CAP rate is terrible.Hi all,
We own a part of a single-family home rental property and are considering buying out the other owners. Would love to hear peoples’ thoughts.
The property is a 1000 sq ft SFH on 9000 sq ft lot. Value on Zillow approximately $300k. We own 1/3 of the house. The other 2/3 is owned by my relatives. Owned outright; no mortgage. The house currently rents for $1450/month, we have long-term tenants, and we use a management company. Total profits last year—subtracting property taxes, management fees, insurance, and repairs—were approximately $12k (which was then divided into shares for us and relatives).
The city is Grants Pass, Oregon, population 40k, with median household income around $50k (50% lower than the national average). Neighborhood schools garner 4’s for elementary and high school and a 7 for the local middle school. We don’t live in Oregon but do live in the pacific northwest and regularly visit relatives who live in the Grants Pass/Medford area. We’ve been using the same management company and have had the same tenants for several years. We—not the Oregon relatives—manage the management company and have had good luck with the company and the tenants (few headaches and minimal time suck).
We’re considering buying out the other owners for several reasons. First, we have had some issues jointly owning the property with family and would like to separate business from family. Second, the other owners are interested in selling to raise cash. Third, we generally like the idea of diversifying our current portfolio with real estate and an additional income stream. Our stock/bond portfolio is currently at around 30X expenses, plus we own our primary home with $200k outstanding on a low-rate mortgage. Also, anticipate significant pension income stream—on top of our 30X portfolio--when we retire (in the next 10 years most likely). Fourth, we wouldn’t need to take on debt to make the purchase and we’re comfortable with the costs and management of the place given our history with it.
If we buy out the relatives, we would likely pay around $200k, which we have available now in a HYS account. Given that we’d be buying from relatives, we would aim to avoid paying agents as part of the transaction.
Some countervailing considerations. First, the cap rate ain’t great. Second, the area isn’t exactly up-and-coming. Compared to where we live (HCOL), Grants Pass real estate prices have stagnated for years. Also, although we like the idea of diversification, we understand that buying a single rental property is itself a highly concentrated investment. Further, we understand that many real estate investors view the use of leverage as key to the benefits of real estate investment, and that we wouldn’t receive any of that benefit through this transaction.
What do people think? Go for it? Or, alternatively, just sell the house to a third party, take our share and put it into our portfolio. Or potentially sell, take our share, and try to roll it over (along with the $200k currently earmarked for this transaction) into something closer to us (where small houses can go for $1M, and we’d have to take on significant debt).
White elephant that you can't sell and doesn't appreciate.
Distance ownership.
Issues with relatives.
Sell your 1/3 or, with relatives, sell all and divide proceeds in 3rds.
Walk away.
Do you want to get into the R/E Residential income property business as a sole owner and your own property manager, and grow that business with more acquisitions over time, each one making from 8-12 percent "net" cap rate after all expenses and taxes?
Do you want to enter retirement taking on unnecessary debt?
*area in green above is irrelevant to making a "business" decision.
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Statistics: Posted by Sandtrap — Thu Jun 20, 2024 11:16 pm — Replies 9 — Views 481