Posted by DanM(OR) on March 25, 1999 at 11:33:42:
David,
Bill also negotiates that the Seller pays any expenses that exceed $100 in any given month. The buyer pays all expenses up to $100. So you pay exactly $0 of the expenses. You CYA to the max. You literally have no risk. Read some of Bill’s articles again or go to his webiste legalwiz.com.
Best of Luck to you!
Dan
Question: To sell or rent… - Posted by MikeSC
Posted by MikeSC on March 24, 1999 at 20:44:43:
My current situation makes this a mute point for me, but hopefully I will soon be in a position to make this choice.
How do you decide whether to keep a piece of property as a rental unit or to sell it to a retail customer? What criteria do you use?
I remember Lonnie saying that he wanted to get out of the landlording businees but continue getting the checks. I like this idea ( as a matter of fact this is how I will probably start my REI ) but by going to the convention and reading this board I have come upon a few questions. I will only ask one in this post. Wouldn’t leasing your property to someone remove most of the problems that people have with landlording? I know you are still responsible for certain things, but this could eliminate the clogged toilet complaints. You would have the tennant paying for the property for you. This way, you could at any time sell your property and take advantage of both worlds. I also realize that a lease/option is a choice, but I consider that more of a sales tool. It is used once the choice to sell to a retail customer is made.
This brings me back to the question: Once you are in a position to have this choice, How do you decide whether you should keep the propery or sell it to a retail customer?
I am very interested in everyone’s comments and suggestions.
Thanks in advance for your insights!
MikeSC
Re: Question: To sell or rent… - Posted by Alex Gurevich, TX
Posted by Alex Gurevich, TX on March 26, 1999 at 10:29:10:
Bud has made some excellent points. To sum up, it depends on a number of factors. Two main factors in deciding your exit strategy are: a) your entrance into the property, and b) your main investment objectives.
A) If you are taking over payments with little or no equity you have the following choices:
If you bought something at a tremendous discount you have all of the above strategies available (assuming you have a long term financing on a purchase) plus you may choose to go after a retail sale to buyer with new financing. This will get you a biggest chunk of cash, but it usually takes much longer to put together.
One last consideration is how much of your own money you put into the deal. Obviously if you get a good chunk tied up, you’ll need to figure how soon you’ll want to get it out to justify the high return on your cash. That’s why I personally try to not ever have more than $1-2K of my money in a property including any fix-up and clean-up costs. This way I have all selling options available, and my sky high ROI is virtually guaranteed.
B) As you can see your selling strategy is a matter of your current objectives. If you are after cash you select certain exit strategies. You’ll need other strategies for maximized cash flow. And the wealthbuilders will work with long term rentals (the smart way is with L/O which may have low chances of exercising) which they eventually may choose to convert into a management and debt free cash flow note.
Needless to say we are all going through different phases of our investment careers, so we need to excercise different strategies. For most of the beginners who jump full time in the business the cash and leveraged cash flow are usually more important since their main concern early on is to cover basic living expenses. A lot of people who’ve been at it for a while (or have other income to cover their living expenses) tend to gradually transition to free and clear ownership of cash flowing assets. The reason is obvious - at some point we want to be in a position when the money comes whether we get out of bed or not.
Re: Question: To sell or rent… - Posted by Bud Branstetter
Posted by Bud Branstetter on March 25, 1999 at 11:23:41:
Mike, It should not be a mute point. You may view it that way because you don’t think you have the cash to buy. While searching for L/O you will find some people will give you their house for just taking over the payments. You could rent that out or L/O to a prospective buyer. You can chose a buyer that is unlikely to be able to exercise the option if you don’t really want to sell. If there is any equity at all and you are starting out why would you not want the cash? If you are young a brick house in a good location may be attractive for long term. A wood frame house in a marginal area is not one that I would want as a rental.
As for appliances-I loan them by saying so in the lease. This somewhat relieves me of liability if they have half a cow in the freezer when it goes out.
My first choice is always a cash buyer or someone that can get a new 100% loan. Since that is not realistic in 80% of the cases you look to L/O or some owner finacing to get the house occupied. Vacant houses rarely make you money. I would rather get on line than wait months for that elusive qualified buyer.
I approach some properties differently if I can get a 20% return or better. Those are candidates for long term owner financing out of my IRA. Mortgage notes add up over time.
As a long term investment vechicle multi-family or commercial can be great cash cows. They just usually take some cash to get into.
My Theory is … - Posted by John Katitus
Posted by John Katitus on March 25, 1999 at 01:20:29:
that unless you are somehow emotionally connected to a property or need the profits from a cash sale, to always lease-option with an option price you would be happy to take. That price can generally be 10% above full market value. Once you establish that price in your mind, you will feel good about it.
You will have above-market rents and better than average tenants. They care about the property because they are going to own it and have an investment interest. Also, my lease for L/O’s says that they are responsible for all repairs after the first 60 days. After all, they are buying the house.
And finally, you get a 3-5% nonrefundable deposit up front.
Re: Question: To sell or rent… - Posted by Dave T
Posted by Dave T on March 25, 1999 at 24:55:17:
If I read between the lines correctly, you are asking when is the right time to sell a rental property you already own or are planning to purchase.
There is no generic answer to your question. What are your goals, what is your real estate investment plan, do you have other sources of income besides real estate, what is your tolerance for landlording? The answers to these questions may suggest the strategy that fits your circumstances best.
Personally, I want to hold seven or eight free and clear rental properties at some time in the future. When I get there, the cash flow would provide all of the income needed to maintain my lifestyle, no matter what happens to the economy. I don’t worry about the landlording, because I hire a professional property management company to take care of the tenants and the toilets.
As far as the criteria for making a hold or sell decision are concerned, consider the following.
If you sell your property to a retail customer, could you invest the proceeds for a return on your equity that is equal to or greater than the return obtained from ownership?
If you have a $50K property with an 80% mortgage on it, you have $40K in debt and $10K equity (disregard closing costs for the sake of this example). Assume that your rent produces $416 monthly net operating income. This income has to service your debt, perhaps leaving you with only $130 monthly cash flow. This computes to about 15% return on equity ($1560 return on $10K).
Re: Question: To sell or rent… - Posted by Laure
Posted by Laure on March 24, 1999 at 22:44:12:
Get Bill Bronchick’s Lease Option tapes and book. His lease contract states that the Tenant performs ALL maintenance except for major things, like a roof. I am using his contract with great success.
Laure:-)
Re: Question: To sell or rent… - Posted by Michael Murray
Posted by Michael Murray on March 24, 1999 at 21:59:26:
Hi Mike,
Remember me? We had a steak dinner with Jim Kennedy at the convention. Good to hear from you.
About your question, I don’t think I understand the question. I have always thought if you lease your property to someone, you are landlording. The only real difference between leasing and renting is in the length of the obligation time. You still have to take care of the stopped up toilets either way. Most lease/option agreements, I believe, still make the landlord or owner responsible for those things until the option is exercised and the property is sold. If that is not correct, maybe someone else on this forum can clarify.
Hope that helps,
Michael Murray
Tenants will always… - Posted by Randy -IL-
Posted by Randy -IL- on March 24, 1999 at 21:54:35:
call with complaints about some of the silliest things. I even had one call me for a burned out lightbulb! A simple lease won’t help much about the maintenance problem… Unless you state in the lease that the tenant is responsible for all repairs/maintenance under, say $XX. You, of course, would be responsible for the stuff that can break your bankbook. (ie. roof, structural, heat, etc.) So be sure to hold cash back to replace these things periodically.
You can also rent them without appliances. I tell my tenants that the fridge/stove are owned by myself but they are only on loan to the tenants. They can use them as long as they wish but if they break, all I do is haul them away, not replace them. You may or may not be able to make this no-appliance deal fly in your market.
In order to smooth these topics over with your tenants, you may hike your rent a little in your ad, then offer a discount for the “Economy Package” rental (No Appliances, No under $XX maintenance calls). If they don’t want the economy rental, at least you’ve got more rent in Hip National for your troubles. Try to super-size it (i.e; www.mrlandlord.com)
As far as clogged toilets go, I’ve only been called once about that specific problem. But they sure can come up with other things to call me about!
I currently only have rentals. I only purchase properties under certain return criteria. So I can’t help you much for the sell or hold question. But these are a couple of ideas to help ease the maintenance a little.
Randy
Re: Question: To sell or rent… - Posted by Reif
Posted by Reif on March 25, 1999 at 01:30:04:
Continuing Dave T’s thought . . .
If you play Cashflow, even though the object is to generate passive income, after a few times you soon realize the way to generate cashflow is NOT to buy and hold rentals right away, but to flip properties for capital gains so you can get enough cash to do bigger deals to generate MORE cash flow.
Dave’s illustration is good because it shows the trap many landlords fall into.
They have break even or slightly positive (or negative)cashflow, but they have a bunch of money tied up earning below average returns.
Robert Kiyosaki would argue what he calls the ‘velocity of money,’ get in, get out with a profit, next deal, is a better way to get ahead.
Even if your rental property is gaining equity at 10% a year, and you only had 10% down, your rate of return after 3 years is only about 25% equity on equity - and you can’t get at most of that, and if you cashout - capital gains nightmare.
Again, I’m just getting started, but it seems to me that if you want to make it BIG, you need to do the deals to generate the cash first, before you start buying the ‘buy and holds.’
Anyway, that’s my $.02
Reif
Re: Question: To sell or rent… - Posted by David Alexander
Posted by David Alexander on March 25, 1999 at 24:54:55:
Ok, call me dumb about rentals, but…
Even with a contract like that, the only advantage I can see with L/O is for tax reasons(albiet a good one).
the first time something major goes down, Roof, Air Conditioning, there goes a chunk of PROFIT.
Me, I’ll sell. I have a one rental property and I’m cringing because I just want to collect checks, I’m working on getting them out, so I can Sell, Sell, Sell.
P.S. Their is another rental property I plan on buying, but only to sell.
David Alexander