Sacramento, CA · Member since 2018 · 64 posts · 9 votes
Will buying condos in cash in any market always cash flow positive? Any cases where buying condos in cash would not cash flow positive? Is the return for condos better if financed or purchased in cash?
Theoretically it is possible to find a market or condo complex where you can't cash flow, even with no debt, but that is probably rare.
Generally, compared to other forms of residential real estate, condos are not a good investment. Why? First of all you don't have as much control of your expenses, and HOA's love to under-collect annually and then sock you with large one-time special assessments to do repairs. Second, they don't appreciate as much. You also have to deal with an HOA that may be hostile to landlords or have restrictive rules that make renting out a property difficult.
Also, if your hope is to build wealth with buy & hold real estate, returns are terrible if you pay cash. It's hard for people to get their heads around this so I like to use a simple model. Stay with me here...
Buy one house for $100,000 cash. Let's say you can rent it for $1000/mo. Taxes, repairs, insurance, and everything else comes to $4,000 per year. You just got $8,000 in cash flow. With $100K invested, you got a 8% return on your money.
Now lets say you want to buy another house exactly like it but have no more to invest. You take out a very conservative 50% loan on each property at 5% interest. (So a $50K mortgage on each property for a total of $100K borrowed.) Interest on those loans is $5K per year, but what has happened to your returns? Before paying interest, you now have $16,000 in cash flow. Take away the $5,000 in interest and you now have $11,000 in cash flow off of your same $100,000 for an 11% return.
The returns magnify if you assume 4 properties at 75% leverage, and the returns grow exponentially if you start adding in appreciation. As an added benefit, you are less likely to get sued if you have a mortgage. Real estate leverage is GREAT!
Theoretically it is possible to find a market or condo complex where you can't cash flow, even with no debt, but that is probably rare.
Generally, compared to other forms of residential real estate, condos are not a good investment. Why? First of all you don't have as much control of your expenses, and HOA's love to under-collect annually and then sock you with large one-time special assessments to do repairs. Second, they don't appreciate as much. You also have to deal with an HOA that may be hostile to landlords or have restrictive rules that make renting out a property difficult.
Also, if your hope is to build wealth with buy & hold real estate, returns are terrible if you pay cash. It's hard for people to get their heads around this so I like to use a simple model. Stay with me here...
Buy one house for $100,000 cash. Let's say you can rent it for $1000/mo. Taxes, repairs, insurance, and everything else comes to $4,000 per year. You just got $8,000 in cash flow. With $100K invested, you got a 8% return on your money.
Now lets say you want to buy another house exactly like it but have no more to invest. You take out a very conservative 50% loan on each property at 5% interest. (So a $50K mortgage on each property for a total of $100K borrowed.) Interest on those loans is $5K per year, but what has happened to your returns? Before paying interest, you now have $16,000 in cash flow. Take away the $5,000 in interest and you now have $11,000 in cash flow off of your same $100,000 for an 11% return.
The returns magnify if you assume 4 properties at 75% leverage, and the returns grow exponentially if you start adding in appreciation. As an added benefit, you are less likely to get sued if you have a mortgage. Real estate leverage is GREAT!
if you pay all cash, then you should definitely cash flow positive. Though it would be irresponsible and incorrect to say "always". but that doesn't make it a good deal. positive cash flow alone is not the metric of a good investment.
the return is generally better when financed as you have to use less of your cash and still maintain a large percentage of the income. Think of it backwards: what if you put nothing down:
if you pay all cash for a 100K house and made 6000/year in net income that's 6% ROI and you're cash poor
if you pay ZERO cash for a 100K house and make 1200/year in net income that's INFINTE ROI / free income and you still have your 100K
Usually the greater the financing, the greater the return as your investment is lower. For example, if I make $1 on $100 investment, my return is 1%. If I make the same return on a $2 investment, my return is 50%. Too much financing and not enough cash flow can put you in trouble if you have repairs, vacancy, or a change in the market lowering rents.
I can't imaging everything will cash flow with a cash purchase, but most things should provide cash flow. It might not be a good return and you might want to see how appreciation is in the area if you are relying on it. Condos don't appreciate the same as houses in some markets.