All Forum Posts by: Andrew Erickson

@Lee Ripma and @Will Barnard and everyone else, thank you for your responses!

I just realized that I used $12k as the income, not $50k. $12k is what my mom receives (25% of the $50k). Those numbers should be 4x'ed. Value is between $170k*4 and $800k*4, so $680k to $3200k.

Yes, I agree that $50k income with a 5 cap would value it at $1mm. Is it as easy as just looking at the cap rate? 

Also, yes the by-laws of the partnership are very important. Unfortunately, them seem to have been lost in the last 50 years (or never even written). We have been working with a lawyer to figure that part out. 

I'd love to hear what are the best ways to estimate rental rates. I use Rentometer and Craigslist.

Rentometer.com seems pretty good for a first pass at rates. It gives you a good idea of rates based on sqft, neighborhoods, and features like distance from beaches. (I'm in San Diego, CA)

Then I look at Craigslist and see what people are offering. It gets way more niche in the CL forums. You can see what people are asking for single rooms with shared bath, master bedrooms, condos, whole houses, etc. You can get a feel for other harder to measure things like pets, parking, etc. 

Then finally I do a little market testing and will actually list a space for rent on CL to see how many inquires I get. I write up a whole listing as if I were selling it: photos, sales copy, bio, etc. We adjust the price up  and down until we get about a dozen inquires within 3 days. Ex. List it at $800 and get 40 inquires on day 1, bump up the price. List it at $1100 and get 2 on the first day, bump it down.  

Any other methods I should try?

I'd love to hear what are the best ways to estimate rental rates. Here are a few methods I use. 

Rentometer.com seems pretty good for a first pass at rates. It gives you a good idea of rates based on sqft, neighborhoods, and features like distance from beaches. (I'm in San Diego, CA)

Then I look at Craigslist and see what people are offering. It gets way more niche in the CL forums. You can see what people are asking for single rooms with shared bath, master bedrooms, condos, whole houses, etc. You can get a feel for other harder to measure things like pets, parking, etc. 

Then finally I do a little market testing and will actually list a space for rent on CL to see how many inquires I get. I write up a whole listing as if I were selling it: photos, sales copy, bio, etc. We adjust the price up  and down until we get about a dozen inquires within 3 days. Ex. List it at $800 and get 40 inquires on day 1, bump up the price. List it at $1100 and get 2 on the first day, bump it down.  

Any other methods I should try?

My grandmother bought a minority share in a commercial property nearly 50 years ago. She passed on her shares to my mother and her siblings about 20 years ago. They together own 25% of a large commercial building in Commerce City, Los Angeles, CA. It has been paying them together $50k a year (take home) for the last decade. 

They want to sell now! What do you think it's worth? 

Here is my reasoning. On investments like this, you should expect a 6% to 10% return. That return will come in 2 parts: equity and income. Equity is just the value of the building/land. Income is of course what you get paid from rent. Let's assume that the equity will grow by 3% each year. That means 3% to 7% will come from income.
Now we do a little algebra ;-) 

Min: Income = 7% of Estate Value = 7% * Estate Value
Max: Income = 3% of Estate Value = 3% * Estate Value
Min: Value = Income / 7% = $12k / .07 = $171,400
Max: Value = Income / 3% = $12k / .03 = $400,000

So I would guess as much as $400 and as little as $170k. 

However, if you use an equity growth rate of 4.5% (which is the average return in LA over the last 50 years), the numbers change a lot!
Max: Value = Income / 1.5% = $12k / .015 = $800,000
So it could be as high as $800k for each share!

Definitely need a good real estate agent to help us, right? 

I used to hate this icon. Now I love it! 

Now that I own a rental property, this is money flying towards my home, not away! 

My grandma is in a nice nursing home. Her house has been vacant for almost 2 years now. My dad and uncle are trying to deal with her stuff and everything else that goes on with that part of your life. They are coming up to the end of the owner-occupied tax exclusion since it has been almost 2 years. They are thinking they might sell the property as-is and are expecting a big discount since it is dilapidated and very "grandma-like" (if you know what I mean). 

My grandma is well off, but might have cash flow issues if she is in a nursing home for a decade. I know my uncle could just rent the place out, but here we are 2 years later and nothing really has happened. My grandma doesn't need the big win-fall of selling a home. She needs some monthly income. 

I threw it out to my uncle that I could take over managing the property. Here are some options I offered: 

• I could just buy it outright with a traditional mortgage. 
• We could do a owner financed sale (that would give her a nice monthly income) and we would have friendly terms for me. 
• We could do a lease-option. I would have to figure out how that works with renovations. The main advantage to that is the house will step up in cost-basis when my uncle and dad get it. I could then buy it from they at the new cost-basis. That way no taxes are paid on the home ever. 
• I manage the property and make a salary or commission (I hate this idea). 
• Something else I didn't think of. 

Few details: North of Portland. House is probably worth about $500k fully fixed. Nothing wrong with "the bones". Just needs a lot of TLC and updated cosmetics. 

So BiggerPocket friends, what do you think? Terrible idea? Great idea? Please don't hold back! 

@BJ G., I just added you as a connection. 

@Jacob Villalobos, great idea. What is the best way to find a commercial agent in LA? 

Ok, here is a long story short.
My grandmother bought into a piece of commercial property back in the mid 70's. It is an industrial building used by a plastic factory in LA, CA. The agreement was all done as a handshake with a friend. Let's call this friend Bob. There was a large monetary exchange. She then owned that property for 20 years and Bob paid her fair share of the rents. When she passed away she gave it to her kids (my mom and aunts). Her kids have been getting paid about $10k/yr each for the last 20 years. Everyone was happy with this. 

The Twist 
Bob just died and left his kids the property. Bob's kids had no idea about my grandmother's family. They stopped paying and thought someone was potentially stealing the money from their aging father. There is no written contract to fall back on and any bank statements of the initial purchase are long gone. 

Where we are now
After sorting it all out over the last 6 months, Bob's kids agreed to start paying again and to formalize the partnership. We need to get a good agreement set up. Lawyers of course are involved. Are there any special things we should put into the contract that we or the lawyers might not think of? 

Selling the property
My mom's siblings want to sell out and get rid of this deal. How do they do that? This property has given $10k/yr to 4 people for the last 20 years. Is a 5% cap rate reasonable? That would mean each person's share is worth $200k each. Is there any other advice on valuing the property? 

Thanks! 

Thanks @Mike V.. Looks like those loans are mostly for construction and subdivision (as far as I can tell).