Hi y'all! Was wondering your opinion if you would buy a rundown condo that is renting for $2600/mo and selling for $315k with $440/mo HOA. The place looks so rundown and decrepit and the tenants are low-income. What is the chance that a rundown property like this can still appreciate and rents can still rise?
At first glance I'd say "no" because of the numbers. This goes for any condo but you need to see a resale cert and reserve study for the complex. From what you are describing, I'm pretty certain what you'll find in the reserve study will make you want to run the other way.
@Diane Tycangco, there really is no reserve "supposed to be amount", but I'd suspect that the reserve contribution needs to be north of $125/month (hard to say lacking adequate knowledge of the project). Providing that the Reserve Study was competently produced and is current (should be current in California since that is the law), take a look at the 30-year funding plan paying close attention to the direction of the annual reserve contribution and whether there are any surprises such as future special assessments, bank loans, or large contribution jumps. A "well behaved" reserve funding plan will grow by a smooth percentage rate year over year which should be near inflation. Assuming a 2.5% long term inflation rate, a reserve funding plan that grows at no more than approximately 5% annually is probably okay if there aren't additional special assessments or bank loans. Don't fixate on the current "Percent Funded" level which means very little, but here again, look to see what the Percent Funded trend line is over the study's 30-year span. I wouldn't be surprised if the current Percent Funded level is low but, hopefully, on an upwards trajectory in a relatively short time span such as 5 to 10 years. To recap - know what the Reserve Study projects for the future and don't just analyze today's figures.
@Diane Tycangco, all things are possible. However, buy-in by most owners (and mortgage holders) would make tearing down and rebuilding a challenging and probably unlikely proposition. The whole process would be messy and leave owners in limbo for years. Large scale reconstruction is another, and more likely, scenario. Here again, owners will be in for a challenging and expensive couple years as the reconstruction project moves from concept, through funding, and finally to completion. Funding will either come from large special assessments (perhaps many $10's-of-thousands per owner) or through an association bank loan with hefty repayments. The way some association loans are structured, owners might have to make good on their outstanding balance if they sell. Many associations avoid the loan by special assessing their owners and letting the owners draw their own loans if needed.
For Marin County, these numbers are great. Your tax, HOA and insurance together should be about $845. NOI of $1,755/mo is unheard of in these parts on a $315K investment. I assume this property is in the Canal? How "real" is the rent here is the only question I would have.