PRICE: $195,000.00 (price based solely on the amount left on my parents 4.25% HARP non-assumable mortgage)

UPFRONT COST: $50,587.42

RENT ESTIMATE: $1750.00

ANNUAL NOI: $11,633.00

GROSS YIELD: 10.79%

CAP RATE: 5.98%

CASH ON CASH: 5.56%

CASH FLOW:

ANNUAL: $2760.32

MONTHLY: $230.03

1ST YEAR EQUITY: $2363.49

ACQUISITION COSTS:

DOWN PAYMENT: $48,641.75 (25% )

CLOSING COSTS: $1,945.67 (1%) *anticipate only using real estate attorney (no real estate agents) for more cost effective deal and save parents 6% commission; do not know actual attorney fee costs for closing so this number is a WAG (Wild *** Guess).

MORTGAGE RATE: 4.5% *anticipated

MORTGAGE TERM: 30 years

ONGOING COSTS:

PROPERTY TAX: $1,927.00/yr

PROPERTY INSURANCE: $300.00/yr

PROPERTY MANAGER: $175.00/mo (10%)

VACANCY RATE: $350.00/mo (20% vacancy rate)

MAJOR/MINOR CAPEX: $175.00/mo (10%)

HEAT/AC: $92.00/mo (Averaged)

HOA: $420.00/mo (has remained approx. $420.00 for decades; although the HOA just hired a property manager for the first time last year, but so far no indications of changing HOA fees)

Notes:

Rent estimate: $1,750.00 (local property manager assessed realistic rents between $1600-$2000+ per month on long-term lease or as vacation rental $140-200 a night/minimum 1 week stays).

My parents are open to any type of creative financing deal, that would free them from paying mortgage (their current monthly mortgage payment is $1,000.00 (+ $420 HOA).

My thoughts:

Originally I thought they had much more equity in their home, but they do not. So now concerned their isn't enough "meat on the bone" to maintain positive cash flow to consider this a great deal.

Here are our options as i currently see them:

A) My parents hire a real estate agent and sell their house, and hopefully make enough to cover 6% commission and other costs and I run away from deal.

B) Offer $195K to pay off their loan, 25% down at 4.5%. This would be PITI of $930.41 + 420.00 (HOA) = $1350.41/mo

C) Land Trust?: We could create a land trust and have me named as beneficiary, and if i understand land trusts, it would essentially allow me to take over payments, likely could put property insurance under my name (or the trust?), but again I'm not sure if this is a solution as I understand this would not transfer ownership and I do not want to risk triggering the sub2 clause scenario by trying to do so. (I'm assuming this would be dramatically more cost efficient solution and I could ultimately gift my parents the originally intended "down payment" money over the next few years (depending on gifting limits). )

D) Parents Gift the Property to Me?: they could gift me the property, but this is the one scenario i am not familiar with enough to recognize the benefits/risks of such a deal for either side. (they do not have to worry about the $4.5 million lifetime cap),and I'm assuming my "risk" is not taking the stepped up basis on the property since they gifted the property while alive. other than that, not sure it is a scenario to consider.

E) OR a creative BP financing solution!...Anyone!? Anyone!? :)

thank you everyone in advance for your honest insight and opinions. If I am missing any needed info, just let me know and I'll hunt it down ASAP!

thanks,

David

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Nathan DionesPro Member
Real Estate Broker · Redlands, CA · Member since 2011 · 127 posts · 43 votes
9y

Hi David - Very well stated and put together. 

F)  Heres an idea, with your parents being your parents and not some random person who doesn't know you, why not split up title say 99% to you, 1% to them and do it via a title change for about (notary + recording fees) $40 bucks. Keep the loan in place and move forward with the investment.  Of course the transfer of title from 100% to 99/1% may trigger a due on sale clause, I really wouldn't worry about it to much since they are still on title and lenders typically don't police their title structures as long as they are getting their payments every month.

I recently (2 years ago) did the same deal structure on a nice cash flowing triplex with a client of ours who was just simply tired of driving 2 hours to visit and manage the property.  The best part of the deal was the fact the loan was 10 years into a 30 year loan. Lots of principal paymon every month now, almost $800 a month and growing! Plus the units cash flow about $500 per month now that I have modernized the units and got the rents up to market rates. 

You could set your deal up with your parents as easy as a title transfer or as elaborate as setting up a new entity such as an LLC and divvy up ownership and responsibilities that way with an operating agreement.

If you could do this with effectively almost zero or a few hundred dollars out of pocket, I would say you got a great long-term retirement vehicle on your hands!

Nathan Diones 

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  • Nathan DionesPro Member
    Real Estate Broker · Redlands, CA · Member since 2011 · 127 posts · 43 votes
    9y

    Hi David - Very well stated and put together. 

    F)  Heres an idea, with your parents being your parents and not some random person who doesn't know you, why not split up title say 99% to you, 1% to them and do it via a title change for about (notary + recording fees) $40 bucks. Keep the loan in place and move forward with the investment.  Of course the transfer of title from 100% to 99/1% may trigger a due on sale clause, I really wouldn't worry about it to much since they are still on title and lenders typically don't police their title structures as long as they are getting their payments every month.

    I recently (2 years ago) did the same deal structure on a nice cash flowing triplex with a client of ours who was just simply tired of driving 2 hours to visit and manage the property.  The best part of the deal was the fact the loan was 10 years into a 30 year loan. Lots of principal paymon every month now, almost $800 a month and growing! Plus the units cash flow about $500 per month now that I have modernized the units and got the rents up to market rates. 

    You could set your deal up with your parents as easy as a title transfer or as elaborate as setting up a new entity such as an LLC and divvy up ownership and responsibilities that way with an operating agreement.

    If you could do this with effectively almost zero or a few hundred dollars out of pocket, I would say you got a great long-term retirement vehicle on your hands!

    Nathan Diones 

    1Reply
  • Account Closed
    Real Estate Agent · Las Vegas, NV · Member since 2015 · 2k+ posts · 1k+ votes
    9y
    I think that is some lofty rent projections and your monthly nut of $1400 plus buying a property with out equity is very riskyI used to live and work in that area still have property and still have my real estate license If you shoot me a message I can have my broker/ property manager verify the rent rates
    0Reply
  • Darlene Harwick
    Real Estate Agent · Palm Desert, CA · Member since 2016 · 17 posts · 5 votes
    9y

    Since I'm an active realtor here in Palm Desert area, I'm very familiar with condo communities and prices near El Paseo. I believe the projected rental rates you've been given is high, especially in light that it is an older unit. The HOA is high and most times boards and property management companies do not reduce it. I'm available if you care to further discuss.

    1Reply
  • David Jensen
    OP
    Alexandria, VA · Member since 2016 · 17 posts · 6 votes
    9y

    @Nathan Diones, thank you for the great idea and congrats on what sounds like a MUCH sweeter title transfer deal than my scenario. I'll research the transfer of title with regards to triggering a Sub2 clause with a 99%-1% split. It is the potential ability to help my folks out with little out-of-pocket money, that has me still considering this opportunity...as @Account Closed I would love to discuss this opportunity further.  Feel free to PM me or would you prefer I PM you?

    I would also love to hear if any others in the BP Nation has had any problems with a title transfer split as mentioned in the thread, as triggering the Sub2 clause or causing any other legal headaches. Once i determine potentially more accurate numbers I will re-post to potentially help others in a similar situation.

    thanks for the great responses so far, this is REALLY helpful!

    David

    1Reply
  • John D.
    Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
    9y

    Like @Darlene Harwick I too am curious about this $1750 in rent.  I'm guessing with an older condo you might be looking at significantly less, although there wasn't enough info given to speculate further.

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  • David Jensen
    OP
    Alexandria, VA · Member since 2016 · 17 posts · 6 votes
    9y

    @John D. you are correct, after conferring with @Darlene Harwick (THANK YOU DARLENE!) I obtained some much more realistic rental numbers ($1,200.00 -$1,300.00/mo ) and Comps for selling an older condo (circa $210K).

    So obviously, and unfortunately, the numbers no longer look close.

    So final question to creative financing BP'ers out there,  is there ANYTHING that can save this deal?

    for example based on @Nathan Diones suggestion, If this becomes a "no money down" deal (hey look everybody, free house!), and I simply assume payments via a land trust (with Bank lenders written blessing?), does this still remain an attractive deal to experienced REI? I'm assuming at this point, based on my new lower numbers, I would simply be moving from RE investor to speculator/gambler on property value appreciation...as i would likely only breaking even or taking negative cash flow until significant appreciation occurs.

    looking forward to any creative ideas!

    0Reply
  • John D.
    Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
    9y

    Will the HOA allow short term rentals? Is there a pool in the complex?

    0Reply
  • David Jensen
    OP
    Alexandria, VA · Member since 2016 · 17 posts · 6 votes
    9y

    I believe Palm Desert has a 10% tax for short rentals less than 30 days. the HOA, I believe is in line with minimum 30-day rental. Is that what you meant by short term? Plus, even if weekend rentals were allowed, I would also need to realistically balance the rental tempo with the patience of the other condo residents/HOA Board members, who are also mostly senior citizens. Yes, there is a small pool on the condo grounds.

    0Reply
  • John D.
    Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
    9y

    Does the HOA allow rentals for less then 30 days?

    0Reply
  • David Jensen
    OP
    Alexandria, VA · Member since 2016 · 17 posts · 6 votes
    9y

    @John D., per the CC&R, "...This provision shall not be construed to limit the right of an owner to rent or lease his entire lot...so long as the lot is not leased for transient or hotel purposes or for a period of time of less than 30 days..."

    thoughts?

    0Reply
  • Mark Stewart
    Palm Desert, CA · Member since 2016 · 1 post · 0 votes
    9y

    A lot of good stuff here. Find out about short term rentals. Find out about a property manager as that will add extra cost to your situation. Most loans are not assumable so that land trust you mention may not work. The good thing is that your tax basis will not go up since this is a transfer from family (make sure you mention that if you actually go through a title company). Based on all the above and all the good advice a free house is a free house and you should be able to make a rental work if you got a new loan, parents sell you the property with a gift of equity, you purchase as a second home and there is possibly no money down. 1% for loan costs is low. Not sure what the current mortgage is but if you can make the numbers work parents are gone and it is all yours. However, long distance property management is a pain and that is why i suggest you get a local property manager.

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