Looks great but is it?

Question

Hi everyone! I am a new investor and I am in a situation that I don't know what to do. I found an apartment 2/2 900+ sf for 35k. Its in S Florida. It rents for $1000-$1150 and the HOA is 330. Tax is just $800. The catch is that the community has code violations. This propriety is on the market for a long time and seems like no one touches it. I know that it would have no liquidity and would not appreciate much but as a rental it looks superb. What to do???? Thanks in advance

Art G. · Answer

My pleasure :) Also, try shopping around for what kind of loan you can get on it. Even a 50% LTV would greatly drop your risk and free up cash to buy a second unit.

Look at the math like this:

Cash for a 100k home that makes 1k per month. you make 12k a year.

Use that same 100k cash to put 20k down on 5 homes with five 80k loans. Mortgage is $500/mo or 6k per year, times 5 = 30k annual mortgage but you are also profiting 30k per year from the remaining 500 off each  units monthly rent ($500x12mo.x5units=30k).  Obviously there are other expenses and issues to factor, but this was just a quick way to show you that leveraging your cash with loans is the way to acquire more units and thus more profits.

Gustavo Figueiredo · Answer

@Art G. Thanks for the reply. I agree with you. My hope is if the association fix all the issues in some point in time certainly it would appreciate a lot. Also like you said it would take about 5 years to get my money back which in my opinion is a short term. I might be wrong though and that's why I'm asking for help or some feedback from someone that has done that before. Thanks a lot.

Art G. · Answer

What loan are you using, terms, interest rate?

HOA is responsible to correct code violations, if you buy you can take legal action against them and force them to fix it. They are dealing with owners in bad faith if they take money and do not upkeep and protect the community.  I dont like hearing there is already legal problems with a sale, unless you can use it as leverage to get a way better price.

But you have a good Cap Rate at 20.7%.

Assuming you are all cash, you are putting a lot at risk on a legally deficient property for only a NOI of $7240 annually. Which would take you 4.8 years until you get your 35k back and thus eliminate your risk and begin to actually see profits from the deal.  Seems like with 35k cash you could leverage that and find a more profitable deal.  Also factor in no real appreciation and you are missing out on where the real money is at in real estate.