Wanna buy it? Make us an offer.
Good news, readers! While getting our total credit card debt down to $45,623.12 this month, and keeping our student loan balance stable at $101,456.44, we managed to add $1200 to our emergency fund! Whoo-hoo! Who knew targeted saving could be so much fun! Yay for us!
Now that we attracted a few additional eyeballs with that moronic opening paragraph, it’s time to tell you how smart people make financial decisions.
CYC owns a modest house in a pleasant part of our hometown. (Well, we own several houses. And it’s actually a pass-through entity that owns them, because paying income taxes at individual rates is for the little people.) Those aren’t realtor euphemisms, either. The house is modest, not decrepit. The neighborhood is pleasant, if not expensive, with gated access and an autocratic homeowners’ association.
The tenants who live in this house have been happy with it throughout their tenure, or at least we assume so. We don’t know for sure, because dealing with their concerns is the property manager’s problem. She earns her 8% by putting out any fires so that we don’t have to.
Alas, the tenants recently chose not to renew their lease. Which left us 30 days to find a new tenant and enjoy (92% of) the concomitant cash flow. Except that getting the house reoccupied is also the property manager’s problem. She doesn’t get her cut when there’s no rental income to get a cut of, so she’s got plenty of incentive to keep the landlords (love that word, it sounds so magisterial) happy.
The typical strategy here is to think within the envelope: How do I find a new tenant fast?
Or as we specified, our immediate problem is slightly different: How do I get the property manager to find a new tenant fast?
Alright, those are only true within the existing conditions of the problem. A true non-enterprising human would have asked:
Should I really be investing in a house that I don’t live in, instead of just contributing to my 401(k) and hoping my employer matches it? (And while I’m at it, maybe I should sell my extra stuff on eBay and categorize my coupons by denomination, too.)
The rich indeed get richer, and not only is that a good thing, it’s the inevitable result of rich people understanding their options. Poor people – e.g., every imbecile with a personal finance blog – are only interested in minimizing damage. Paradoxically, they end up perpetuating the damage because they’re too busy trying to reduce tiny defeats instead of building for big victories. Success begets success. When the 1st (or the 2nd, or maybe the 3rd) avenue generates positive cash flow, it’s easier to see subsequent avenues open up. That always seemed like a better way to go about life than despairing over how much work it’s going to take to reach zero.
Back to our real-life problem, is “How do I find a tenant?” even the right question to ask? How about:
How to profit the most from this?
Which means looking at cashing out.
To determine how much the house might sell for, we looked at comps. That’s industry slang for “comparable houses”, which are easy for us to find thanks to a realtor license that’s cheap to maintain from year to year. That license also provides access to the secret weapon of the real estate investor, the Multiple Listing Service.
Here are 3 recent and 3 pending sales. Like our property, these houses all have 3 bedrooms, 2 bathrooms and a 2-car garage. If it isn’t obvious (given that we’re calling them comps), they’re all in the same part of town, too:
| Date Sold | Price | Square Footage | Price/Square Foot | |
|---|---|---|---|---|
| Property A (Model and Subdivision Match) | Pending | 207,000 | 1508 | 137.27 |
| Property B | 7/10 | 221,000 | 1523 | 145.11 |
| Property C | Pending | 171,000 | 1594 | 107.28 |
| Property D | Pending | 205,500 | 1594 | 128.92 |
| Property E (Short Sale) | 5/10 | 170,000 | 1651 | 102.97 |
| Property F (Pool) | 6/20 | 240,000 | 1594 | 150.57 |
Property E was a short sale and, not coincidentally, the lowest price per square foot. Property F has a pool and the highest price per square foot. Because these 2 are thus the least comparable, we’ll disregard them. The remaining 4 average $129.65 per square foot. Assuming a linear relationship, and that said line begins at the origin (as if), if we multiply $129.65 by our 1508 square feet we get $195,505. Property A is an “exact match” for ours, which is in quotes because while no 2 properties are identical, realtors still use the term in cases like this. These two properties are a model match and a subdivision match: you can figure out what that means. Property A’s pending sale is for $207,000. Therefore, our property should sell between $195,000-215,000.
Here are the proceeds at the top of that range:
| Sales Price | 215,000 |
|---|---|
| Net Proceeds | 19,705 |
| Less Costs | |
| Commission | 12,420 |
| Closing Costs | 5,375 |
| Loan Payoff | 177,500 |
Or, are we better off putting another tenant in the property for a year (or two) even if that means the property is vacant for 2 weeks to 1 month?
Here’s what those numbers look like:
For what we could sell the house for, we couldn’t get another one (you didn’t think we were going to just pocket the money, did you?) at a comparable 3 1/2% loan. We don’t need the windfall, so we’ll take the cash flow. And we’ll take an educated guess that real estate prices will continue to rise after that historical nadir of a couple years back.
