50% Rule on a Condo. Would you do this deal?

10 Replies

Here are the deal details

1 bed 1 bath condo. 800 sq feet. The unit doesn't need any updating.

Best part of the condo is location. Great location, I've lived in the area for 7 years. Pretty confident in the $ rent amount and limited vacancy.

Price 80k
Closing costs 2k
20% down
Cash out of pocket $20k
Mortgage 62k
Taxes $1200
HOA $170

Rent $900
50% rule - $450
HOA $170
Taxes $100
Mortgage $350

Profit (loss) ($170)

Considering this is my first deal I like the fact that the purchase price is relatively low, the maintenance should be manageable with it being a condo, and the property is within minutes of my primary residence.

So, with the above numbers this deal leaves me with $320 a month for expenses. This deal is profitable with 30% going to expenses. Do you do this deal?

Thanks you for your opinions!

HOA fees and taxes are part of the 50%, so you're double counting those. So, this actually looks like its cash flow positive $100 per month. That's $1,200 per year, which gives you a cash on cash return of 6%. Too low, IMHO. Would be higher if you manage it yourself. Beware of HOAs coming in with special assessments and restrictions on rentals that make your life difficult down the road.

From the surface it looks decent...however I would get an insurance quote and see if you can squeeze any information about delinquency rates in the HOA. If a lot of people are behind it could spell trouble in the future.

Also condo's are difficult to finance right now through traditional means, have you found a lender willing to do one in your area? Did you ask what kind of extra points you'll pay for a condo?

Have you checked to see if there are any other fee's such as for shared lighting or other fee's to promote higher property values in the surrounding area.

How are the recent sales? Banks and appraisals for condo's can be a bit underwhelming at times!


My 2cents.

Also look if the condo has at least 51% of the units owner occupied. If not, you will have a helluva time getting a conventional loan on it.

I take it this is in SLC? If so, good market likely to see strong long term growth IMO. I've spent quite a lot of time there, like the place.

I looked at a condo deal locally recently. Jon is right about looking out for condo issues. Another thing to look into in that regard is the % of investor owned units etc. If a certain % of units are investor owned there are issues potential buyers may have obtaining financing which lowers resale value.

Without knowing the SLC market overly well (being based on educated assumptions basically) it seems like a decent enough deal. This is the sort of in-between world I live in. It's neither a heavy cash flow property like many on BP look for nor a break-even/cash-flow negative property that appreciation players often take. At the end of the day it's your chunky down payment that drives the cash-flow though. Personally, in a market like SLC sounds decent on the surface but I would try to see if I could find a comparable return in a non-condo situation. The idea of ceding control and adding an element of uncertainty frustrates me. For people looking for more hands off set it and forget it type investments I think they can make sense.

The low buy in costs allowing you to be able to dip your foot into the water and get comfortable investing could indeed be a good selling point. I know once I became a landlord for a bit I was much more comfortable getting into bigger stuff. So if it is the difference between doing this or being to uncomfortable to take on something bigger then it's probably worth it to do it condo or not.

Hey Bryce! I'm newer to BP as well and am currently considering roughly the same thing (2bd/1bas) in the south suberbs of Seattle. So I am very interested what you end up doing. I have not pulled the trigger yet but here is what I found which is close to yours.

Purchase: 85k
Loan: 68k
Taxes: 1200/yr
Insurance: 500/yr
HOA: 3300/yr

So Monthly break down is this:

Market rent $950
Mtg pmt: 355
Tax/ins: 142
HOA: 275

Leaves me with $178 in cash flow and a cash on cash of around 10% return for year 1.

This potential property for me would me my first and I would manage it as well. My concerns are HOA friendliness and finding renters. I just want to get my feet wet too.

Thanks for the responses.

Jon, I would manage the property myself. I have yet to find a property here in SLC area that even comes close to 6% cash on cash. I'll discuss that more later in this post.

Josh and Rafael, Im going to find the answer to all of your posts and come back to this forum.

George, thanks for your comments. In the SLC area this is the first deal that I have even really been able to consider. Granted, I have only been looking through the classifieds and MLS but I have yet to find a SFH that would even meet the 1% rule. I would prefer to find a SFH. However, the numbers just don't make sense in my surrounding areas. Take a two bed two bath in the Sugar House Area. Best case scenario I get $1800 a month rent. Putting my purchase price at $180k. The two bed two bath is going somewhere from 250k to 300k. Homes in Sandy/Layton that rent for $1200 are going for $200k+

If this doesn't work I will give direct marketing campaign a shot. However, after looking in the SLC market for several months now I'm starting to wonder if in the SLC area prices are just too high, with rents too low.





Hello,

I currently own a condo in the Seattle area and have been learning that the Board, Dues and HOA can make make or break a deal. When we bought this property all was good. The HOA was worried about everyone defaulting on their loans and as a result they weren't really enforcing rental restrictions. When the market came back, they hired a new management company and are tightening the reigns. The lesson we've learned is that it isn't just the current state of things that matters. How are the cash reserves of the HOA? If the HOA hast planned well, just one assessment could destroy all of your projections.

Find out exactly what their rental cap rules are and make sure they work for rental purposes and find out if there are any grumblings about changes to their policy. Some have a designated number of units that they sell as "investment properties" and you need to know all of these things before pulling the trigger. Some have waiting lists before you can rent and force you to the bottom of the list if your tenant doesn't resign a lease. In 2010 I wanted to rent a condo, which I bought at the peak of the previous Seattle boom. I was getting married, but the waiting list to be able to rent was taking about 2 years! They were actively fining people and I was forced to sell in 2010 and took a hit. The upside is that we haven't had board come after us yet, our unit cash flows well and our unit rents within one day of listing.

When you buy a condo as an investment, there is much more to the deal than just the numbers. My 2 cents.

Chris McCune, Real Estate Agent in WA (#119642)
Originally posted by @Bryce Till :
Thanks for the responses.
I have yet to find a SFH that would even meet the 1% rule. I would prefer to find a SFH. However, the numbers just don't make sense in my surrounding areas. Take a two bed two bath in the Sugar House Area. Best case scenario I get $1800 a month rent. Putting my purchase price at $180k. The two bed two bath is going somewhere from 250k to 300k. Homes in Sandy/Layton that rent for $1200 are going for $200k+

If this doesn't work I will give direct marketing campaign a shot. However, after looking in the SLC market for several months now I'm starting to wonder if in the SLC area prices are just too high, with rents too low.

You are going to have a very difficult time finding a property, which matches the 1% rule, especially in the markets you used in your example. You might still find a 1% house in Rose Park, or Magna, but it will take some real searching. I think it will be a while before we see prices in the 1% area again.

I didn't see where you are personally living. If you don't have a personal residence, my recommendation would be to buy a duplex in the South Sugar House/Brickyard area. It won't meet the 1%, but it will appreciate better than the areas, which will hit the 1% "rule." You should be able to find a legal duplex for around 220K, which will rent for 850-900 a side. Live in half of it for long enough to save another down payment, rinse and repeat.

Jacob G,

Thanks for your comments. Considering your comments what area or strategy are you implementing in SLC to find deals?

Regarding the duplex, I live in a condo down town and sub lease one room. I pay about $600 cash out of pocket for all my housing expenses (mortgage, cable, utilities etc), not a bad deal.
I'm not really interested in moving into a new duplex. but would love a deal that rents for 1800 and sells for 220k. I just haven't found one.

Thanks,

Bryce



Originally posted by @Bryce Till:
Here are the deal details

1 bed 1 bath condo. 800 sq feet. The unit doesn't need any updating.

Best part of the condo is location. Great location, I've lived in the area for 7 years. Pretty confident in the $ rent amount and limited vacancy.

Price 80k
Closing costs 2k
20% down
Cash out of pocket $20k
Mortgage 62k
Taxes $1200
HOA $170

Rent $900
50% rule - $450
HOA $170
Taxes $100
Mortgage $350

Profit (loss) ($170)

Considering this is my first deal I like the fact that the purchase price is relatively low, the maintenance should be manageable with it being a condo, and the property is within minutes of my primary residence.

So, with the above numbers this deal leaves me with $320 a month for expenses. This deal is profitable with 30% going to expenses. Do you do this deal?

Thanks you for your opinions!


 

To be perfectly honest, I have 2 condos which run almost the exact numbers as what you posted. I am going to be selling them hopefully this year and moving towards houses. I am ok with restrictive covenants. Not so much with HOA. In addition to the property assessment going up, you also have to worry about the HOA dues. While I realize that this goes towards insurance of the structure, and roofing, paint, pest control etc... I do not have control over when it is spent, who is hired and how the price is negotiated.

before you purchase- do yourself a favor and sit in on one of the HOA meetings first. These will give you a flavor of what to expect before you have committed financially/contractually.

Sebastian

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