Athen Apaquette

Five siblings, one duplex that they inherited from their mother, and none can agree on what to do. Buy and hold forever? Cash out now and buy your own home? Cash out partially and pay off debt? Rent it out? Sell?

The family’s trustee, who is also one of the siblings, asked me to help to show his brothers and sisters the value in keeping the property and renting out the front house where their mother lived, versus selling it.

I looked over the rental comparisons, gave him the backup data as proof of the rents for comparable properties, then asked my property manager what she estimated they could get for the rent. Her estimate was $3800 – $4500 for the mother’s house.

After deducting the expenses for utilities and management, the net would be $3575. Split 5 ways that means $715 per month.

If they sold for $2.2 million, less sale expenses for the realtor, title, escrow, some termite corrective work, painting, and the current mortgage balance their profit would be $1,759,000. Split 5 ways, that’s $351,800 each.

So what is the ROI? When considering $715 per month x 12 = $8580, divided by our investment of $351,800 we get a 2.4% yield.

Now what if one of the partners wants out? You would either have to scurry to find a loan or you just don’t let each other out. Another option is that they could agree on a mandatory minimum time as partners. However, what if an expense comes up and their cash flow went down to $600 or $500. Or what if the tenant moves out and you have no cash flow for 2 months?

Another scenario is one sibling wants to keep the property, takes out a loan and buys out the 4 others.

BIG NUMBER: $351,800 x 4 plus loan balance of $301,000 means a new loan of $1,708,000. Jumbo loan at 5% = $9168.91 plus tax bill of $150 per month, as well as $150 per month for insurance, plus utilities and management fees = $9968.91. Rental income of $4000, plus back house $2500 = $6500 equals Negative cash flow, out of your pocket minimum with no extra expenses: $3468.91

Keeping the family home is something a lot of my clients want to do. For sentimental reasons, or to keep the low tax bill, or they know they can’t buy back into that same neighborhood, etc.

This week’s success is that I was able to bring clarity to these heirs’ options by showing them the numbers and the clear logical decision on what is typically a very emotional decision. These kinds of things can tear a family apart when the family home is the biggest asset being left behind.

If you know a family that needs some help making a decision please introduce us.