Condo purchase for rental???

Question

Hey all:

I have 9 single family homes as rentals.  I stay within a basic protocol of 3 bedroom starter homes that I can easily sell one day when I am ready to move on…  That said, I am looking at a few condos (that were coverted from apartments) for super cheap.  It is in my area that I have all of my homes so I am comfortable with the area. I can buy these for 30k and rent them out for $600+ per month.  I am typically buying homes for 70k and rent them for 1k per month.  So, the ROI on the condo is very attractive.  My concerns are:  Higher turnover (its basically an apartment), exit strategy (Is anyone going to purchase a fractured condo?)

In the end, I am all about the cash flow so I shouldn't be so worried about the exit strategy because I have long term plans.  But… I know the future is always uncertain so I like to have options… Thoughts?

Thanks.

Mike

Marc M. · Answer

If this is a recent conversion, the developers have a vested interest in keeping fees as low as possible to make it more attractive to buyers.  This is a well known tactic and their barebones budgets never encompass all the true expenses of a property.  If it's not a recent conversion, you need to check your docs and figure out what the association is responsible for and what the unit owners are responsible for.  If the association is responsible for the roof, boiler, landscaping, etc., it doesn't take a math genius to realize that $40/unit isn't going to cover it.  If the unit owner is responsible for everything and the association only picks up common area insurance and maybe a stormwater management system, then that isn't too farfetched, though still on the low side I would think, at least for my area.

Bob E. · Answer

Here is an idea.  Can you sell it for 45k and carry the financing?

If so you don't have to worry about HOA fees or taxes.  You could offer to sell if for 45k with 5k down, 9.9% interest and 180 months and the payment would be $429.60.  This would yield 19.49% ROI after factoring in their downpayment.

Otherwise it would be hard to exit this property by selling to an owner because they would likely have trouble getting financing.

Mike Williams · Answer

that is something I need to investigate - the special assessments. That is really the main thing holding me back. Just curious, why do you think i would be able to get financing on it?

Jesse T. · Answer

Look at the HOA financials and the condition of the buildings.  Also find out if they have been hit with special assessments.  It seems very unlikely the condo fee will stay that low long term.

Not being able to borrow on them, lowers the purchase market, but with the cash flow, that might not be a deal breaker.

One strategy you might use is marketing your SFH rental vacancies to your good condo tenants.

Fred Heller · Answer

Well then I would say go for it. It sounds like a great deal, and you can't argue with a 16% CAP rate.

In fact, I would say you are doing it exactly right. I talk to so many condo owners who want to rent them out. But their cash flow would be eaten up by the PITI and HOA fees.

The fact that you don't have that drag on your cash flow makes this a great deal in my opinion.

Mike Williams · Answer

the hoa is extremely cheap (like $40 per month).  there are 500 condos (basically 1 & 2 bedroom apartments).  I would own it outright (30k investment).  After taxes, insurance, HOA, prop mgmt fees, I would clear about $400 per month free cash flow on a 30k investment.

Fred Heller · Answer

I would be very leery of purchasing a condo for a rental. The monthly PITI plus HOA fees often make them a break even proposition at best. And you have little control over any future increases in the HOA fees.

If you own the condo outright, that's a different story. But you still have the (usually) large HOA fee which you would not have with a SFH.

Mike Williams · Answer

So, its a fractured condo.  There were in the process of an apartment condo conversion when the market dropped.  Now, half of the condos(about 250) are owned by a property management company that rents them as apartments.  The other 250 are owned by either individuals or investors.

Section 8 is a nice possibility as it would be a guaranteed check and a likely long term tenant.  I will have to look into that.  In general, I have never been interested in Section 8 but it could be worthwhile.

David Chwaszczewski · Answer

Is there an HOA?  I would look into that and see if you can get a copy of the latest meetings before you buy a condo for a rental.  HOA can make it hard for investors, especially if the board members reside in the community.   Have you considered S8 as a rental option?