Condo rental property

10 Replies

Does anyone have any experience with purchasing and renting out a condo? I am looking at buying one for 74k, 1700 taxes, 175/m HOA fee, and I would get 850/m rent with a tenant already in place. I would need to put 25% down. This would be my first rental property.

@Dave Mazza  I don't have any answers to your questions, but you might try doing a search of the site, looking at the Podcasts, and Blogs. There are people in every conceivable niche of real estate that are members of BP. 

I just wanted to stop by and say hi, and welcome to the site. I'd also suggest you upload a pic to your profile. If you don't want to have your pic online, maybe upload one of a hobby, a local landmark etc. (as long as it's not a copyrighted picture) See you around the forums! 

Karen Margrave

@Dave Mazza   welcome to the site!

Yes I've done 2 condos. Make sure the HOA allows renters and there aren't any restrictions on how many units in the building can be owned by investors, as well as any rules the HOA places specifically on renters.

your gross income is $10,200/ yr- Effective gross income after 8% vacancy is $9384.

Your annual expenses are $4500-5000/ yr depending on age/ upkeep of property. Dont forget to add in your landlord insurance and licensing expenses in analyzing your deals.

Your debt service for a $59.2k loan @ 5% interest for 30 year fixed is $3813/ yr

Your total annual income will be $590-$1000 depending on how many repairs are required throughout the year not covered by condo fee like interior appliances etc. A couple of major service repairs to HVAC, water heater or appliances will wipe out this positive cashflow.

Return on investment is 1k/20k total investment= 5% each year. It will take you 20 years to break even on your investment. Is this return worth the work managing tenants and  collecting rent each month? That's up to you but I wouldn't if I were in your shoes.

This doesn't seem like a good investment or good use of your 18-20k (more since you will incur closing costs/ loan fees/ renovation and make ready costs. Assume closer to 20k for your initial investment. My criteria for buying a rental is about $5000 a year positive cashflow, however others have criteria as low as $2400. I'm a condo investor so they can be a good vehicle but they tend to only be good investment vehicles in cosmopolitan areas where the higher rent can offset the condo fee and other expenses that can wipe out any potential profit in lower rent communities. Your cashflow would be $2100 higher if this was a house and all aspects were the same.

I suggest you look at SFRs or duplex units where you can live in one and rent the other while keeping a owner occupant mortgage. The low prices of condos can seem lucrative, but you need to capture higher rent income to make up for the higher expenses you incur from condo fees and many will not produce good cashflow. My rents are about 65% higher, which is why condos work well for me. pardon the math, I read 20% down by accident, but everything is pretty close to 25% down.

I project operating expenses of $7,789 and negative cash flow when paying mortgage.

Good Luck.

Bill

Yes, I currently rent a condo that was once my primary residence. Small HOA, just 8 units. Two biggest pieces of advice I can give are 1) know your HOA docs inside and out and 2) know that condos have the added challenge of decision-by-committee. Being an active member of the condo board is helpful but it's also real work.

Our board recently dicsussed implementing rental time limits, which I was certainly opposed to. Fortunately, it didn't have the votes to pass...but I learned from my attorney that here in MA if the HOA passes an amendment to the docs I'd be powerless to do much about it.

I've learned there is some risk in that you don't have exclusive control over your property. 

@Dave Mazza  

The others have given you their take on the numbers. One way to make the numbers look better is if you can negotiate down on the sale price. If you're going to get into real estate investment with any seriousness, you need to learn to negotiate and to get really comfortable with making low offers.

I own two condos and I make very sure to do my due diligence on the HOA before buying into a condo association. As to see copies of the minutes of at least the last two annual general meetings. Find out what major maintenance projects the association has coming up. Large maintenance projects mean special assessments and unexpected money out of your pockets. At least going in I make sure that there won't be some major assessment in the first two years at least. I always put a condition into my offers that all special assessments levied as of the date of my offer are paid in full by the seller prior to closing. Also make it a condition that any special assessments, if known about by the seller, and even if they have not been levied yet, must be disclosed to you with an option for you to back out of the deal. Special assessments will happen in a condo situation but do the best you can to not walk into a deal where the roof, heating system and the exterior paint are all set to be repaired in the first year you buy.

Another rule of investing in condos: Get involved in the home owners association. Go to the monthly meetings, go to the annual meetings. vote in all the elections that are held. Be active. You want to be the first person to know about upcoming maintenance issues and you want to be involved in the decision making about how those issues get addressed.

Thanks All.  Here is some follow up information.

Thanks so much for your input.  It was my first post and should have listed more information.  I didn't know exactly how to start it out and who would respond.  I can't thank you enough for your thorough analysis.  Let me add more information and see what you think then.

All appliances are included with the 74k except for washer/dryer which current tenant owns. The HOA fee includes water, garbage and landscaping. The tenant pays for utilities, cable, etc. It is a brick Condo and built in 1979.

I assume that my NOI would in the 5k-6k Range. The furnace was put in in 2008. My only expense I really forsee in the future would plumbing issues because all else is coverage by assocation dues. There is already a renter in place and I met with her and reviewed the interior. There doesn't seem to be any initial issues that I would have to pay for.

Your assumption about the NOI disregards vacancy, which while it is currently occupied, will eventually become unoccupied and you will spend 1-2 months touching up interior and re-renting. You should not assume NOI based on perfect circumstances but based on more conservative figures like 8-10% vacancy (about 1 month vacancy while you find new renters if they were to move out each year). This way, even if you had someone move out each year, you still wouldn't lose money. anything above that would be bonus. Even with your 5k NOI, your cashflow after debt service is 1.5k AND you have 20k+ parked in an investment that you will not recover until you sell. Also, lets say you move and need a property manager and can't sell due to market conditions. There will be no margin to pay for one without losing money each and every month.

I honestly wouldn't look past the cashflow potential and be distracted with things like if appliances are included or what the condo fee covers because if you lose money or are just breaking even on a 20k investment, then what's the point? Those are cashflow neutral aspects. I only explore these other aspects if the cashflow analysis passes muster and meets my personal criteria. You are analyzing a business, not a personal residence after all. Good luck!

Jeff, would it make a difference if I planned to have this unit paid off within 4-6 years?

I don't think it will matter much. OK so lets run those new numbers. You now have a 74k cash investment + 3-4k closing costs~78K total cash investment. 5k NOI/78k= 6.4% ROI. 1% additional return for putting down 55k more of your money. This doesn't bump up your return that much and now your unable to invest 78k of your capital in other projects. I think leverage is your friend. Ideally you use leverage to allow you to make a small up front investment, then let the tenants build up your equity. Further, it allows you to make future investments without tying up all your capital in a single low cashflowing unit.

What happens if/ when condo fee goes up unexpectedly in 2-3 years. a $50 increase would mean $600 less cashflow for you each year. So you're down to $1000 in positive cashflow. I think others will agree its not a screaming deal with low cashflow and could actually be a liability for you in the future if condo fees go up and rent doesnt increase that much with it.

I think you could and SHOULD find a better opportunity that can put more cash in your pocket, especially for your first deal. Strive for better value and better cashflow. I think you could even use your realtor in your area to hunt down some gems that will be better investment options. single family houses possibly....

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