BiggerPockets

So I'm not buying for some time, but I've been looking at some REO properties in my area to see what's available. I found a condo close by that seems to fit the 50% rule, but I just wanted to double check with the experts:

Price: $54,000
Rent: $1,100
Mortgage: $43,200 (w/ 20% down, 7% interest, over 30 yrs)
Annual Rental Income: $13,200
NOI 50%: $6,600
Annual mortgage payment: $3,444
Annual Cash flow: $3,156 or $263/month

Again, just looking to see if the math was correct here and if you guys would pounce on a deal like this...

Thanks for another great reply Jon. A couple of quick questions:

1. When you say the difference is coming from my cash, do you mean that I would have to pay in cash since of the low purchase price? Or where is the discrepancy between the $263 and $191? A bit confused on that.

2. I was under the impression that HOA should be included in the 50% rule. I'm assuming you're making the point that the 50% rule is a good rule of thumb, but if one is planning on purchasing a property they have to make sure the HOA isn't wildly high.

3. Would the RE agent be required to give me all of these HOA details or would I have to do some prodding on my own?

As for the rents, I actually gave pretty low estimates. From the comps I have which seem to be pretty good, similar properties rent for $1,100-$1,400. Interesting...Perhaps I should look into this further and see if I can partner with someone more experienced and with funds...

Excellent explanation Scott. That really clears everything up.

Just curious, but based on the surface info you have here, would you consider this property further?

As Scott says, the HOA fees are included in the 50%. Trouble is they can sometimes be VERY high. I looked at a listing for a condo here recently that seemed very cheap. Then I realized the HOA fees were quite a bit more than the P&I. You also don't really control HOA fees, and they can jump dramatically.

You certainly should buy your own landlord insurance, even for a condo. Yes, the HOA covers some things, but it won't cover something going wrong inside the unit. Further, you can have problems, like a toilet overflowing that can damage the building and other units, and without insurance you would be on the hook. Landlord insurance also gives you liability protection, and loss of rent protection.

You will have other expenses in addition. You'll have taxes, vacancy, and interior maintenance at the very least. You also have all the potential bad expenses like evictions or tenant damage.

The HOA fees SHOULD cover things like new roofs. If the HOA is underfunded, these things can turn into sudden, unexpected bills, though. Even it if is well funded, they can turn into higher dues in the future.

Personally I hate HOAs. (That didn't show, did it? :-)) They're OK if you a homeowner, and want to have that degree of control over your neighbors. As an investor, though, they really do nothing for you. You end up having to pay for all the same stuff you pay without an HOA. And, they may choose to do things you wouldn't do, left to your self. Essentially, you'll always have a partner in your investment. So, honestly, I would not, and do not, consider a condo.

Condo is probablly not your best first investment, even first couple.
HOA is generally determined by some sort of HOA Board, where generally those positions are not paid, and the residents run most if not all of the seats. and they determine the cost needed to run the complex, pay for items such as grounds keep, water trash and stuff, and then that amount gets split between the units, Alot more complex then that but thats a simple break down from what I understand. Then there is generally a HOA Management company that recieves the money and contracts out the work and such.

The complex can add items they feel are needed, and charge an additional assessment charge, for improvements to the grounds, which you really have no choice but to pay, sometimes they can be outrageous, for items of really no use, trees ect., a big and common approves condo association financial assessment charge is for repavement of the parking lot. Very costly, and dont fairly frequently
HOA budgets are often not managed very well, and depending on the HOA sometimes you might not have any say in condo association financial decisions
Ive even heard of HOA's where they dont allow you to fix up the condo yourself, your condo, you cannot make repairs or anything without a licensed contractor, unless you go in get permission from the board. HOA fees are generally a ton more if the property has a pool (insurance reasons)
Basically you own 1 apartment in a complex. And they tell you what you can and cant do. Biggest concern I've heard is some complex's limit the amount of units that can be rented at one time, so sometimes people are stuck with unrented units and the HOA will not allow them to rent them as the percentage of non OO units will be higher then the HOA allows.
-Scott

Just talked to a buddy who has some condos as rentals, he said his biggest problem was in Arizona the condo assoc. is limited in how much they can raise the fee each year, although they can recieve exceptions., But he said one of his properties they didnt raise it for several years, then raised it a ton,
Example:
100 month HOA
10% yearly increase
after 5 years of no increase, they raised the HOA to $161 (10 percent, per year, after 5 years. )
although they didnt raise it each year, they were now allowed to raise it by that much.

These numbers were just used for example, I think he said they raised it like 5% per year, still can take a huge bite out of your cashflow.
He also said one of his REO's he purchased, he ended up being responsible for the back HOA fees from before he even owned the property, as they wernt paid and he wasnt told this until after closing. But he also said the fees were less than the cost to fight them would of probablly been (lawyer fees)
-Scott

P.s. You should recieve and look over the cc&r's for a property with a HOA as well.
definition-
Covenants, conditions and restrictions. The basic rules establishing the rights and obligations of owners of real property within a subdivision or other tract of land in relation to other owners within the same subdivision or tract; and in relation to an association of owners organized for the ...
My parents HOA (non condos, sfr) charges you a fee to transfer ownership, such as when you sell your house, you have to pay the HOA a fee, I believe there community www.ranchosahuarita.com is one of the most restricted and costly HOA's I have ever seen. currently I believe its around 2% sales price to sell your own home, so add a realtors 6%, gets pretty costly to sell in this HOA, never heard of such fees for a condo, or any other HOA for that matter..

Originally posted by Scott Ricenbaw

1. The difference being the $10800 you have invested (20%) to obtain this property. Since youve invested your own money your making $72 a month on your $10,800 you put in it, if you didnt put this money down you wouldnt make that extra $72.
2. Your HOA DOES need to be included in the 50% that has your payment included. MOST condos will not fit into the 50% rule as the lowest HOA on a 1 bedroom I've ever seen in southern Arizona is little over $100/mo.
HOA DOES generally cover water and trash, as well as landscaping, sometimes roof, termites and exterior building insurance. this GENERALLY doesnt require you to have any further insurance, it will not cover the property inside the condo, but you would not be covering that anyways, and recommend your renters get rental insurance.
3. Most realtors should be able to tell you or give you a good idea, but I recently looked at some one bedroom condos in tucson on the MLS, and 3 of the 6 listing had different HOA prices for the same size units, generally the HOA is based on the unit/square footage, so I believe some of these prices were wrong, but they were all within $25., They ranged $119-145 month for the 1 bedroom.
-Scott

Hi Scott,
You clarified:
"1. The difference being the $10800 you have invested (20%) to obtain this property. Since youve invested your own money your making $72 a month on your $10,800 you put in it, if you didnt put this money down you wouldnt make that extra $72"

Isn't this figure supposed to be $52?
20% of 263 is $52.6.
I'm new to property investing myself, so if I have missed anything here would appreciate you explaining it to me.
Thanks,
Tom

Originally posted by Scott Ricenbaw

This is based off borrowing money for 30 years at 7%,
if you were to borrow full purchase price, (100% Financing) $54,000 your payments would $359.26 a month,
using the 50% rule, based on 1100 rent, your mortgage (monthly holding cost, we need to include HOA for more accuracy) cant be above $550. $550 - $359. = $191

Obtaining a mortgage with 20% down, he would get a loan for $43,200 making his payments $287. $550 - $287 = $263

The difference is rounded at $72 / month more, since he invested the 20% down to obtain the property. Cash flow looks alot better, but hes invested $10,800 of his own money.

Hope that made sense?
-Scott

Ah! I see. Thanks Scott