Posted by Gary (CA) on January 22, 2002 at 17:23:24:
Thanks Ralph for writing.
The house value went from $150k to $190k. The house was purchased at $150k with a $135k loan and later refinanced at $171 when the appraised value went to $190k.
Also, in California, a deed of trust (DOT) state, the loan amount may show on the recorded DOT but not necessarily the terms of the loan.
You’re right about the upfront due diligence. I had to act fast to get it. I checked title beforehand and it was fine. Purchasing without thorough review of the loan documents, however, was a calculated gamble. In our market, the house is easy to flip at a small profit if necesssary.
Expert Advice Needed- Rent or L/O? - Posted by Gary (CA)
Posted by Gary (CA) on January 22, 2002 at 16:25:54:
I need some L/O vs. rental advice. I bought a property that is 1 hour from my house. I’m not sure whether to just rent it or lease option it. Below are the facts.
5 year old SFH, 1955 sf, 4b/3b, 2 story, 3 car garage
Purchased subject to VA loan of $171k at 5.5% (payment = $1162/mo. PITI)
FMV = $190k. Property purchased by sellers for $150k in 1997…appreciation of $40k in 4 years.
I had to pay about $8k to reinstate the loan with Countrywide.
Fair market rent, based on asking local property managers, is $1300 to $1400 per month. That would make $140 - $238 pre-tax cash flow.
Property was placed into a title holding trust (i.e. land trust) at the time of purchase and the beneficial interest reassigned to me.
Property could use $5k in carpeting and paint.
Large backyard is not landscaped but does have sprinklers.
A complication is that I had to act fast and couldn’t see the loan documents. It is a 5.5% fixed rate loan. I verified this through their monthly statement and the customer service rep for Countrywide. My concern is that the interest rate reverts to some other terms at a later point in time. The divorced sellers could not find their loan papers.
My questions are:
Should I rent this out or lease-option the property?
How much more should I ask for in rent and price when I lease-option it over a straight rent or sale.
Who should I contact for a copy of the loan documents to verify that the loan interest is fixed for 30 years? Do I ask for this in a letter from the trustee of the trust? The concern is that they will inquire if a transfer has occurred with respect to the due-on-sale.
I think Lloyd Cook gave you good information. Except about the deed of trust.
If it is not a fixed rate loan, the deed of trust will tell you what the terms of change are. However, I have never seen a variable rate VA-insured loan. I suspect that there are none. But read the deed of trust.
I suspect that your actual cash-flow will be a bit different than you calculated, what with expenses of maintenance, vacancy, etc. Also, if you can take advantage of the tax benefits of owning rental residential real estate, there will be more cash-flow than you think. To take advantage of them, you must be making less than $150K/yr taxable income.
I am a fan of long-term holding of real estate. Having a positive cash flow allows for the long term hold. In general, one should be owning less costly properties than the one you are discussing. However, the attractive interest rate on the loan makes is a possible keeper. Don’t expect quick riches from it if you do decide to hold for the long term. Do expect a very good investment if you hold for over 10 years.
You took over a property very close to market price with 8k out of pocket down and 5k more work needed. Good news is the interest rate is very low leaving room for cash flow. Some investors would say your crazy but personally I would have taken this one myself if it was within 2 hr of my home.
Should I rent this out or lease-option the property?
And
How much more should I ask for in rent and price when I lease-option it over a straight rent or sale.
This depends on your investment plans. Do you want to ?Buy and Hold? or do you need cash now. I would ask for 4% down (may take 3%) and lease option it for $199,900, monthly lease payments of $1,500 with $100 going towards the down payment for the first year only. If the tenant does not close within the first year, the price goes up 6% per year prorated (or one half % each month) and the rent credit drops off.
You could also do an AIDT, or wrap loan and charge from 9 to 11% interest, making a nice cash flow for a long time.
Who should I contact for a copy of the loan documents to verify that the loan interest is fixed for 30 years? Do I ask for this in a letter from the trustee of the trust? The concern is that they will inquire if a transfer has occurred with respect to the due-on-sale.
This may be wrong, but personally I would not ask for a copy of the note. The recorded deed of trust can be obtained from a title company, but this will not tell you the details you want, but get a copy anyway, you never know. Try again from the sellers.