Deal Review Help - Negative Cash Flow Luxury Condo, Good Price

4 Replies

Hi everyone,

I am new to investing in real estate but somewhat educated with a deep finance background. I have stumbled across a property and structured a deal that could make a lot of sense, but there are some glaring deal killers if you took it for a rule of thumb approach. I get the sense I'm doing a stupid deal here, and will look back and wish I asked for advice, so hoping someone could shed some light.

Property is in the nicest luxury highrise building in a tier 2 city outside of a major city. Constructed 5 years ago and structured as a condo with HOA/common fees of $1,500/mo (yes that's right). Property taxes are another $1,600/mo. Very comparable 3 bedroom units in the building sold for $950k-$1.1mm a few years back. This particular unit has been on market for $1.2mm, $1.1mm, $1mm, and most recently $925k. Last sold unit was in the $800's. There have been some expensive add's like high quality paint, high end appliances, and really nice carrera marble since the purchase.

Seller owns it outright and is bleeding $3.2k/mo. (per HOA and taxes) and does not live there. It has been vacant for about a year and he doesn't want to deal with managing a rental, just wants it sold.

My question is would you completely stay away, at any price, given the large cash drag? My sense is that these condos are going to continue to trend down in price until they bottom out somewhere way lower than the asking price. Supply in the area has increased a bit and I think it's being reflected in prices. I am not an expert here though, and given how nice these are I can't imagine them selling in the $600's for 3Br.

Per MLS I can rent the unit out for $5.0-$5.3k/month and get someone in there pretty quick at that price. This is NOI positive, but my P&I will be $3k/mo. making it a clear negative cash flow rental at ($2k)/month.

Deal Structure:

I have negotiated a $700k purchase price, which I believe is significantly below market value. I will be using an FHA loan, and the seller will be rolling $100k of proceeds ($600k cash at close and $100k cashto sit in the LLC) for the pro rata % ownership of the property ($100k/$700k). I will use the $100k proceeds for the down payment ($25k), and $75k to fund operating losses at the rental for the next 4-5 years. So basically I am putting no cash down, and buying the property below market value, and have 4 years of cash to fund losses.

If the property sells for $750k or more, I'll make money. I will lose money below that because in order for him to roll the cash and fund the losses he will be entitled to 15% of the total exit sale price, not just the equity (so if we sold for $750k he would get $113k, with $637k remaining which will be roughly my mortgage balance + commissions). If it sells in the $850k plus I will make great returns (call it $80k on no cash investment). $1mm plus we are talking about $150k. I have no idea what would push prices higher to $1mm though, besides the fact that they traded there a couple years after the financial crisis.

Thanks guys

Looks like you will be chasing the price to the bottom.

My guess is that it is still on it's way down due to a shortage of luxury buyers. 

If you are using FHA you will need to have this as your primary residence.....

If the owner is having a hard time selling it and it has sat on the market for over a year I would expect the same for you. Another hiccup is the fact that you must reside in the condo for a year with an FHA loan. If you buy it solely for investment it could be considered fraud. Personally I would stay away because there are too many question marks. Hope this helps some

Let's assume the FHA primary residence is not an issue. I believe you only need to live there for one year and I could consider that a separate expense. Without getting into too much detail in my current lease situation, I am already paying a high amount per month to live in a nice place in the same city, and am in need to upgrade in space so I could make it work.

Separately, I could have the $100k fund my down payment on a traditional loan. But then I will be paying the $3-3.5k per month out of pocket, which I initially modeled in and the deal still works pretty well (as my mortgage amount is much lower and that is reflective in my exit proceeds and not the Sellers as they are tied to the exit sale price), assuming there are no liquidity issues (I have a large enough W2 to cover this pretty easily). 

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