First Investment Worries

9 Replies

Hey all, first of all thank you in advance for all of your responses.  I saw a condo today that I really liked. It was at a price that I can take on right now, and it was near a large university so I'm optimistic about rental opportunities.  

Since this is my first investment I'm a little hesitating to pull the trigger.  I wanted to run the numbers by you guys.  My question is, as a first time investment, does this sound like something worth going into? 

- Two level Condo; 2 BRs, 2 1/2 Baths; very small patio area; Appr. 1,100 sf. 6 - 7 years old, and fairly well maintained. 

Asking price: $100K

(All amounts are ANNUAL)

Approximate rental: 11,100

Taxes: 975

Insurance: 600

Pr Mgmt: 1,100 (most likely will use one) 

Repairs/Maintenance approx: 400

HOA: 1,200

Mortgage (P&I only):  4,836

Yearly Cash Flow Before Taxes: $1,989.  Feels kind of tight to me. Property Mgmt fee is a killer.  Of course the property mgr has other one time costs at the outset that I'm not figuring in. 

Thoughts?

With a 20% down payment I get a P&I of $479.64. Monthly rent is $925. The 50% rule tells you $462.50 will go to expenses, capital and insurance, leaving NOI of $462.50. So, you're in the hole about $17 a month on this deal.

I agree with Jon and Gerald. The numbers are too slim. That's the tough part about condos in general - you have monthly condo fees which eat into profit and make it harder to include financing. The association could also vote on a special assessment down the road which would increase your monthly fees and kill any cash flow you may get. Move on to another property....

Hello Jatin! My thoughts:
  • You're not assuming vacancy.  What is the vacancy rate in your area?
  • You're not including closing costs or initial repairs.  What will those be? 
  • I would factor in the other property management one-time costs.  Ultimately that affects your cash-flow.

I would account for these when purchasing a condo aiming for student renters:
1. vacancy in the 10-15% range. The rental market is extremely seasonal. Everyone wants to move in in August and move out by the end of May. Every year you will have a slight time lag (a week or two) due to repairs and time it takes to rent. If you ever try to lease the property outside of the summer( after school has started) it is going to be a lot more challenging to rent out. So, really account for high vacancy specially if you are hiring a pm, as often it takes more than a couple of weeks to just do the rent out.
2. Also add lease out fee for pm. Make sure to understand the local property management pricing structure for finding new tenants. Depends in the area it might be up to 1 month rent.
All being said, sorry to say that the numbers are in the red on this one. For condos, You also need to consider factors like:
A. how is the HOA? How easy/hard is it to deal with them.
B. how easy/hard is it to get from the gate to your unit? That would be a red flag for me if it is difficult to do showings.
C. How far is parking from unit?
D. How are your upstairs and downstairs neighbors? Middle floors are noisier.
All these factors will effect your pricing so be sure to use caution when estimating rent price. Do not be over optimistic.
If you can afford 100k, have you considered single family homes that are in nice surrounding suburbs?
Just my 2 cents. A lot also depends on where you are. For instance next to university of California, Santa Barbara, this is a community immediately adjacent called Isla Vista. There you can rent out anything without ever having to bring it back to rentable condition first. You will get a lease signed 4 months ahead of time. That is not the norm though.

Hope this helps.

One thing you cannot control with condos is the HOA fee. I knew an investor awhile back who invested solely in condos in nice areas. Unfortunately, the HOA fee kept going up and eating into the cash flow. Eventually, this investor sold the entire portfolio and went back into buying single family homes without HOAs.

Just my thoughts. Best of luck! 

Thanks guys just what i needed. While I'm anxious to get my first deal done. I don't want to rush into it.

Quick followup. The property was just built in 2008. Does this change anyone's thoughts in regards to possible special assessments? 

@jonholdman, I was figuring in 25% down per my lender requirements. Thanks

Originally posted by @Jatin Shah:

Thanks guys just what i needed. While I'm anxious to get my first deal done. I don't want to rush into it.

Quick followup. The property was just built in 2008. Does this change anyone's thoughts in regards to possible special assessments? 

@jonholdman, I was figuring in 25% down per my lender requirements. Thanks

The special assessments they're referring to is an action taken by the HOA to ask for more money than the usual fees. Usually for things like upgrading the pool / clubhouse, adding tennis courts, etc.. The amount varies greatly but will always come straight out of your cash flow since it's so random when they occur for many. Using conservative numbers should usually cover it, but still annoying I'd bet.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here