Beach condo investing
Help me with my first purchase. This is where I feel comfortable is purchasing a condo on the beach as an investment and something to enjoy. Let me know what you think I should do. It has been on the market for 6 weeks.
How do I calculate a purchase price offer for beach condo w/HOA? It is a resort property where I currently have a unit for pleasure and rental. My return is 3% but my income is $16,000 tax free. I also use a rental management company and there is an HOA fee. These 2 things hurt my income. My current rental condo is in the same building I purchased for fun, put half down and it yields 15k tax free which is low but the HOA fees are high and pay 25% rental management. Now I want to get another one and want it to be an investment with a yield of 6-7%.
I know I have to buy it right for it to do that but it seems like my calculations come out so low they aren't close to comps.
Let's take an example. I am looking at a unit that they are asking 675K for. I have comped it out at 610K. To get the max rent for it by updating it I need to spend 60K. It has been renting for 41K/year with its current appearance. To get to 60k rental income I will have to do some updates that aren't structural but more cosmetic for improved rental income. Similar units fixed up rent conservatively for 60k/year. These are short term seasonal renters. If I pay cash and compare that amount of money to what I have invested in bonds and stocks it needs to return 6-7%.
Expected Rental Income is conservatively $60,000 after spending $60,000 with updates. Currently renting at $41,000 without updates as it is. With no updates and Cost to Own of $41,000/year there is no income or yield as I see it.
Cost to Own is $41,000( includes all costs including management fee and HOA, utilities....
However in addition to the above costs there is an expense assessment of $21,000 for this unit for the building updates which has not happened before in 30 years. This is this unit's pro rata share for all 100 units in the building.
If I improve this property spending with spending $60,000 to get $60,000 rental over - $41,000 = $19,000 per year and with depreciation most of that is tax free. What do I offer. Am I correct in taking $19,000 and divide by my needed yield of 7%. It would be $19,000 divided by .07 which = $271,142. Is this correct math. At 6% return assume $19,000 divided by .06 = $316,667
Based on other sales without seeing them It comps for $610k. I need to add that the building exterior is being redone and it will cost an additional $21,000.
To get top rental and paying $60,000 in improvements to do that.
Let's figure it another way, if the unit comps out at $610,000 and you subtract the $60,000 for cosmetic improvements for furniture and paint and interior touch improvements now makes it worth = $550,000 to me but there is also a $21,000 k one time assessment. To me to be safe I would say the unit would be worth $550,000- $21,000 assessment or true value of $529,000. With tax writeoffs for depreciation the income at this price will be $19,000 tax free after depreciation. The only way I can get the $19,000 is to pay for the upgrades of $60,000 otherwise per it's rental history there is no return b/c of CTO compared to rental past revenue history.
So 7% return = purchase price of $271,142 with upgrades
3.4% return if I pay $550,000 but income is $19,000 tax free. At low tax rate of 28% it yields 4.4% which is less than my stocks and bonds return.
Bigger Pockets gives the example of ARV offer. They use 70% for flips or investment property purchases. That being the case . 70% of $610,000 with no improvements and rent breaks even = $427,000 and you still have a $21,000 assessment.
Current return on my money is 5.5% average.
With Yields
6% yield I have to spend $60,000 which yields tax free $19,000 and offer $316,000 + $21,000 assessment fee = $337,000
7% yield and I have to spend $60,000 yields $19,000 = $271,142 +$21,000 assessment fee = $292,142
Bigger Pockets formula for flipping and investment propety using ARV value
If no improvements 70% of ARV assume comp value of $610,000 = $427,000 + $21,000 = $448,000 and no rental yield but the property is worth about $610,000. I bought it right. Plenty of room to fix up.
With Improvements of $60,000 -$610,000 =$550,000 x 70% = $385,000 + $21,000 assessment fee. Plenty of room to fix up .
Another Unit in bulding
It's rental ready
Asking $530,000 and probably worth $520,000 + $17,000 One time Assessment on this unit but I'd have owner pay this so $503,000. A decent deal for me is $450,000..and I pay assessment = $467,000 It's been on market for 236 days why I don't know but I'll have it checked out. The agent says buyers are freaked out about assessment fees for all units in the building. I think it's an opportunity on this property.
Cost to Own $29,117
Current Rental basis is currently $39,000 for this unit.
Profit of $10,000 for $39,000 rent minus Cost to Own
7% return is $10,000 divided by .07 = $142,857 NO WAY
Average Rental is $45,000 and assume Cost to Own is $29,117
$15,883 tax free but Return on $520,000 = 3.05% and unit is paid $520,000 if they pay assessment of $17,000.
$15,883 tax free and buy for all in $470,000 = 3.4% return.....
5 % Return assuming rental of $45,000 and yield of $15,883 = offerring price of $317,660( i.e. $15,883 divided by .05 and unit is
Bigger Pockets 70% Rule
70% of $520,000 = $364,000
If my math is right what would yall do? I don't think I can wrap my head around a house yet.