Windsor, CT · Member since 2016 · 2 posts · 0 votes
Hi All,
I am new into investing market. I am looking to invest in CT or NJ. I looked at some properties in CT.
For example: I looked at 2 family which has been rented for last 20 years. One tenant pays 1100 and other pays 900 and heat and water paid by landlord. Price for this 2 family is 300K. Taxes is 5600.
Another is a one bedroom condo for 69K. It is vacant and rents in that area is nearly 1000 to 1100. Association fee is 272 a month and taxes 1400/yr.
When I compare the above two the ROI for the condo looks much better compared to the 2 family. I am just concerned with the HOA since I have heard many horrible stories. I am seriously confused on what should my decision be?
@Sonia J., Paying for utilities and only bringing in $2k a month gross on a $300k house is a loser in almost any market, especially with our CT taxes! The condo looks better, but still not great. The way I see it:
Income: $1000
HOA: $272
Taxes: $116
Insurance: $30
P+I: $275 (borrow 51,750 after 25% down)
Management: $100
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So your NOI in a perfect situation with no vacancy and no capex is $207/month.
That is an awfully slim margin. Throw in 10% vacancy ($100) and 15% capex ($150) as rules of thumb, and you're losing money.
@Sonia J. Are you working with an investment savvy agent that can advise you? It is very hard for anyone on here to give a definitive answer to your question when we don't know where the properties are, what the quality of the tenants is, how much deferred maintenance do both prospects have?
These are things a good agent can help you work through.
@Sonia J., Paying for utilities and only bringing in $2k a month gross on a $300k house is a loser in almost any market, especially with our CT taxes! The condo looks better, but still not great. The way I see it:
Income: $1000
HOA: $272
Taxes: $116
Insurance: $30
P+I: $275 (borrow 51,750 after 25% down)
Management: $100
----
So your NOI in a perfect situation with no vacancy and no capex is $207/month.
That is an awfully slim margin. Throw in 10% vacancy ($100) and 15% capex ($150) as rules of thumb, and you're losing money.
Sonia J. Welcome and congrats on your action of taking steps toward financial freedom! What areas are you looking in? We assist investors in Hartford County and have sold several in Windsor this year. Please feel free to reach out any time. We are more than happy to help you with your search. There are several other investors on here that have utilized our brokerage and/or property management services. Hope to speak with you soon! Happy Holidays!
Now if I pick up this condo giving cash offer say 50 to 55k, how would that fit in in getting good ROI?atleast 5yrs from now the rent will payoff the price of the condo and then it will just be the income, am I missing something in way I am thinking?
@Sonia J. - Thinking in terms of getting your principal back is certainly valid in some investment, but it's not usually how real estate investors think, because when you invest in a property, that money isn't gone, it's just changed from a cash asset to a real estate asset. It's not the same thing as buying a lawnmower and thinking you'll make your money back after you mow 10 lawns. The lawnmower isn't a performing asset. Real estate is more like a stock - it has a value that you can get back when you sell.
The way to think about it is in terms of ROI and opportunity cost. That is, how much money is your money making, and could it make more somewhere else.
For this particular deal, if you get it for $50k cash, you're not going to make your money back in 5 years. The only expense you are getting rid in that case is the mortgage, so it looks like this:
Income: $1000
HOA: $272
Taxes: $116
Insurance: $30
Management: $100
---
That gives you $482/month in cash flow, before any maintenance, vacancy, or CapEx expenses. To make it a decent birds-eye analysis, we should add at least 10% CapEx and 10% vacancy. That's $200 more in expenses, leaving you with $282/month.
To find your ROI, multiply that by 12, and divide by the acquisition cost. You've got $3,384 in cash flow each year, and you spent $50k to get there (ignoring closing costs for now). That works out to between 6-7% ROI. Thinking in terms of opportunity costs, the stock market should be able to return 8-10% in the long term, so why would you put $50k into real estate, which you have to actively manage and work on, for less return than you can get by just putting it in an index fund and watching it grow? If you are paying down a loan, then you don't have to rely on appreciation to boost your IRR, and it might make sense to make only 6-7% COC. When you pay cash, though, your IRR is tied to appreciation, which is unpredictable.
TLDR: The return is still too low to make it a very solid investment. Keep looking.
Every time I look at condos or townhomes , I am attracted to the low prices, but it seems like the HOA fees really eat up most of the cash flow. Then there is the issue of the HOA board politics and assessments that happen on the board's schedule not yours.