Real Estate – new offer on short sale

March 6, 2013

I received a call from my rental property manager.  He had a short sale he was working on for 6 months, and wanted to know if I wanted to purchase it.

Truman short sale

The house is a 3 + 1.75, built in 1963.  It is 1,487 square feet.  It has central A/C, a 2 car garage, and a pool.  There are tenants that have been renters for about 18 months, and have a great rental history (meaning they pay on time each month).  Rent is $1,250 a month.  Price is $124,000.  The property is located in California.

My analysis is as follows:

Monthly Income:
Rent = $1,250

Monthly Expenses:
Mortgage = $0 (I would be paying all cash)
Property taxes = $200
Insurance = $50
Gardener = $70
Pool = $85
Property Management = $85

Total expenses = $490

Net income = $760 a month or $9,120 a year

The ROI (return on investment) is 7.35%

I decided to pass on it, mainly because it has a pool.  Pools are great for tenants, but a headache for landlords.  There is the $85/ month pool maintenance charge, plus eventually they require expensive pool equipment repairs, tile work, and more.

If the property did not have the pool, my net each month would be $845/ month, or $10,140 annually.  This works out to a 8.17% return.

I am also not including any repairs that would be needed, as this is an unknown right now.  But after buying over a dozen homes in recent years, repairs will likely run $5,000 to $10,000.  This reduces the return considerably to below 7%.  I always look to get at least 9% for rental houses, after repairs and renovation costs.

 

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