Is 4.4% ROI a good investment?

Question

I'm considering buying a condo & renting it out during my retirement as a source of income.

I'd pay approx. $232,000 cash for the condo.  It would rent for ~$1,500/month.

The HOA dues are $350/month, property taxes are $230/month, and insurance $20/month.  I anticipate approx. $50/month in maintanence.  Without accounting for deducting these expenses on my tax return, the numbers break down like this:

$10,200 annual return (annual rent minus expenses)  divided by $232,000 (total investment) equals 4.4%.  This will be higher after deducting the expenses on my tax return.

Based on these numbers, does this look like a good ROI?  Why or why not?

Any specific feedback would be much appreciated!

Keith Goodwine · Answer

Rule of thumb - your rent should be no less than 1% of purchase price in Arlington.  Some say 2%, but Arlington is a hot area and rentals will always be in demand with DC close by.

If 1% of rent is too high for the area, drop your purchase price.

If your purchase price can't be dropped, then it doesn't make sense as a rental investment.

Josh Mitchell · Answer

@David Cole Why wouldn't you buy a home for $232,000 with no HOA on it and make the ROI much higher? I do have some condo's and the HOA is a killer..... You can do ok, but I would highly recommend you look for a home with the same type of numbers less the HOA to increase your cash flow and profitability tremendously.

David Cole · Answer

This puts things into perspective, although investing the $232,000 & earning 5% would likely involve more risk (i.e., investing in the stock market).  But the 1. liquidity and 2. not having to deal with tennants and 3. possibility that they'd screw the condo up would likely make up for the risk.

Paul Hormann · Answer

@David Cole Have you run the numbers if you used leverage?  See what the returns look like if you buy 4 condos with 25% down each.  Try some different scenarios such as 30, 20, and 15 year loans, but the rates are so low right now that it's easy to make much higher returns using loans than with cash if the cap rate is high enough.  Of course, this also depends on how close to retirement you are...

Brent Coombs · Answer

There's THOUSANDS* of better ways to invest $232k. Keep looking. Thanks for asking...

* Hint: most of them involve effectively LEVERAGING your money to accelerate equity/profit!

Thomas S. · Answer

If you take a closer look you will see this is terrible. If you invested the $232000 at 5%, which is easy to do, you would make more money, $966/month, than you would be making with the added hassle of having to deal with tenants.

Rent  $1500 - (HOA $350 + taxes $230 + insurance $20 + maintenance $20 + return on equity $966)

= - $116/month

Negative cash flow and all the expenses are not yet added in. Your ROI is negative.

David Cole · Answer

Thank you for the feedback.  I know the condo fee turns it into a not-so-great deal.  I'm surprised that condos in northern VA don't rent for more (considering the condo fees).

Russell, the condo is located in Belle View, a mile down the Potomac from Alexandria, VA.  Those who work at Andrews Air Force Base and Fort Belvoir (among others) live here, so there's a pretty constant demand & it's in a nice area.

Russell Brazil · Answer

Coming from a local....this all depends on what your goal is.  You have better cash flow plays in the area....and you have better chances at appreciation....however this property will give you a some of each, but not a home run in either. (I also dont believe in trying to get home runs).

You can get some condos further away from the city that would rent for $1400-$1450 in the $150kish range with a $200k fee......but you will get almost no appreciation on those. You could also pay something similar to what this condo costs say right off of Good Hope Rd in Anacostia and get considerably higher upside on your appreciation than the condo you describe, but possibly with a higher risk tenant. You could also go condo in various parts of the citDistrict y that have better appreciation potential. Arlington though has descent appreciation plays, just not as good as in the District, and less so on the condos than other assets in Arlington.You do mention you want it for retirement income...so if you are going to self manage condos are a lot easier to manage than other types of properties.

One thing I would caution is if the condo is at RiverPlace (I think thats the name) I would not buy it. The land on those condos is not owned by the buildings and is instead leased....and as the clock ticks down on that lease, the value of those condos will continue to drop over time.

Larry Turowski · Answer

@David Cole This is a terrible investment with these numbers and you are not even accounting for management, vacancy, and capital expenditures.

Learn what cap rate is, find  out what cap rate investors in your area are looking for and adjust your goals accordingly.

Is 4.4% ROI a good investment?

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