I need a sanity check please! I see too many condo deals like this in my area (Reno, NV) and keep passing because it looks like these wont cash flow. Am I doing this right, can somebody check my math and logic please? It just seems like the 50% rule should be less for condos, although when I asked before, I was told to use 60% for condos! Is that right? These numbers are estimates, for screening.
My goal is buy and hold to generate passive cash flow from rent.
The following looks painful, is that right?
Purchase Price = 64,500
Finance 80% = 51,600
mortgage payment = 324 (includes taxes, not insurance)
HOA = 155
Average Rent = 690
50% rule = 345
My cash flow estimate calculation:
Rent - mortgage - HOA - 50% rule = est. cashflow
690 - 324 - 155 - 345 = Pain
Thanks in advance!
A couple of points that you are overlooking that should work in your favor
-- taxes should be included in the 50% of expenses, so when you're subtracting out the mortgage payment, just count the P&I.
-- the HOA should be covering exterior maintenance and maybe some utilities (i.e. water for my condo) which should cut down on how much you need to budget for those. (Of course, you hope they budgeted appropriately or they might jack up the HOA fee when capital expenditures come around)
@Brett Russell - Thanks for the quick reply and I will include only P&I in my mortgage number! That will help.
Assuming the HOA is properly ran (it's a professional one, hundreds of units) then I would need to dig a bit more into details. 50% seems high for condos as some of the opex and capex expenses is reduced compared to SFR, assuming competent HOA. Would 35% - 40% be better as a rule of thumb? I know I would still have to do my due diligence; I'm just looking for a better way to screen condos based on what others have experienced.
The HOA being over 20% of rent is the real issue here.
@Steve Babiak Thanks Steve! That gives me a different way to measure the HOA.
My comment wasn't a metric by which to measure the HOA fees; but when it is 20% of rent that is a lot of rent money that you have to give up. I don't invest in places with HOA fees, so I can't speak for what a good number would be for any HOA fee - but I know a bad number when I see it :)
I rent a condo for $1,600/month and I pay $295 in HOA, which comes out to 18.5% of the rent. I would never invest in a condo, but my wife and I used to live there and instead of selling, we decided to keep it as a rental.
My brother rents a place for $1,200/month and his owner pays $500/month in HOA, which comes 42%!!
@Sharad M. - I don't think any of those would be considered profitable rentals (unless they were already paid off).
@Steve Babiak I agree. We have some decent equity in our condo and it is in a very desirable area, so we figured we keep it as a rental and if it doesn't work out, we will put it on the market to sell.
Sound like my numbers are sane. Condo's in my area would likely be a painful investment.
Free eBook from BiggerPockets!
Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!
- Actionable advice for getting started,
- Discover the 10 Most Lucrative Real Estate Niches,
- Learn how to get started with or without money,
- Explore Real-Life Strategies for Building Wealth,
- And a LOT more.
Sign up below to download the eBook for FREE today!
We hate spam just as much as you
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing