1st possible deal

12 Replies

Hi Guys,

I'm looking into my first potential real estate investment and would like all advice possible.

Option 1:

This property does not have a good appreciation potential, but financially appears to be cash flow positive. Based on the below info, would you recommend that I pursue this deal?

Type: Condo 1bed 1bath

Price: $28,900 (would try to pay $26,000 cash)

Current Rent: $550/month

HOA: $220/month (not sure what expenses/amenities are covered)

Option 2:

Next door is an efficiency unit with a remodeled kitchen listed for $32,000. Not currently rented. HOA is $186/month. Should be able to rent it out for $400.

Thanks,
Leon

@Leon Trak Thanks for posting. IMO: I'm not a huge condo guy, so I would pass and look for SFH or duplexes.

In your projections include: Maitenance, Insurance, and taxes.

@Leon Trak  I'll start by answering your question directly. In my opinion I would choose option 1. I don't know what other expenses you may have such as those listed my @Jordan Thibodeau  But assuming all else was equal I would go with option 1. 

Now, my two cents. 

I wanted to start investing in condos as well, and asked a similar question here on BP, I received a reply from an investor that completely changed my mind. Here is the jist of it. 

A property with an HOA is like investing in a high risk stock. HOA's are notorious for changing renting rules, increasing fees and banning one thing or the other, or choosing to change what is covered under the HOA fee. You essentially have little to no control over the property you own. Furthermore, as an investor you would need to make it a priority to attend Association meetings and possibly even get on the board so you could provide insight and help maintain a friendly environment for yourself and your tenants. That is a responsibility that not may investors are looking for, because time is a precious commodity. The last thing I would want is to spend two hours in an HOA meeting instead of spending those two hours finding deals.

The HOA destroys this deal. Think of it as a rent of $330/mo. If you have 26k cash you should be able to finance a nice 3 bedroom SFR that will cash flow, appreciate and get equity accrual.

Thank you all for the quick and honest input. You all have just helped me avoid several thousands in beginner mistakes. What about the following multi-family deal:

Type: 4 unit complex with two garage apartments. (would this qualify as a commercial property requiring higher interest rate?)

Price: $150,000 (planning on 20% down)

Rent: $3,100/month (4 units at 550/month and 2 garage units at 475/month)

Utilities 1,450/month (Owner pays utilities, electricity, water, gas, for 2012 came out to $17,000)

Mortgage: 750/month

Taxes/Insurance: 450/month (based on zillow)

Cash Flow: 450/month (please let me know if I'm missing some basic expenses)

Building has window A/C units. Property is not in the best shape. Located next to a university but also not in a very good area of town.

@Brant Richardson what is your opinion regarding multifamily vs SFR for cash flow. I feel that at a comparable price point, you could get more cash flow from a multifamily than a single family. But please correct me if this is a wrong assumption.

Thanks,
Leon

I hate HOA's a little more than owner paid utilities, but not by much. Your total rent of $3100/mo just got spanked down to $1550/mo.
minus mortgage of 750 = 800
minus tax/ins 450 = 350
minus 10% vacancy 310 = 40
minus 10% maintenance 310 = -270
If you pay a property manager 310 = -580

Vacany and maintenance are real, especially with students, you must account for them. If you could put in meters to make the utilities paid by tenants maybe it would work.

Multi vs SFR depends on the area. I don't know houston to be able to say. From what I have read about the area, a SFR for 100k that rents for $1100/mo is a very reasonable expectation. Yeah your multi is only 150k for rents of 3100/mo but the expenses are much higher.

@Brant Richardson I don't think the HOA applied to the multifamily deal (correct me if I am wrong because I am new), but instead the HOA was part of the condo deal he first mentioned. If the multifamily doesn't have HOA (his post didn't mention it) then I think it would actually be a good deal with positive cash flow.

No HOA in my calculations, but owner paid utilities, which are almost as bad. The numbers would be excellent with out the 1450/mo utilities. You can think of this deal more like 150k for 1550/mo. It will cash flow until a maintenance issue eats up the profit. Definitely better than the 1 bedroom. 26k will not be able to make this deal happen with conventional financing though.

Updated over 4 years ago

After thinking about it for a while, 10% for maintenance is an overestimate in this particular case because a large part of the rent is actually the utilities.

@Roman Pak that link is to a good lesson I didn't have to learn the hard way, thanks. Right now, I'm trying to narrow down my potential niche and can cross off condos. From what I've read, a good starter deal would be either a SFR or multi unit (4 or less) which my wife and I can move into and rent out the rest.

It's been more challenging than I expected to find the right property, part due to a hot market in Houston and part due to my inexperience. I'm trying to stick to the rule of thumb 1 month rent = 1% purchase price, but these properties are located in areas not known for appreciation. In areas where properties have been appreciating, monthly rent is closer to .07 - .08% of purchase price. 

Anyone have recommendations as to what I should be willing to accept? Would you guys go for the lower rent but higher appreciation potential?

@Leon Trak  

I would say base your decision solely on the cash flow of the property. Consider appreciation as a bonus and never bet on it.

Houston is getting hard to find deal now. you are not alone. keep looking and you will find one

Good luck

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