Hi everyone,

I have a two part question to ask and I highly appreciate everyone's opinion.

My wife and I are buying our first property in Boca Raton, FL. The money was lent to us at no interest (a total of $224K) which is nice! We found a 3/2 townhome that listed at $195K and we're getting it for 190K.  We originally offered $182,500 but the owner counteroffered at $190K bc the previous contract (which fell thru)  was appraised by the bank it at $190K but we have no proof of this. Our max was $188 so each agent agreed to give us $1k each from their commission to us.  The community has a 20% cap on rentals which is at capacity now so we'll live at the property until we can rent it, possibly for one year. Once we are able to rent it, we can get up to $2,100/mo. Here are the two questions:

1. The inspection was done today and the inspector recommended we asked for a $2k contingency since he found moisture on a wall near a window and there's a possibility of mold. The owner of the property is hard headed and my realtor thinks it's a bad idea. How do I proceed?

2. Assuming we go forward with the purchase, should we use the remaining cash to renovate the property?

Thanks in advance!

it does not sound like you will make any money on this unit as a rental

how long does the property people say you could rent ? Also if others are renting properties, what’s to say they will give up renting so the 20% goes down and you can start to rent.

Does your lender know that the IRS will probably impute interest  on the loan

Originally posted by @John Thedford :

Does your lender know that the IRS will probably impute interest  on the loan

I don't know what this mean honestly.

Originally posted by @John Thedford:

it does not sound like you will make any money on this unit as a rental

I runned the numbers and if I self manage, it should cashflow $150/m

I considered $1000/m (loan) + $360/m HOA + $2400/y taxes + $750 insurance + 10% cap exp. + 8% vacancy rate. I think I am being very conservative with number. Am I missing anything?

Originally posted by @Fareed R. :

how long does the property people say you could rent ? Also if others are renting properties, what’s to say they will give up renting so the 20% goes down and you can start to rent.

 I am going to call Monday morning the condo management company to find out for sure.

@Francesco Barbati who is loaning you the money? You both need to be fully aware of the tax implications. The IRS will tax the gift, you can research imputed interest.

I don't understand why you would purchase an investment property with such strict rental rules. What if the building stays at 20% rented for the next 5 years? 10 years? Even if it dips below 20%, how is the next allowable rental chosen? It doesn't seem like you've done your homework.

I don't see maintenance included in your numbers, either. $150 or less cash flow wouldn't work for me on such a large investment, personally. I cash flow more than that on an $80k condo.

@Francesco Barbati

The IRS may impute interest on the lender meaning they may have to pay tax on interest even if they received none. I believe the threshold is $10,000. I have an attorney friend that loaned his daughter a lot of money through the years. In his last audit, he got hammered HARD with imputed interest calculations which meant he had to pay tax plus penalties and late fees on interest he never received. As to your deal, I don't see any bargain. You make your money when you buy.

Originally posted by @John Thedford :

@Francesco Barbati

The IRS may impute interest on the lender meaning they may have to pay tax on interest even if they received none. I believe the threshold is $10,000. I have an attorney friend that loaned his daughter a lot of money through the years. In his last audit, he got hammered HARD with imputed interest calculations which meant he had to pay tax plus penalties and late fees on interest he never received. As to your deal, I don't see any bargain. You make your money when you buy.

 Thanks for this info. I have a question: was your daughter's friend paying back her father and recording the payments? 

what does a 20% cap on rentals mean?  Only 20% of units can be rented?  Rest must be owned?

Originally posted by @Sara K. :

@Francesco Barbati who is loaning you the money? You both need to be fully aware of the tax implications. The IRS will tax the gift, you can research imputed interest.

I don't understand why you would purchase an investment property with such strict rental rules. What if the building stays at 20% rented for the next 5 years? 10 years? Even if it dips below 20%, how is the next allowable rental chosen? It doesn't seem like you've done your homework.

I don't see maintenance included in your numbers, either. $150 or less cash flow wouldn't work for me on such a large investment, personally. I cash flow more than that on an $80k condo.

Very good points and legit questions.

I am going to call the accountant asap to figure this out.

About the strict rental rules, the plan is to live there for a while (probably 6 to 12 months) because it is 5 mins from work and next to a family member that can help my wife with the kids (a toddler and a newborn) and it is in a great location (5 mins from Whole Foods, a big university, a big hospital, a huge mall, beach, Publix and 10 mins to Costco and a financial center). In the worst case scenario I am ok living there longer than expected honestly. 

I included maintenance in the cap ex since exteriors are all taken care of from the HOA. Thanks for the input!

Walk away

As long as you are prepared to accept that it is and may never be more than a personal home you are fine. Personal homes are a life style choice not a investment. In a few years you can always sell if necessary.

Originally posted by @Thomas S. :

As long as you are prepared to accept that it is and may never be more than a personal home you are fine. Personal homes are a life style choice not a investment. In a few years you can always sell if necessary.

 You are right, I read the little purple book and I should try to fool my self... Thanks for your opinion!

@Francesco Barbati Initially it seemed like a good deal to me, but that 20% cap and high HOA fee make me pretty wary. I would walk away from it myself, unless you are cool with the potential of not being able to rent it out for a while. Good luck!

Originally posted by @Lindel Turner :

Walk away

 I have time until Friday now to decide.

Originally posted by @Taylor Chiu :

@Francesco Barbati Initially it seemed like a good deal to me, but that 20% cap and high HOA fee make me pretty wary. I would walk away from it myself, unless you are cool with the potential of not being able to rent it out for a while. Good luck!

 Thanks so much! This is exactly my thinking process... I am ok living there, it is like a perfect spot for me. I wish I was able to rent it out whenever but it is not the case. I have to make the decision considering it an house and not an investment.