First Time Investor - Condo or Multi-family?

Question

Hello,

So I currently live in San Diego, CA and I'm looking into investing in real estate. I have two options right now: first option, I can afford to buy a condo this summer with at least a 5% down payment and I plan to live in it for 1 year then rent it out. Second option, I plan to save as much as I can for one year (on target to save at least 22k by Summer 2019) to have enough down payment for a multi-family home.

My goal is to build enough passive income a month in order to quit my job. So, which is the better option right now? Are condos good for starting out so I can start building equity? Or would it be better to save up for a multi-family home?

-Ian

Ken Nyczaj · Answer

@Ian Viray Check your Condo/ Coop Fees, they could decrease cash flow. Also, review CC&R's, Bylaws. Here is something you could ask for:

A resale package is a packet of vital information provided to those purchasing a condominium or a home in an association. The package includes a complete set of recorded documents that govern your association. The Resale Package will vary from state to state. Typically, the documents included are: Annual Financials, Articles of Incorporation, Budget, Bylaws, CC&Rs, Insurance Declaration Page, Regular Meeting Minutes, Resale Certificate/Demand, Reserve Report, Rules and Regulations.

Dan H. · Answer

Condos purchased at retail in San Diego at such high LTV (95% LTV) do not have initial positive cash flow and typically have negative cash flow.  If you are unwilling to supplement the condo until rents appreciate enough to provide positive cash flow then the decision is obvious.

if however you are willing to supplement the condo until the rent appreciation creates positive cash flow there is the advantage of getting in sooner.  San Diego RE appreciation has been outstanding for the last 6 or 7 years.  Redfin says my market appreciated 17.5% last year.  Note at 5% down and maybe 5% closing you have 10% of cost.  A 17.5% appreciation means an ROI due to appreciation of far over 100% then subtract off the negative cash flow and even with huge negative cash flow you still likely have an ROI of over 50%.  Note, however the appreciation/depreciation cycles goes in waves.  Maybe we are at the end of the appreciation cycle.  Anyone can have an opinion on this but no one really knows.

To put numbers behind the Condo lets assume you purchase a $250K condo in my market with a total cost (down payment and any closing costs) of 10% so $25K at the beginning of 2017.  With the 17.5% appreciation that condo was worth $293.75K at the beginning of 2018.  If you had to supplement the unit to the extent of $250/month (I would consider this fairly low suppplement for a 95% LTV) you have $3K out of pocket above incoming.  $293.75K - $250K - $3K = $40.75K.  ROI on the first year 163%.

What is the right choice?  it depends on your risk tolerance (will properties continue to appreciate in the near term) and are you willing to supplement a negative cash flow property?

Good luck

Lynda Evans · Answer

Welcome and you're definitely asking questions in a very good place!  I agree- multi family.  Listen to podcasts here on BP about house-hacking.  Also, is there a particular area you're looking to live?

Do you attend local REIAs?  Are you creating relationships with realtor/investors?  Do you know about creative financing?  Do you have a mentor?  All of these are not mandatory, however will strengthen you on your journey.

When I began, I networked at every REIA I could find; we have so many great ones with incredible value and education and great investors with different levels of experience.  Knowledge is your foundation and imperative.  Keep asking questions here and be on webinars and over 200 podcasts available-

First Time Investor - Condo or Multi-family?

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