What do you think about these numbers

Question

Looking to buy rental condo. $184,000 property, 20% down, so finance 147,200. Rate estimated to be 4.75% 30 yr fixed, taxes $2175/yr, insurance $600/yr, HOA dues $115/month. Cost estimate would be about $1110/month. Units in this area have rented for $1350-1395/month in a short period of time, recently. This unit is nice, so let's assume I could get the upper limit at $1395/month. That's $285 of cash flow per month (assuming no repairs etc). Cap rate of 9.1% (12*1395/184000), and rate of return on the 40k down payment of about 8.5%.

My question is do these numbers look good to the experienced investors and landlords? What numbers or ratios do you consider before buying? Thank you, this is my first potential investment purchase.

Chris Westie · Answer

Thanks, Greg S. for the comment.  You are certainly right, there.  Depending on the area, of course, but what type of dwellling do you gentleman prefer?

Thomas S. · Answer

The biggest problem with condos is they are attractive due to the purchase price in certain areas. Unfortunately many investors seeing the price of a condo take the plunge due to believing it is their only option. Regrettably this is not a good reason to invest. Convincing one self a condo is good because it is the only game is not usually a ideal approach to investing.

As mentioned when all the windows, a brick façade or elevator need replacing a $5,000 - $10,000 assessment is not out of the question.

Condos for the beginner are a good income investment till the tide turns then it becomes a terrible investment.

MIchael Rickerd · Answer

Its usually 10% for repairs (which I agree with and take into consideration) and 10% for vacancy (which I don't use in my personal situation. I live in a high demand for rental (especially students) area).

So 140 x 2 gives you 280. So you're cash flowing 5 bucks a month. Which is at least in the green!

If you aren't looking to get rich off of the cashflow of this property (which you won't) it may be worth it to dive into this lifestyle. Skilled investors with all sorts of tools/connections can hunt down the best cashflow producing properties, but I feel that your first property comes with a lot of experiences/teachings. And that mad cashflow isn't the top priority.

Investing for cashflow is more difficult. But even if you aren't cash flowing heavily, you are still receiving financial benefits in other areas. Don't forget to analyze those as well.

Chris Westie · Answer

So then I'm looking at $285-$140=  $145/month of profit if I manage the place myself.  HOA does suck and I agree with what everyone has said about them but this place has the location check box for sure.

MIchael Rickerd · Answer

Yep, 10% is typical. It may be tailored to your location though.

Chris Westie · Answer

Thanks, guys.  The maintenance and repairs stuff definitely will materialize.  I agree with @Nick Colamarino about the HOA, but the ones in this area have been some what stable with dues etc.  This place doesn't have anything other than landscaping and trash to really pay for (i.e. no pool or other amenities) that could cause a huge assessment.  Most HOA payouts I would likely guess would be covered by the insurance.

So is 10% per month generally a good number to use for repairs and vacancy costs?

MIchael Rickerd · Answer

Not having maintenance built in is a bad strategy to me. Also, I personally dislike HOA fees. Be sure to be familiar with the in's and out's of the HOA contract/guidelines as well. There is a place here where I live that can double your yearly HOA fee if they are working on a project that ends up costing more money.

This probably isn't a great place to start, but there is nothing quite like getting real, hands-on, experience. You can probably stay in the green if you make some personal commitments, but that depends on you.

Abdul Azeez · Answer

@Chris Westie You haven't factored a number of things on your calculation. Factoring in the below brings your monthly cash flow down to Negative (-$210) i.e. ($285 minus sum of all of the below). This is not a good investment in my opinion.

1. Repairs and CAPEX 10% per month = $135

2. Two months vacancy prorated for a month = $225

3. Property Management 10% per month = $135

Nick C. · Answer

Every market is different, but this looks really tight even in the best case scenario. This is just a personal decision, but I would never buy a condo. The HOA dues could go up, they could hit you with an assessment, either of these things would kill your cash flow. Or even worse the board could vote in rental restrictions.

There's really no room in there for the normal stuff either; vacancy and maintenance. I would never assume no repairs, even for a condo.