my 2 brothers and I have inherited a condo in Scottsdale. Before mom passed there was a fire and gutted the entire condo, so insurance will basically give us a brand new condo from the studs out. My brothers want out, so I'm trying to decide do we sell or should I buy them out and rent it. here are the numbers: Comp just sold in early Feb for $205K - after renovation I assume $215K, which leaves us with about $103K in equity. I can rent for $1400 per month (top end), $200/mo for HOA and $150/mo for prop management. Insurance and taxes are pretty minimal around $500 total. Given the condo will be brand new, I assume the maintenance will be negligible for several years. My simple math is $1400 rent - $200 HOA - $150 Prop Mgmt - $70 vacancy (5%) - $50 maint - $40 taxes/ins. = $890 /mo before financing. Standard financing of 75% ($161K) and I'm left with about $120 /mo. Other financing option is a HELOC on my personal residence at 2.24% for $200K for a similar monthly payment but use $39K of the banks money - but rate is variable based on prime. I guess a third financing option would be to do self directed IRA for about $100K and get a mortgage for the balance. If we sell outright we can turn it probably in a few days and walk away with $35K each. What to do and what am I not thinking of? I don't own any investment property yet so this would be the first if I decide to keep it
$120/mo in cashflow is $1,440 per year. With a 75% LTV you have $54K of equity in the deal. That means you are getting a 2.7% yield on your equity. I would add that a condo has an added risk of a "special assessment" which could make this amount lower. I won't touch any property with less than 8% cash on cash.
You could probably take that $54K and buy one or two rent properties in greater Phoenix that give you far better return, avoid the condo risk, and diversify your holdings. Moreover, since this is an inherited property you would pay no capital gains if you sell now.
Also think about tax implications. You might want to sell it and then use the money to get a rental closer to where you live that you can manage on your own. Ideally a house where you don't have to pay condo fees.
@Greg Scott . Thanks Greg. Hadn't thought of the capital gains piece. What about the self directed ira option, seems this would increase the cash flow and capital gains would be taxed deferred for some time. Also, how do you factor in the assumed appreciation and gains in loan value ( ie paid down principal). Let's say I hold for 3-5 years.
@Theresa Harris . Good point. Feel like denver is a little pricier but I guess the right financing structure can get a deal done.
Originally posted by @Ben Grubb :
@Theresa Harris. Good point. Feel like denver is a little pricier but I guess the right financing structure can get a deal done.
If you can find a home with no condo fees or need for a property manager, that saves you quite a bit of money.