Reconsidering our rental situation

[debtheaven]

We had four 1BR rentals in a HCOLA (Paris and suburbs of Paris). We sold one in February. The building is in very bad shape, in a changing neighborhood, on literally the only block that seems to refuse to improve. I felt it was about to become a major money pit, so we sold (well). We close on a studio that's nearly the same size, in a much better suburb adjacent to ours, next month.

This has made me think. Initially I really didn't like the idea of studios.

The seller of the studio we are buying owns the entire building. He lives 1000 km away. He is in his late 60s/early 70s, and semi-retired. He is selling the entire building (but piecemeal, apt by apt). He is selling another (smaller) studio adjacent to the one we are buying. In a year his wife plans to sell the studio she owns, which is directly above ours.

I am wondering whether it might be a good idea to sell another 1BR apt in another suburb in the hopes of buying both of these studios. His wife does not intend to sell her studio until it is completely paid off in a year. Of course she may change her mind by then, and it may well be out of our price range by next year.

I was initially reluctant at owning studios, I wasn't thrilled at selling a 1BR to buy a studio. But renting the smaller spaces are frankly much more profitable. I just had this idea, so I haven't even had to chance to run it by DH yet, since he's asleep.

Any thoughts?

[debtheaven]

Sorry, it's late here, and tomorrow is DH's birthday, so I won't be on again for a while. Thanks!

[2kids10horses]

DH,

You didn't give me much to go on here.... What's the current value of the unit you're thinking of selling, what's the cost of the replacement studio. What do each rent for?

If the question is something like this: 1BR unit worth 100K rents for 1000, but Studio worth 50K rents for 800, does it make sense to sell 1BR and buy Studio? If that's the question, then, yes.

In my example above, you could own 2 Studios for the price of 1 1BR, and get 60% more rent.

(Of course, your "real life" numbers would be different, but you get my drift.)

Bon chance!

[Deleted]

Debt,

I agree with 2kids that you need to run your own set of numbers because the European rental market is very different from most of the US.

In the US, apart from rent controlled areas like San Francisco and Santa Monica, I recommend most folks looking at condos look at 2brs because of the greater pool of tenants and the flexability of even moving into the unit yourselves in retirement.

But Europe (and most rent controlled cities in the US) are different. Not only are you limited in how much you can raise the rent each year but you are also limited in the ability to terminate a lease unless you are going to renovate or move in the unit yourselves. So over a 10 year period of ownership you could easily be way under market rates. It could affects your ability to sell the unit unless your buyer is planning to move into the unit themselves.

I suppose another option would be to explore if you could buy a unit next door and combine the units at some future date if you really like the location and wanted to move into it at a future date.

[2kids10horses]

bonnap, you have valid points. I know nothing about landlord/tenant law in France. Or how the system works there. I was trying to figure out how two small rentals would yield more rent than one larger one.

Here in the US, it is usually the case that owning 2 modest rentals yields more rent that one luxury home. There is usually a rent ceiling that most tenants will not go over. (There are exceptions to every rule of thumb, of course.) So, on a return on investment it just makes sense to sell the expensive place, and reinvest in more modest homes that have more affordable rents.

[debtheaven]

Thanks very much. Bonnap, great points. 2Kids, yes that's exactly what I'm realizing, that I'd get more rent from two smaller studios than from that 1BR.
I will see the seller at closing in a few weeks, so I'll get more the numbers from him then. This said, it's not a great time for us to sell the 1BR because it is currently rented out, and we'd get a better price if we sold it unoccupied. But I am thinking about this with an eye towards optimizing those investments, even if it's not for tomorrow. Thanks!

Bonnap, this would not be for us. We may well downsize one day but hopefully not to 39m2 (and that would be two studios combined.).

ETA: There is another issue I wasn't thinking about when I posted my question yesterday, which is our RE lawyer has told us that if we sell too often, we risk being considered RE "professionals" rather than private citizens by the gov't (and taxed at a much higher rate). So that also nixes selling that 1BR for now. But I am definitely thinking about this for the future.

So I'd better just let the dust settle for a while.

[debtheaven]

I have 70K in cash. It's pretty much all I have left.

Color me crazy but I just asked the agent how much the seller really really wants for that small studio next door. It's for sale at 81K (plus the legal 8% closing costs). As far as I know (I will need confirmation) it rents for 450 per month.

I tried to discuss it with DH (because obviously I'd rather we buy it together as we have our other rentals) but he told me although he thought it was a good idea, I was violating his "no money talk past midnight rule". LOL. I want to buy it cash to help pay for our last two kids' education expenses.

That studio is not in as good shape as the one we close on next month, but it has no water damage from the flood in the building since like the one we are buying, it's on the other side. From what I can see on the pix, there's absolutely nothing wrong with it, the deco is just sort of old and fugly.

It has been on sale for six months, at the same price. The agent admitted that nobody will buy it because the tenant won't let the agency show it because he is scared of being thrown out. I realize this is a potential issue but I'm thinking he'll need to leave eventually, if I can get a screaming deal on it, it may be worth it. And if he never leaves, I can always sell it to another investor, like I did our last two rentals. This is the small studio immediately adjacent to the one we are closing on next month.

Am I crazy to be cutting myself that close cash-wise? If I could get it for 70K closing costs included, I'd be getting 450 per month in rent. If I couldn't, I wouldn't do it, I wouldn't empty out my cash without all the rental income. Again, I'd rather DH and I did it together, so I'd only have to spend half my cash (as well as the fact that I prefer we continue to do our rentals together).

Thoughts?

[Deleted]

I wouldn't pay all cash for it and deplete your entire cash nest egg. You do need to keep a good sized EF if for nothing else paying some costs for the viagers (until you could get a reno loan) or if you have major repairs with one of your other units. How would the numbers look if you got a $35k loan and paid half cash? Is the current rent $450? Is that FMVl given you may inherit the tenant for a long, long time?

[tskeeter]

debt, here's something to think about. Right now, it sounds like you have rental properties scattered around the city. Consolidating your rentals, or some of your rentals in a single building/neighborhood could make them more convenient to manage. On the other hand, consolidating can increase your risk. If the neighborhood goes to pot, it could affect the value of more than one of your investment properties. A single building could be even worse. If the building owner decides not to maintain the building, or if there is a fire that destroys the building, or a major water leak high in the building that does a lot of damage, or the building owner selects a bunch of bad tenants for the apartments they own, or the building owner dies and the family starts to fight about spending money on maintenance, etc., more than one of your properties could be adversely affected. You need to balance the potential risks and rewards.

[debtheaven]

Great points again, Bonnap, and tskeeter. I'm not worried about the neighborhood but you raise very valid points about having several apts in the same building. Yes Bonnap it is FMV but do I really want another "lifer"? Not so much ...

I think I am being impatient and trying to get ahead of myself. I know I should let things settle down for a while. In 58 months we will have paid off one of the apts and the reno loan, I should just "set it and forget it" until then.

Again, thanks to y'all for being the "voice of reason".

[2kids10horses]

450 per month is what? 5400 per year? divided by 70K is 7.7%

Before taxes and insurance?

I usually want a bigger return than that.

[debtheaven]

2kids
Yes, that is before TI. That's a good ROI here where RE has gone through the roof and continues to do so.

But (see above) I'm going to leave well enough alone for now.

ETA: As Bonnap rightly pointed out, the viagers (private reverse mortgages) are somewhat of a wild card, so it's better to keep the cash intact and our debt load reasonable. My much more modest goal now is to pay off the boiler loan (see signature) and get a 155e/mo "raise" LOL.