It appears all of the formatting was removed from my post... sorry in advance for that! I’ll fix it when I get to a computer.
So I can't edit my post. Also not quite the first post I was hoping for. Anyway, here it is formatted to be a little easier on the eyes:
First, I want to say how happy I am to have found such an active community concerned with real estate investing. It's rather unfortunate that I didn't know about BP when I bought my condo, but oh well, you don't know what you don't know... So here's the deal. In late 2015 I bought a condo in cap hill for $425k. I love the condo, and at the time, I was certainly not looking at it through the lens of an investor. It has since appreciated to the 475-495 range, which is nice, however if I were to rent it out, the HOA plus mortgage amounts to about $2350. As for rent, it seems that the rent is in the $2300-2500 range, but there's a huge luxury apartment building coming up next door, as well as other buildings in the Golden Triangle area coming in. In general, it looks like the place would be cash flow neutral before considering any tax breaks, and rent durability may be affected in the future. Further adding to my confusion is the expectation that the housing market will cool off as interest rates are hiked, and much of the appreciation I've seen over the past 2.5 years could be wiped out if I wait too long to sell it. In short, I am sort of anxious to get rid of it.
I am getting married this summer and would like to move to Lakewood, Golden, or Wheatridge. We’re busy and my fiancé works a night schedule, so she doesn’t want to move until after the wedding, but it seems that June 2018 would be the ideal time to unload.
Here’s what I want to do: I want to get a house. Then I want to start buying rental properties, probably SFRs, but maybe duplexes and quads. Buy and hold over fix and flip. My reservation with keeping the condo is that I did not really understand how to analyze a property as an investment when I got into it, and now when I look at it, it doesn’t seem that it is really a solid investment. Rather, it is a nice place to live, so the likely market for it is the homebuyer who doesn’t care about the economics, but enjoys the location, granite countertops, et cetera. Beyond that, the condo is tying up all my credit, and if it goes vacant, I will quickly become destitute ;)
Given everything I have shared please help me tease out a couple things: are my concerns about the market unrealistic, maybe do I have more time than I think? Is there a way I could make this condo cash flow positive? $200/mo doesn’t seem like a very big carrot for holding such a large liability. Are there things I am not considering? What would you do if you were a 30-something looking to start generating passive income to the tune of several thousand per month?
I acknowledge that my case is just another riff on a familiar story. Regardless, I really appreciate your feedback, and I look forward to being able to give back to the forum as my experience grows. Thank you.
@Dave White I think your sense about your condo is probably accurate. You purchased at a time that you didn't have investing in mind. Thankfully due to our appreciating market, you'll come out ahead on the "investment" but it may not be a great option for you to hold on to when there are plenty of options for you to redeploy your capital in Colorado. I'm not saying the condos & townhouses can't work, but you have to work harder to find something that makes sense with the HOA fees.
The good news is that if you're looking to conserve capital for investing, there are still some options for you to purchase your new primary with minimal down payment (3-5%) and still have funds left to find more properties. If you're looking for cash flow, you may need to look at properties that need some rehab work, lower price points, and maybe even look further north or south along the front range.
Thanks for your input! I think you're right on about what to do, mainly because it's not the best use of the money. I like your idea of not putting all of the money down on the new place. Unsure that I would be comfortable putting only 3-5% down, but I had considered doing 10% down and paying the PMI, in lieu of the HOA (~$170 vs $400/mo), with the plan to get up to 20% equity soon. That could free up enough for a 20-25% down payment on something to get me started as an investor.
Just curious, what allows a person to buy single-family home for 3-5% down? I don't think I was qualified for anything like this when I bought the condo.
@Dave White It depends on the program at the time you purchased. Right now there are 3 Conventional programs available for 3% down payment on a 1-unit primary residence. Fannie Mae offers HomeReady which has income resctrictions and Conventional 97 which has no income restrictions but has a First-Time Home Buyer requirement. Freddie Mac offers Home Possible which has income restrictions and starting in July they are rolling out a new program called HomeOne which will have a First-Time Home Buyer requirement. Aside from that you have FHA which allows a 3.5% down payment. Since you won't meet the FTHB requirement anymore, you have HomeReady & Home Possible depending on your income at 3% down, FHA at 3.5% down, or you can do a straight Conventional mortgage at 5% down with no restrictions. For the income limits, most of the Denver metro area is 100% of AMI which is around $84,000. There are a few low-income census tracts which have no income restriction.
Long story short, at the very least you could do 5% down and possibly less depending on your circumstances.
Hi Jared, thanks a lot, this is really a lot of good information in one place! It's good to know that I can just do 5% down on a new place, which would let me unlock a bunch of money for investing if I sold the condo. Getting out from the HOA today would subsidize the PMI, and I think I would still be able to bank some reserve cash for big repairs.
One thing: I feel like a lot of people are averse to accepting offers from buyers who don't put a lot of money down... But if you have a loan approval letter, and the bank is paying anyway, why should they care?
@Dave White I think it depends on who you're working with - both agent and lender. Different people are better at getting your offers accepted. I haven't seen issues with getting low down payment offers accepted. I'm not saying you'll win every one, but I haven't noticed a trend and I tend to do a lot of the low down payment type of loans.
@Dave White What's the ROI metric that you're using to evaluate properties? Cash-on-cash? Cap? monthly cash flow?
Analyze the property with that metric in mind. Then go out an analyze other properties to see what their returns are. Then you'll know your opportunity cost.
There isn't a clear right or wrong answer. A lot depends on your goals and what you're comfortable with. I have a pretty simplistic point of view... pretty much anything you own around Denver is going to perform great over the next 30 years.
If you want, I can send you some examples of deal analysis around the Denver market. If you ever want to grab coffee, let me know.
Hi Dave, your take on selling now is a great look at the market. Best home sales prices are historically in June. You might be able to get more than asking price and maybe even more than appraised value.
Once you have the property sold you will have many options with the profit you receive. There are many different lending programs that can help you protect some of the profit to be used later.
Personally, I would see if I could take a portion of the remaining funds to buy an out of state rental with great cash flow.
@Chris Lopez so I wrote up a little worksheet and then did the cash flow, cash-on-cash, and cap rate calculations. Those numbers for my condo are: $115/mo, 1.7%/yr, and 4.67%/yr. Not really the kind of numbers to get excited about. Damn.
I bet Charles' analysis on the home price vs. interest rate is very compelling, but I would be shocked if it really takes a 10% interest rate to hurt home prices. I personally think it takes a lot less than that, because loan size is really determined by the maximum monthly payment a family can afford; that is, their income. And for this discussion, people’s income is really a fixed quantity. So if the interest rate goes up, the monthly payments change but since a person's wages are more or less fixed, the purchase price of the home comes down. To compare, my current loan at $425k with 20% down, 3.75%/yr is about $1570/mo P&I. If $1570/mo is all that I could afford, with a higher interest rate, say 4.5%, the maximum home price I could afford would be $387k. And at 10%, $1573/mo will only get you $225k of house! So while increasing rates may not cause an literal “crash” in the market, I think that the recent changes will nonetheless exert negative pressure on home prices. (https://www.zillow.com/mortgage-calculator/)
I really do like @Kevin Grinstead 's idea to go out of state. I think my money would go a lot longer and the numbers will be better than Denver. I started poking around Kansas City and Omaha, which are affordable, and can be reached in a short, direct flight. Some realtors out there claim cap rates above 7%, and I've heard it's hard to find much above 6% around here, now. That said, I don't think I'll be out of this house in time to sell by June. But a man can dream!
Condos are better deals for cash investors because of their higher price and equity volatility. Problems people face selling condos creates opportunity for cash investors. The other big advantage of condos is limited repairs, and time commitment. Cashflow potential varies by market. An expensive condo or house rarely cashflows well. Renting to blue collars with spotty credit is usually much more profitable. Blue collar properties don't appreciate as well but its easier to find below market deals in blue collar areas. A long term hold with vitually no cashflow or actual losses makes more sense for people with large incomes looking for paper losses while gaining long term appreciation.
Robert, thanks for the insight. It would seem that I am exactly NOT the right person to hold property with no cash flow and/or losses, for the reasons you mentioned ;)
One thing that might be worth mentioning is that the cash flow of a buy-and-hold rental could be really hurt by the HOA. This may be intuitive to many, but I see that HOAs tend to increase each year at a rate that is usually above inflation, which will hurt the profitability over time. I mean, there are some condos in Cheeseman Park that have $700/mo+ HOAs, just because the building is old. Also, since many of the residents have probably paid off their loans, they tolerate such insane HOA, but that's basically a rent check! Looking at the HOA in that way, the profitability of a condo may be somewhat correlated with how old the building is, because in the beginning the management company will probably start at the current allowable market rate for an HOA, then steadily increase from there. Right now I expect an HOA to increase in the 3-5%/yr range, but the grounds and common areas are not getting any cleaner! While the general upkeep of the place may be lower than a house, condo owners still typically have a furnace, boiler, and all of the major appliances, which represent large capex they may have in their future. In all, I see this as a major reason to unload the condo now. [anti-HOA tirade over]
Plenty of answers in here already; but I would agree with all things said. And with that; as you look at Cap Hill, you can get a two bed condo still in the low and mid 300k range which can command a decent rent -- which isn't going to be drastically overridden by the rents you receive for your (what I am assuming is 'nicer' condo) but valued at 150-175k higher. Also that being said, if people are willing to pay that much they will likely go into the newer luxury builds or situate themselves somewhere other than Cap Hill which has a bit of a 'gritty/blue collar' reputation. Overall consensus; lots of cash tied up for a low rate of return and lack of security in future laws of supply and demand. Good time to sell and reallocate.