What do you think about this deal?

Question

Okay, I know most of you are fairly negative on Condos, however, I want to ask you about this potential deal.  Condo is in Columbus, high rents around $1500

Selling price/ final price is $160,000

HOA per month is $149.  There are no restrictions on rentals from what I can tell and I called the HOA management company and the said the same thing.  Basically the deed states any rental can't be for LESS than 30 days for transient use.

So I own 2 condos in this complex.  Bought 1st for $150,000 in early 2009 and second for $140,000 in Mid 2014.   When these were first built in 2007, they were selling for $165000 - 170,000

Now this unit that I am looking at is $160,000..Market has gotten very hot over the last year or so.  This one was built in 2010 so it's a bit newer.

Current rent for the other units is around $1500

So with that in mind if this is purchased with cash, main expenses would be $150 a month for HOA; about $150 a month in reserve for incidents

so left over is $1500 - $300 = $1200 x 12 months = $14,400 / $160,000.  That gives a  9.0% Cash on Cash return.

Only reason I like this is because I own 2 other units in this complex so it makes it a bit easy to manage..

Thoughts??

Julie Falen · Answer

From a lender's point of view, How many units in the complex are rentals?  I ask because often a buyer or an owner cannot get a new loan or a refinance, especially for cash-out, from Fannie Mae, if the same person or group or entity owns more than 2 units in a building with 5-20 units; or owns 10% or more of the units in a 21+ unit building.

There are other restrictions for FHA (more lenient) and Freddie Mac but it is often something to take into consideration.

That being said I agree with @Samuel J Mrofcza  that you will get a better CCR using leverage of a loan - and get better tax treatment as well.   that sma amount of cash could be used to purchase 2-3 additional properties - somewhere else outside that complex and increase your overall CCR

Sunny P. · Answer

thanks Julie. That was very helpful.

Wanted to update on the HOA financials. There are 76 units total in this HOA and there are other HOAs around and then a master HOA.

As of 6/30/16, reserves were $100,000 and checking acct has another $120,000 for operating expenses.

No assessments have been planned as of now.

Julie Falen · Answer

A Hard money loan (or even soft money loan)  is generally any loan that is outside the government and conventional loans. It can be money from a private lender, like a friend, relative, colleague or stranger; or it can come from a broker who has many people who are private lenders, looking to put money into a loan that earns them a good return, or money from insurance companies, hedge funds and the like.  Loans are priced based on how low or high the risk is to the lender of losing $$.    A private lender reduces their risk by having a decent equity position, meaning they want the borrower to have a 20-35% down payment (or equity, if refinancing). so in case the borrower defaults on the loan, the lender can take back the property and sell it to get their money back.

Typically, "hard" money is quick,  requires less documentation, has lower credit requirements, can be for 6 months, 1 year or 30 years, and many use it to close as if they have cash and no loan contingency.

I like to describe hard money rates as being like ordering a car.  The more options you want, the higher the cost. If you want the money in 3-5 days, it is going to cost more than closing in 15 days.  If your credit is bad, that's ok but the risk is higher for the lender so the cost goes up.  If is based on an after Repair Value (ARV) that is another option on the "car"  so the cost goes up, a 3 or 5 or 7 year  or 30 year fixed rate is an option with a cost;  if you do not want to prove any income, that costs more than if you DO show income, and on and on. Rates are higher, but can still be as low as 6.5% for a longer term loan.   Generally rates for a short term loan are on the area of 8-12% interest-only payment though.  hard money generally also has a cost of 1-4 % or points, to get the money quickly. A point is 1% of the loan amount.  Most hard money lenders want the higher rates for a shorter term. A broker can find you the longer terms and lower rates.

Sunny P. · Answer

What's hard money loan?

Julie Falen · Answer

You could also do hard money, which is quick compared to someone else who is financing via conventional loans.....

Sam J Mrofcza · Answer

@Sunny P.  You can always close with cash and then refi, but keep in mind what @Julie F. had to say about obtaining financing on a condo.  It will more than like have to be a conventional loan, which in your case shouldn't be an issue since you clearly have the cash.

Everyone else comments for repairs/cap ex/financial status of HOA are extremely valid too.  Every deal is different, so you have to exam the condition of course but unless you have a 20 y/o water heater  furnace and center a/c unit i try to simplify the cap ex/repair budgeting process by just putting aside $1000 per year per unit.  Again every deal is different.

Good Luck boss.

Sunny P. · Answer

Really good points Sam and I completely agree that returns are better with financing.  Problem is they have a $169,000 offer from someone that wants to finance. So the only way they let this one go for $160,000 is if they close on it quick, which means cash offer.

So I am not sure what to do but timing is everything here

Joseph Leonard · Answer

@Sunny P. - exactly. Although you may buy a property that is in good shape, eventually all things wear out. If you haven't put money aside for repairs and upgrades then it will be a painful hit to your wallet to have to pay for all of those things at once.

If you just have a huge chunk of money sitting aside and you aren't worried about having to pay for those expenses later then maybe you could put the cash flow to use in another way. Maybe you could buy another property or use it to pay down a loan if you took one on that property.

I'm currently in the situation I just mentioned. I just closed on a rental house and I got a 15 year mortgage on it. I have cash flow from it but I don't really need the cash flow because I have a really healthy amount of money in savings and I have a high paying job. I'm trying to decide if I want to use that cash flow to pay down the mortgage quicker and own the property free and clear or to just take the cash flow and use it toward something else.

Sunny P. · Answer

@Joseph Leonard are these potential costs that you would want to figure out ?  So the month doesn't necessarily incur these costs but at some point, have these reserves for new Windows, HVAC, water heater, new flooring, etc???

I did forget to include taxes in my original calculation. :(

Joseph Leonard · Answer

@Sunny P. - There is some debate on buying condos. I personally own one in California and like the idea of it for the fact that the HOA maintains the outside of the structure (roof, exterior walls, etc). To me, that helps cut down a little bit on your Capital Expenditures (although technically that is what your HOA fees go toward).

In this deal, don't forget to figure in things like vacancy, repairs and you should still sit some money aside for Capital Expenditures because you are at some point going to need to replace some big ticket items in the condo such as floors, kitchen cabinets, countertops, etc.

Consider this rough calculation: $1,500 rent - $124 (8.3% vacancy) - $120 maintenance (8% repairs) - $135 (figuring for 9% Cap Ex money set aside) - $150 HOA = $971 before paying taxes and insurance.

What do you think about this deal?

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