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Archive for November, 2011

Calculated the Return on Investment for the California Rental Property

November 21st, 2011 at 04:23 pm

I had a really big revelation this weekend regarding the rental property in CA. I wanted to share it, I doubt it’s a new perspective but it was a new to me perspective.

I have been debating about whether to keep or sell a property I inherited in California. There are pros and cons to both decisions, but a decision needs to be made soon because my renter is leaving in January.
I was trying to determine long term gain of the property if I decide to keep it. To look at the future, I looked at the past.

There are some assumptions at play here, but even being very cautious, the numbers kind of blew me away.

My mom bought the place in 1976 and lived there for 2 years before moving in with my dad in another town. She bought the place for $45,000. This property has been in the family for 35 years.

I assume there was a mortgage, so here are the assumptions:

Assuming she put 20% down, she had a mortgage of $36,000.

Assuming she had a 10% mortgage interest rate (I heard that rates were in the double digits in the 80’s. I’m not sure about late 70’s.

Assuming it was a 15 yr mortgage (I have heard the 30 yr mortgage is new?) She paid $78,080 total for her condo. Taxes are fixed at $1200 per year so in 35 yrs she has paid $42000 in taxes. In total, the place has cost her $120,080 plus HOA fees.

She has rented the property for 33 years. Rent goes up so I have no way of knowing what she has charged through the years. Right now the property nets (after HOA fees) $1250 a month. I’ll assume her rental income has averaged a net of $800 a month.

$800/month x 12 months =$9600 year. $9600 x 33 yrs = $316,800.

The property has brought in $316,800 and cost $120,080. Over the years, my family has had a $196,720 income boost from the property. And then on top of that- it has appreciated to a value of about $440,000! So with realtor fees and closing fees and fix up fees, we’ll say the property will net $400,000 after the sale.

So with the property equity and rental income, this little condo has given my family $596,720!!

Is my math right on this? Is my line of reasoning correct?

And I do understand there were vacant months where no money came in, things broke, needed repair. But even rounding down to $500,000. Whoa! That is serious money!

Now I can better understand why long term real estate can be so lucrative for long term investments!

Seeing the long term return on investment numbers are a bit more crazy than just considering how the monthly amount might impact/help your budget.

In this case, it pays to be patient with the real estate market.

10/31 Tax Deferred Exchange?

November 11th, 2011 at 05:02 pm

I need some help with a tax rule. I talked with a realtor in California today and set up a date to meet with her when I travel to CA this month to make a decision about the CA property (rent or sell).

I like her so far. She is very friendly, knowledgable. She told me about 2 tax items I need to keep in mind:

10/31 Tax Deferred Exchange
I can use the proceeds of selling the property to buy a property in my state and there is a tax break if I choose to do that. She told me to talk to a tax lawyer about it. Is anyone familiar with this? Can someone explain this to me better?

FITB (Foriegn Investment Tax Back)
Any out of state owner selling a CA property has to pay 3.33% tax on proceeds to the state of CA. It's a tax that is unique to the state of CA. Is there any way to get out of that one?

I was able to follow the rest of her conversation well. We talked about the property and renting vs selling. She said she has property managers on her team if I decide to go that route. She is gointg to email me a few listings soon so I can starrt becoming familiar with the market.

The Impulsive Purchase Renovation-Pictures!

November 11th, 2011 at 03:05 pm

ok, I started renovations in September 2010 and moved in April 2011. I owe everyone some pictures! So here they are; my big renovation:


The kitchen

Length of the house

The Dining Room


Living room

(I have a thing for light fixtures.)
Thats all the pics I have right now. I just wanted to share because I love looking at pictures too!

Just venting, rambling and organizing my thoughts...

November 9th, 2011 at 05:19 pm

Greetings, this blog posting is going to be a vent just to get all my jumbled thoughts into an organized process.

First I feel like I have had a wave of financial problems hit me all in the same month. Stupid October. And I feel like the problems stem from a bad decision I made by buying the Impulsive Purchase. I wish I could say it was a Stupid decision but it was actually a good decision. Short term pain (right now) for long term gain.

To start with the decision that caused the problems: Husband (BB) and I were living in ½ of a duplex that we owned, and rented the other half out. Our financials were pretty secure but then BB got a big time job and our finances really improved. We decided (in 2010) that the real estate market was at a great time to buy and we really needed more space, and would like to live in a better part of town. We found a rundown duplex on a great street in an ideal part of town for way below market value. And within a few days we bought it without really, really considering the possible consequences.

At first things were good. We left it rented out for 6 months while we replenished the savings from the 3% down payment and closing costs. During this time we took out a HELOC on the first home to use for renovations of the 2nd home.

Once we began renovations, our budget was completely unprepared for this building. Our contractor found unanticipated structural problems, and we learned along the way that his “vision” of what we wanted and our “vision” was vastly different. So all the things we thought we would be getting suddenly turned into an extra cost. It’s not that we got taken advantage of; the contractor is BB’s best friend. And every time I went to the job site (2-3 times a day) the men were working. No sitting around or wasting materials. But it was a “oh you want crown molding in this room?” and “wait, you want subway tile in the shower not 12 x 12 tiles? The subway costs a lot more to put in because of the labor and additional time it takes to install. And subways are like .50 a piece versus a 12x 12 for $1 a piece.” (To tile 2 showers was $1338.00 in just tile). So it was little things like upgrades that I thought was standard and my contractor didn’t anticipate when we were discussing budgets. And it was things that were needed that the contractor didn’t think of like blinds for the master bedroom. $350.00 for 3 wood blinds! And $160.00 for light dimmers! Then there were big expenses like the original Air Conditioning unit breaking 2 weeks into moving in. That was a $3200 unanticipated expense. And $1729.00 in dumpster charges! I look at the detailed budget I kept and nothing sticks out as “the biggie” charge, just a lot of unanticipated and more expensive than thought charges.

So the budget went from $40k to an end product of $120k. And I know that is mind blowing. I thought it was mind blowing for a long, long time. Luckily the we gained about $50k in equity over the renovations we put in; the building 2 doors down equally renovated just sold for $90k over what we are into for our place. I congratulate myself that we walked away with debt of the $45k HELOC and $15k in credit card bills. The rest we covered out of savings and paychecks. And we did get the card down to $7k but then October came along and things are complicated and overwhelming.

BB lost his job. That’s the real issue at play here. If it was not for this, we could weather any of the rest of the things that came along. BB was on a year to year contract and his job called in Oct to say they are not renewing when the contract runs out in December. That was a totally unanticipated blow that hit us financially and hit BB hard mentally. He loved the job and was crushed. Aside from the depression and despair and disconnect he is now in, I don’t see another job of that caliber coming his way. He is a baseball coach and those jobs are hard to come by. We have sent out his resume to all teams 3 times since he got the news and we have gotten back 90% negative responses. There is one glimmer of hope with a team but they won’t know until mid December. I’m not counting on it.

We also contacted the local universities but there are no openings right now.

If the coaching does not pan out, BB has no other skills to fall back on. He has no degree, no office skills, no experience. He is exploring getting a phlebotomy? License but that will be 6 months of courses and just knowing BB I know he won’t follow through with it. Though right now he thinks he will. So he is counting on a Phlebotomy salary of $12-14 an hour, maybe with benefits, even though he is not signed up for courses, has no idea how to get into the field and has no contacts in the industry. He is kind of useless to long term plan with. I’m on my own in the realistic planning department.

So without his salary, we can get by on my salary and our rental income. We will be able to pay about $500 a month toward the CC and still live somewhat comfortably.

But then my long term renter in CA is moving out in January due to long term unemployment. For 13 yrs she paid $1750 a month and last year it was reduced to $1200 to accommodate her job loss. I recently blogged about whether to continue to rent, renovate or sell the property. I’m still undecided and constantly thinking about it. I’m kind of leaning towards selling to ease the current financial strain of BB’s job loss, the CC bills and the HELOC. Though I worry about missing out on long term benefits of having the property to ease short term problems. (Although BB is not very employable, I do think a baseball job will come along in the next 2-3 years.)

And now one of my renters here in GA announced they are not renewing their lease which runs out in January. I think we can get that rented out within a month, so it is a loss of one month’s income but it’s just an added stress that weighs on my mind. With the loss of that rental income just for the month January combined with the other lost revenue streams, we are going to scrape by that month.

How could this have been avoided?

I used our emergency fund to pay down the CC bills that were charged for the renovation. I had never touched the fund before and figured getting rid of the interest on the CC was a justified reason to deplete the fund.

I used the $18k I had saved for the CA rental property on the renovation. I had saved that money to put towards the time when the renter moved out and I would need to renovate the property and/or cover several months of it not being rented. But during the renovation I justified that “this renter had been there for 13 years, what were the chances she would move out before we could replenish the account?” (BB blames himself for that because he talked me into doing it. I blame him too.)

If either of those funds were still intact I would feel a lot better about the unemployment situation.
So I’m not sure why I am writing. I just don’t have anyone to talk about this with. I don’t have anyone in my life that is better or more experienced with finances than me. That sounds so egotistical, but my dad is the person who managed the family finances and he did very well. And he died before he taught me anything about money. My mother squandered a good portion of the money when it was left to her. And she died too, not that I would ever ask her for financial advice. My friends are young and struggling, or just getting comfortable, but don’t have a track record that makes me want their opinions. Some friends would look at my situation and tell me that I don’t have a problem at all. Other friends would rant on and on about how BB doesn’t carry his weight and he is the source of my problems. But all friends would probably look at me differently if they heard me use actual numbers in reference to my life. And BB’s family has made poor financial decisions as well. I wouldn’t want their advice. So that leaves people like my financial advisor who I feel has a stake in what I decide (He would advise me to sell and give the money to him to manage). Sounds odd, but I go to this forum because you guys are checked into your finances, aware of financial basics and can offer me perspectives that I had not considered.

So I don’t have any questions right now. Just a lot of factors on my mind that I wanted to organize and vent about. Thanks for listening.