Starting with a small condo to learn the basics, good idea?

Question

I’m looking into start investing in real estate somewhere close to where I live (Redmond, WA) but since I have never bought a property with the purpose of renting it ( the only thing I have ever bought is my house) I wonder if it’s a good idea to start with one of the few 1 bedroom, 1 bathroom condominiums that have recently popped up in downtown Redmond and learn the basics of owning a property and renting it. Would be looking for a small cash flow from it ($100-$200?) and hoping for appreciation.

Since these properties are not that expensive ($280,000 to $380,000) I feel like I can put 20% down and I can handle not been able to rent it for a few months (worst case) without going broke.

I’m still learning how to run the numbers to understand if these are good deals but I wonder if the overall approach to start with is good at all?

Julio Casal · Answer

Thank you Jaysen! I started using the DealCheck app on these condos and indeed it pops up more than $500 in negative cash flow in all of them, which is eye opening. I’ll keep learning how to estimate the right numbers in order to find an actual good deal.

Julio

Jaysen Medhurst · Answer

@Julio Casal; starting small and using it as an opportunity to learn is a great idea. Your specific strategy does have a few challenges, though.

• Condos can be very difficult to make cash flow due to the HOA fees. This often eats up all/most of your profit. Additionally, they can go up at anytime or you may get hit with a special assessment, which can easily wipe out months or years of profit.
• Due to the price point, these units are unlikely to make good rentals. You'll have to hit the 1% rule (or much better due to HOA) to make any cash flow. The problem is that if someone can afford $3k/month in rent, they can easily afford a $300k condo. Therefore, you're going to have a very small tenant pool. Larger in Redmond then a rural area, sure, but still quite small.

Take time to really understand how to underwrite rental properties. Do a bunch every week using the BP calculators. Post some of the deals to the forums and the community will double-check your assumptions and math.