Condo Rental - $0 Cash Flow - Appreciation Play

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Condo Rental - $0 Cash Flow - Appreciation Play

Peter Austin
Rental Property Investor · Hoboken, NJ · Member since 2019 · 10 posts · 4 votes

Hello All,

First time poster, just getting into RE investing. Wanted to pose a scenario to get your thoughts if you don’t mind. Thanks for reading.

SHORT STORY: Bought a 2 bed/2 bath condo 5 years ago. Looking to rent out next year, however: $0 Cash flow; 0% CoCROI; ROI: 13.6% (10 years @ 2% growth/yr). An appreciation/pay down play. Is this worth it?

Details:

SCENARIO: Bought a 2-bedroom/2 bath 5 years ago in Hoboken, NJ (across the river from Manhattan). At the time did a 10-year ARM @ 3.125% thinking we'd sell and move on 5-7 years down the line. However, after reading about rental properties and the low interest rates I decided to refi to a 30-year @ 2.875% last month.

CASH FLOW/CoCROI: I ran the numbers and including all fixed costs (mortgage, taxes, HOA, etc) and variable costs (repairs, capex and vacancy) I am break even (math below). If I include property management, I'm in the red but I plan on managing the place myself leveraging a handyman. Needless to say the CoCROI (cash on cash) is basically 0%.

Monthly Cash Flow

$3,500: Rent

($2,045): Mortgage

($626): Taxes

($325): HOA

($37): Insurance

($150): Capex

($150): Repairs

($175): Vacancy @ 5%

($8) Cash Flow (w/o property mgmt)

($350): Property Mgmt

($358) Cash Flow (w/ property mgmt)

ROI (rough math): The place is worth $725k today. If I assume a conservative 2% growth rate for the next 10 years (arbitrary # of years):

$901k: Sale Price 2031

($70k): Sale Expenses 2031

($367k): Loan Payoff 2031

($197k): Invested Capital (initial 20% down payment + accumulated equity up to 2021 less fees if I were to have sold it)

+267k profit

ROI = (267/197k)/10 years

ROI = +13.6% (if I assume a 3% growth it's closer to 28% to 29%)

Is it worth getting into if you’re breakeven on cash flow? Again, thanks for your thoughts.

Peter

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Mack BensonPro Member
Rental Property Investor · Woodbury, MN · Member since 2018 · 299 posts · 299 votes
6y

Coming from a mindset of "if it don't cash flow, let the grass grow," I'm not a big fan of a $0 monthly return and counting on future appreciation. That is especially true today when the future is very uncertain. I'm not saying this is a horrible deal but it is a risky play and for a first deal it could cost you in the end. What happens if things go down the crapper in the next year and your property loses 10% of it's value, now rather than starting at $725k you are starting at $625.5k. What if, because of the pandemic, rent goes down 5%, that's a conservative approach some of us are taking in the multifamily world? Now rather than taking in $3,500 you are only taking in $3,325. I know some operators are underwriting to a 5% rent decrease and 10% economic vacancy over the next 12-24 months.

Now, in a different hypothetical, how much is left on your mortgage, do you currently have any equity, and what would it look like to sell the condo and use the proceeds to purchase a rental that has a decent positive cash flow? This may require you going out of state because two of your numbers look to be killing the deal, the taxes and HOA.

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  • Mack BensonPro Member
    Rental Property Investor · Woodbury, MN · Member since 2018 · 299 posts · 299 votes
    6y

    Coming from a mindset of "if it don't cash flow, let the grass grow," I'm not a big fan of a $0 monthly return and counting on future appreciation. That is especially true today when the future is very uncertain. I'm not saying this is a horrible deal but it is a risky play and for a first deal it could cost you in the end. What happens if things go down the crapper in the next year and your property loses 10% of it's value, now rather than starting at $725k you are starting at $625.5k. What if, because of the pandemic, rent goes down 5%, that's a conservative approach some of us are taking in the multifamily world? Now rather than taking in $3,500 you are only taking in $3,325. I know some operators are underwriting to a 5% rent decrease and 10% economic vacancy over the next 12-24 months.

    Now, in a different hypothetical, how much is left on your mortgage, do you currently have any equity, and what would it look like to sell the condo and use the proceeds to purchase a rental that has a decent positive cash flow? This may require you going out of state because two of your numbers look to be killing the deal, the taxes and HOA.

    3Reply
  • Gabe C.
    Investor · San Francisco, CA · Member since 2016 · 192 posts · 95 votes
    6y

    I wouldn’t buy something like that unless it was virtually guaranteed to appreciate, but since you already have it, that’s a different story. If your financial situation isn’t precarious and you can deal with extra expenses or buying an occasional appliance, it’s still nice to have someone else pay off your mortgage for you. If you can afford to ride it for a year or two to see how it goes, might be worth not making a hasty decision. Maybe there’s even some ways to add value to increase rents? For me, it would largely depend on the Age/swankness of the property and neighborhood. Is it a gem? If not, it’s probably better to move the money into something that works a little harder for you, like Mack was recommending. 

    2Reply
  • Peter Austin
    OP
    Rental Property Investor · Hoboken, NJ · Member since 2019 · 10 posts · 4 votes
    6y

    @Mack Benson

    Hi Mack, first off thank you for taking the time to listen and reply I very much appreciate it. You make some insightful points.

    Bought the place for $659k have $492k mortgage. Gross equity is $233k right now (assuming $725k holds). Wholeheartedly agree that if I could go out of state and do the leg work could find a better deal. Read David Greene’s book on long distance RE investing but I have a hard time investing where I can’t physically see the property.

    Thanks again!

    Peter

    0Reply
  • Peter Austin
    OP
    Rental Property Investor · Hoboken, NJ · Member since 2019 · 10 posts · 4 votes
    6y

    @Gabe Cinquepalmi

    Hi Gabe,

    Thanks for listening and the advice, appreciate it.

    It is a gem actually. I am the top floor (5th floor) 7 blocks from the Hudson River. I have a view of the NYC skyline including the Empire State Building, Freedom tower and Hudson yards. I was thinking just what you said, see if I can get the rent in a year and if so ride it out for a year or two and see. Worst case I can sell and likely (hopefully) the market is back in full swing assuming people want to be near or in NYC area. I just bought a new HVAC and washer/dryer. Building was built in 2002 so in pretty good shape.

    Again appreciate it!

    Peter

    0Reply
  • Mark F.
    Rental Property Investor · Northern NJ · Member since 2019 · 673 posts · 677 votes
    6y

    I'm very familiar with that area and in your shoes, if I was in a decently paying job I'd rent it out and do the appreciation/loan paydown play (which I normally hate). Let them pay the mortgage over the next umpteen years. 

    Now if you need the money then thats a whole different story. Depends on your goals and current financial situation. If you're set, hold it (I assume you are cause you bought in that area lol). If not, sell it. Hell you could always get a heloc down the road and pull your money out! Oh not sure how long its been since you moved out but don't forget about the 2/5 rule. You could sell in that time frame and get your equity tax free.

    Way more hassle but airbnb it too when the pandemic is over? Much higher returns. I do work for some airbnb in the Hoboken/JC area. If your hoa allows it which i assume is a fat no. 

    2Reply
  • Justin Thorpe
    Member since 2020 · 437 posts · 675 votes
    6y

    @Peter Austin

    If 350 a month does not make a dent in your pocket, I'd keep the property. I also feel you are quite conservative in your assumptions on vacancy, Capex and repairs. So the 350 may be way too high.

    I won’t employ a PM. I own a property in UES and have managed it remotely from the west coast. I get a max of 1 - 2 repair requests a year. They have costed me a max of $500 a year in aggregate. I don’t have much cash flow coming out of that property but it’s positive and I am keeping it so my kids can use it, if they ever choose to move to Manhattan in the future.

    I think Hoboken will continue to rock post Covid-19. It’s a terrific alternative for young people who choose to not live in Manhattan. Short term you may have to watch the glut in condo developments in Manhattan and the falling rents in the area and how that sits with property values and with renters vis a vis their decision to live in Hoboken vs Manhattan.

    1Reply
  • Gabe C.
    Investor · San Francisco, CA · Member since 2016 · 192 posts · 95 votes
    6y

    @Peter Austin

    Yeah, sounds like a potential keeper. You'll never have problems renting a place with a view like that. You can probably keep that vacancy contingency and count it as $150 cash flow. That might be enough to cover the occasional appliance. If it's only 18 years old with a new HVAC/W&D, your maintenance costs should be low too. Good luck with it!

    0Reply
  • Dan Schwartz
    Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
    6y

    @Peter Austin, I'm not familiar with your market, but the five-year appreciation of only $66K caught my eye.  It lags the local index quite a bit.  Will that change and will you see the appreciation you seek over the next 10 years?  Sometimes houses we buy and enjoy for ourselves are not the best investments.

    Data source: https://fred.stlouisfed.org/series/ATNHPIUS34017A

    1Reply
  • Scott Robinson
    Los Alamitos, CA · Member since 2017 · 25 posts · 17 votes
    6y

    @Peter Austin sell it and buy a place with the money you get back that will cash flow AND appreciate in value. If its 0 cash flow on paper then there is a good chance it will be negative at some point if not always. Just takes a hail storm to need to change the roof or a water heater floods the condo to make this a horror story.

    1Reply
  • Peter Austin
    OP
    Rental Property Investor · Hoboken, NJ · Member since 2019 · 10 posts · 4 votes
    6y

    @Mark F.

    Hi Mark,

    Thanks for the response and the advice on the 2/5 rule...just looked it up really interesting. I do need the $$ for a down payment but worked out a private loan that’s beneficial to both parties. It’s an added yearly expense but the interest arbitrage is there.

    As for air bnb you're correct that's a no per the HOA.

    Peter

    0Reply
  • Peter Austin
    OP
    Rental Property Investor · Hoboken, NJ · Member since 2019 · 10 posts · 4 votes
    6y

    @Justin Thorpe

    Hi Justin,

    Thanks for the reply. Feel like you are reading my mind. I love that idea of keeping it for your kids or it basically being their college education if you sold it down the line. There’s no need for me to get a PM since I know the property, live nearby and I know handymen that can fix things if I give them a call. Only included to go by the book (Brendan Turner’s book).

    Pre COVID, Hoboken was a thriving city...it still has a lot to offer just hoping more restaurants don’t close. I’m hoping that people realize how close Hoboken is an alt to the city...great place.

    Thanks,

    Peter

    0Reply
  • Peter Austin
    OP
    Rental Property Investor · Hoboken, NJ · Member since 2019 · 10 posts · 4 votes
    6y

    @Dan Schwartz

    Hi Dan,

    Thanks for the response and sending that link. I assumed 2% growth per year to be conservative, I believe it to be higher than that. I stole a page from B. Turner’s approach.

    If any area in Hudson county is going to see appreciation, I’m convinced it’ll be Hoboken. Since Pre COVID, Hoboken is a high demand area close to NYC especially for younger people and couples. I believe things will come back to normal over the next few years and that demand will continue. Question is will the rents hold, that I need to wait and see.

    Appreciate the point of view.

    Thanks,

    Peter

    1Reply
  • Henry Lazerow
    Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
    6y

    Sell it and use the funds for something that atleast cashflows a bit. $0 cashflow can easily turn into negative cash flow if taxes go up, etc.

    0Reply
  • Jason Pedersen
    Member since 2020 · 27 posts · 15 votes
    6y

    I'm over in California and in a similar situation to you. My wife and I purchased our home last year for $690k. After some upgrades and appreciation, it's probably $730k now. We are doing a refi now to save us ~$200/month in mortgage. I still need to do some more research on rents here (SFH in a suburb outside LA), but we are probably looking at a wash on cash flow. Doesn't sound great, but when I look at someone else paying over $850 of principal (and that's assuming we rent it out today), it starts to look pretty attractive! Then there is continued appreciation...

    I guess the biggest question for you (and for my wife and I!), is what is the opportunity cost of keeping your equity in the condo? I know HELOC can help mitigate some of that, but not all of it and not without interest. Are you going to be moving somewhere in the same area, but paying more? Or maybe downsizing to something cheaper and you can get your cashflow there? Are you moving out of the area (or state?)?

    In case you are curious, after we've lived in our current residence for two years (for tax reasons) my wife and I are considering downsizing to a cheaper place in the next town over (closer to where I work and a "nicer" area we just would like to live in more) and doing a live in flip. Hopefully that project will take two years and then we will have some options of two rentable properties or selling one (we will have $250-300k equity in the original place). 

    We have two young children (3yo and 1yo), which makes everything just a touch more complicated (but fun!), but considering property values where we live and the minimal cash flow potentials, it currently feels like our best bet in terms of building wealth while still providing our family with the lifestyle we want for them.

    1Reply
  • Brian Kantor
    Investor · Brooklyn, NY · Member since 2019 · 185 posts · 205 votes
    6y

    Hey, @Peter Austin. A lot of really good ideas on this thread already, and I support the sentiment of @Scott Robinson. With low to no cash-flow coupled with the unknown long-term effects of covid on the NYC metro area real estate prices, you do run the risk of both the property value decreasing and the rent decreasing.

    I'm not saying that keeping it is a bad idea, but it is not without risk.

    Since lockdown a ton of companies have gone remote either temporarily or permanently. Many people will wonder why they should be paying a premium to live in or around NYC when they no longer need to commute. Many young families that had been planning to move out to the burbs at some point in the next 5 years are doing it now. Young people are moving back with their parents and saving all of their previously spent rent money,

    I live in Brooklyn and am on Street Easy all the time watching rents drop. $3500 apartments last summer are now renting for $2500 in many cases. Purchase prices will likely see dips as well.

    The above makes me question the stability of your property's value in Hoboken (which I know well). Selling your apartment now if you can, and using your equity to buy something in a more investor-friendly market isnt a terrible idea. (I invest remotely in Detroit, and have followed David Greene's Long Distance Investing advice.)

    I'd also be careful on assuming that becoming your own property manager is just about having a handyman on-call. There is more to it than that, and if at some point, it becomes too much of a headache, you may decide you need to out-source this role, and your expenses will go up further.

    Again, I am not saying to sell or keep, but to think everything through before you decide. Good luck!

    1Reply
  • Chelsea Shapiro
    Real Estate Broker · Member since 2019 · 27 posts · 11 votes
    6y

    @Peter Austin lots of good thoughts and ideas on this thread! I have a similar situation in the Bellevue/Seattle area. We're going to keep it as an appreciation play since Google just bought a building down the street.

    The only other thought I'd add is what is the condo market doing right now where you're at? Despite the SFR and MF market being red hot right now, condos are seriously lagging in my area since so many people dont want to live in urban areas if the amenities are closed etc... I think it will take a while for that trend to reverse so that influenced our decision too.

    0Reply
  • Scott Robinson
    Los Alamitos, CA · Member since 2017 · 25 posts · 17 votes
    6y

    @Peter Austin just wanted to add that when you run numbers for a property you should always include the cost for property management. The reason for this is that your time is worth money. This means that when you do your own management you arent really saving money because you are spending it in the form of time. One of the most important things a property manager does is ensure that the right people are accepted as tenants and the wrong people are not. If you make a mistake in this process it can cost you way more than you would ever spend on a property manager. This cost can come from eviction or from repair costs due to the tenant trashing your olace. With no cash flow to help out in these situations you are looking at significant risk.

    1Reply
  • Account Closed
    Member since 2019 · 1k+ posts · 1k+ votes
    6y

    @Peter Austin

    Curious what led you to believe 2% appreciation was both likely & conservative? Not suggesting it won’t happen just curious what went into that on your end?

    0Reply
  • Justin Thorpe
    Member since 2020 · 437 posts · 675 votes
    6y

    @Scott Robinson

    You bring up a very good point. Even in my experience the max value (frankly the only value) PMs have bought is tenant scouting and searching. It is a valuable piece. So perhaps what may be required is a great listing agent vs a PM.

    On a day to day basis, I own & manage a property sitting here 3000 miles away and several others that are at least 40 miles away and it’s been working well for many years.

    0Reply
  • Peter Austin
    OP
    Rental Property Investor · Hoboken, NJ · Member since 2019 · 10 posts · 4 votes
    6y

    @Jason Pedersen

    Thanks for sharing, feel like your my west coast twin! Ha! It's interesting because we live in such high priced areas and we have the opportunity to deal with the "devil we know" so to speak. While it may be flat in cash flow, you know the property and the history which provides a level of comfort. Like you, I've done some upgrades (albeit smaller), I also know what might be an issue down the line and my HOA is very well funded. All that helps guide my decision.

    My wife and I have a four month old and we plan on buying a house.... where, we don't know yet. I worked out a private loan for 3-4% to use as a down payment. For you and me, while certainly possible to invest in other areas, it's much more comfortable to be able to invest locally. Assuming a 2%-3% appreciation, your talking a 14%+ ROI which is still higher than the geometric average return of the S&P (again assuming cash flow is not negative).

    That last paragraph of yours sums up exactly my thinking. It also sounds like you are doing the right thing. Best of luck to you!

    Thanks,

    Peter

    1Reply
  • Peter Austin
    OP
    Rental Property Investor · Hoboken, NJ · Member since 2019 · 10 posts · 4 votes
    6y

    @Kris H. I looked at the case shiller index over the last 20 years and US housing prices increased around 3% per year. Based on that I took a haircut to be conservative.

    1Reply
  • Peter Austin
    OP
    Rental Property Investor · Hoboken, NJ · Member since 2019 · 10 posts · 4 votes
    6y

    @Brian Kantor, thanks for the reply. All good points you make. Question for you, how is the long distance RE investing going? Why did you choose Detroit?

    0Reply
  • Brian Kantor
    Investor · Brooklyn, NY · Member since 2019 · 185 posts · 205 votes
    6y
    Originally posted by @Peter Austin:

    @Brian Kantor, thanks for the reply. All good points you make. Question for you, how is the long distance RE investing going? Why did you choose Detroit?

     So far so good. My property is not on the market yet, but my video walkthrough of the house went well, the closing was easy, and I'm using my agent to keep my PM in check and vice versa. Detroit has a great price-to-rent ratio, low cost of entry, high percentage of renters, a growing economy, and plenty of short flights there to and from NYC if/when I need to visit. 

    There are plenty of great markets out there. I wanted something with a good amount of universities and hospitals, relatively close to NYC, and a blue collar economy that might not suffer as much from suburban flight due to covid.

    0Reply
  • Peter Austin
    OP
    Rental Property Investor · Hoboken, NJ · Member since 2019 · 10 posts · 4 votes
    6y

    @Brian Kantor, very interesting. Thanks for sharing will check it out. Good luck, sounds like you did some good research.

    0Reply
  • Brian Kantor
    Investor · Brooklyn, NY · Member since 2019 · 185 posts · 205 votes
    6y
    Originally posted by @Peter Austin:

    @Brian Kantor, very interesting. Thanks for sharing will check it out. Good luck, sounds like you did some good research.

    No problem. It's ALL about the research. I interviewed nearly 20 agents and nearly 20 PMs before I settled on my picks. And I think for property #2, I may pick a different PM so that I can watch them in action side-by-side.

    0Reply
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