expensive area price/rent ratio - Posted by DT

Posted by Steve (CA) on July 18, 2001 at 03:32:06:

I live in Silicon Valley, and am trying to do exactly what you suggested. Stumbled across your post after posting the following:


Bronchick’s course on wraps (‘Cash Cow’) says that you can L/O and then sell with a land contract, although the law is “a little more gray.” Apparently the main grayness has to do with the question of who gets the tax write off. The seller is treating it as rental, the buyer as a primary residence, so if they get audited IRS will obviously disallow one or the other.

Seller would have been paying property taxes and insurance during term of lease, but this would become buyer’s responsibility, right? Whose legal responsibility would it be for the taxes? Is it possible that IRS would view this as the deciding factor in terms of who gets the write off, and that it could become a negotiation point when assembling the deal? Would the seller have to be notified, and informed his tax deduction just vanished?

Let’s say I buy on a lease/option at $450K option price, $20K option money, $2000 rent with 50% credit for 3 years. Sell $450K, $40K down, 8.5% interest, land contract, hefty prepayment before 3 years, at which time contract must be paid off.

Would the fact that, at the time I sold, the property was encumbered beyond what my buyer would owe make it illegal? In other words, after signing with my buyer, he would have to come up with $410K (plus pre-pay penalty) to get the deed, but I would have to come up with $430K. If the pre-pay is $20K or more, would that solve the problem?

Certainly, the land contract with my buyer would have to state that I was not the titled owner, yes?. What would be the most innocuous verbage, and where should it be placed in the contract? Something like “buyer understands that, in the event seller is not owner of record, title may be conveyed via concurrent closings” maybe? Would I type it up and slip it in with the boiler plate, or write something by hand on the contract?

-Steve

expensive area price/rent ratio - Posted by DT

Posted by DT on July 17, 2001 at 09:19:39:

Can anyone advise me on buying investment property in an expensive area? I live in Marin County, just north of San Francisco. The S.F. Bay Area is too expensive to allow for a cash-flow-positive purchase of a 1 - 4 unit property unless you put a huge amount down, like 20-25%. It’s been like that for decades, I hear: rents just haven’t kept pace with housing prices. Putting that much money down would mean I’m poorly leveraged and would keep me from buying more than one property. That’s frustrating because I’d really like to do more significant investing and have the time and energy to manage two or more properties–and, of course, because one of the main appeals is to leverage my money as much as possible. Also, in my area, things like foreclosures and REOs are pretty rare and tend to get snapped up by contractors, according to the realtors. It’s all because this is an extremely desireable place to live with people moving in all the time.

I don’t want to buy hundreds of miles away for obvious reasons. Is it even possible to make money in an area like this if you don’t have a fortune to invest starting out? If so, how do overcome the bad price/rent ratio problem? (Have I been listening to realtors’ opinions too much?)

Thank you! - Posted by DT

Posted by DT on July 17, 2001 at 20:52:28:

Thank you all very much for the advice and please let me know if any other good ideas come up!

Re: expensive area price/rent ratio - Posted by Lor

Posted by Lor on July 17, 2001 at 20:08:34:

Hi DT

  1. “I don’t want to buy hundreds of miles away for obvious reasons.”

I live about an hour from you near Half Moon Bay where 2/1 starters are 500-600K. I realize Marin is even higher. I also could not originally afford to invest in the bay area so invested in many affordable locations around northern california. I see no obvious reasons at all why this can’t work for you.

  1. “If so, how do overcome the bad price/rent ratio problem? (Have I been listening to realtors’ opinions too much?)”

Now that I invest locally I don’t even bother worrying about price/rent ratios. Concentrate on finding a house in an appreciating area near you and try to hold for a year or two. Vallejo and Santa Rosa are still appreciating. I picked up a house a couple years ago for 240K, low down and owner financing. I am listing it on August 1st for 599K.

I agree with the other poster that you need to do the math. Even if you have a monthly $ loss, depreciation and other tax write-offs can turn it in to a positive. Try to find a house with an in-law apt. or a house built in the 60’s by Moyer & Green. These houses are all over the bay area and with some modifications the upstairs/downstairs can easily be rented separately and this will increase your rental income. Lastly, let your neighbors, friends, relatives and co-workers know that you are looking for investment property. You never know when someone’s mother might be thinking of selling and you could be first in line. Good luck.

Re: expensive area price/rent ratio - Posted by JoeKaiser

Posted by JoeKaiser on July 17, 2001 at 09:49:14:

You have to put your thinking cap on and devise a strategy here. Flip it on its head. Sure there are negatives to out-of-whack rent/price ratios. Can you think of any positives? Heck yeah, you can.

Go out and lease properties. Lease is cheap, buy comparison. Get an option so you have total control. Now, turn around and “sell” those places on owner financing terms. That “owner financing” may very well be a lease option too, but the difference is you’ve “framed” it to your buyer as a sale and the corresponding numbers are more in line with “buying” than with “renting.” All of a sudden, cashflow happens. Often, huge cashflows, especially when interest rates are high.

Do the math on a $400k home and see where things end up. I just missed one like this about a year ago. Had things all set up but then a real buyer showed up and the seller killed my deal. Still, he’d agreed to rent me the place for $1695. Value was about $375k. I’d have turned around and “sold” that thing on terms, getting at least $10k down and 10% interest, plus I get to add in taxes and insurance (you missed that one, Alex G.). Do the math, you’ll be amazed.

You have an ideal situation here if you can figure a way to pull it all together.

Joe

Re: expensive area price/rent ratio - Posted by Tommy_FL

Posted by Tommy_FL on July 17, 2001 at 10:57:52:

Please help me understand. When you sell with “owner financing” does it mean that the buyer gets the title to property right away? I know that it’s not the case in L/O situation. So how can you be in between a L/O and a “seller financing”. Thanks for the details.

Re: expensive area price/rent ratio - Posted by JoeKaiser

Posted by JoeKaiser on July 17, 2001 at 13:24:58:

Tommy,

Some of my “owner contracts” say “lease option” right across the top. It’s all in how you present it to your buyer (tenant).

Joe