Analysis of a Potential Rental

14 Replies

I am still learning the rental business and would like some thoughts on this deal for a rental. What would you rate this deal, scale 1-5? 

Purchase: $160,000

3 bed, 1.5 bath in Fontana, Southern California

1110 sq ft condo

Two Story Unit, patio gated with parking entry, new cabinets with granite counter tops, new stainless steel appliances, new paint, laminated wood flooring, new carpet, new bathroom vanity and toilets, new shower tub, new blinds. Washer/dryer hook ups located in private closet area, so I would need to buy a washer/dryer. 

Looks like it was fixed up for a flip, so it's just about ready for a tenant.

It would pull in $1350 in rent.

Unfortunately, it has HOA dues of $275/month.

Please rate this deal as is, say a 3 out of 5? What are the issues with this deal. What price would make this deal make sense. Etc. I appreciate the advice. Thank you. 

"0".  Where's the profit?  Why are you buying this as a rental?

Here is what I see:

1350         Rent
- 275 HOA
-760          Mortgage (4%/30 yrs
315          Money left
-135         PM
-???         Taxes
-???         Insurance
-???        Cash Flow (I'm guessing this is a negative number)

Don't buy rental with negative cash flow.   

Actually, after running these incomplete numbers, I have a new rating

= -5 (that's negative 5)

Hi Joe,

Your head is in the right place to want rental property, but If you are serious about rental properties you might want to consider getting out of condos and researching / finding yourself a multifamily residence of some sort, perhaps starting out with a duplex. One aspect of a plex is that you will have multiple tenants helping pay down the mortgage, in some cases much faster than a single residence family. The better part of it is having rental checks coming in even if a tenant moves out and needs to be replaced. There are generally no HOA fees therefore most of your costs are fixed and known and you own the property outright, leveraging the full and value and property for leveraging against taxes, not the cube you would claim as a condo.

With Condos you will never have the control of how management handles maintenance fees or how well they will run the complex.  As a result you may be finding yourself not only paying higher dues for services not equivalent, but you may find yourself with fees similar to a moving target...in other words, your dues will increase over time and still not provide the services needed to ensure the property is properly maintained giving you a good value. so if you start out negative cashflow, it will deepen with each raise in fees.

oops, sorry i meant Andrew.

Joe, you are also very correct!

This post has been removed.

Thanks for the advice both of you. So we all know there are better deals out there, especially outside of California, what price would make this property make sense? 

The property management is only $50/month. Taxes have been $65/month. 

Does buying all cash make a difference? Thanks 

Originally posted by @Andrew C. :

Thanks for the advice both of you. So we all know there are better deals out there, especially outside of California, what price would make this property make sense? 

The property management is only $50/month. Taxes have been $65/month. 

Does buying all cash make a difference? Thanks 

 First of all, I highly suggest you don't buy washers and dryers.  Just having the hookups will be great for tenants.  You'll have one less maintenance cost, repair visits, paying a manager to oversee that maintenance, etc.  The fewer appliances you're responsible for, the better.

There are a lot of areas in CA that are lower COL and have decent rental markets.  I'd suggest you just look farther out in CA.  The upside, is it would be easier for you to visit your property, and your property taxes will stay basically the same forever, regardless of how the property appreciates - because of Prop 13.  It honestly drives me kinda nuts when people assume the entire state is like SF or LA.

HOAs are always going to be an unknown factor for as long as you own a property that has to bow to one. Fees can go up, you can get obnoxious owners on the board who make up new rules, they can foreclose on your property. I owned one condo I intended to keep forever in Davis, CA, and happily sold it two years later, vowing to never have to deal with a HOA again.

Seriously, look around CA. You can find SFHs for $160,000 in many areas - Shasta County, Del Norte County, Tehama County, and maybe even Humboldt County, that I am aware of (don't know southern CA).

Originally posted by @Andrew C. :

Thanks for the advice both of you. So we all know there are better deals out there, especially outside of California, what price would make this property make sense? 

The property management is only $50/month. Taxes have been $65/month. 

Does buying all cash make a difference? Thanks 

 If you mean "does it make a difference" as in paying cash, and not refinancing (leaving all the cash in)?  Yes.  It makes it worse.

I dont follow any of the traditional formulas when evaluating rental properties anymore. To me, things like debt service are completely variable costs that can be manipulated. A buyer can borrow more or less money at different rates and terms to influence the payment amount, PMI and ROIC.

Here is now what I do for my area.  I want to get a minimum 10% yield on the total cost  + any fixed expenses (taxes, hoa, insurance).  So in your case that would be:

  • $16,000 in Annual Rent (assuming no repairs since you didnt mention)
  • $3,300 in Annual HOA Dues
  • $800 in Annual Insurance (estimating 0.5%)
  • $3,200 in Annual Taxes (estimating 2%)

So that would total out to $23,300 that I would want to collect annually, or roughly $2,000 per month. If you can only collect $1,350 in rent then I rate this deal at about a ZERO. Its really hard to overcome that much in HOA fees, which is similarly why Vacation Properties in Beach Areas really stink for cash flow.

Thanks for the feedback everyone. I do my deals mostly in the desert area of Southern California, so I know there are much better margins and deals around. I have an individual who wanted to know how much would make sense for this type of property. I'm just looking for a general figure here, I was thinking $115k, am I close? Or is there a better estimate? 

Also, the taxes have been $800 im seeing, not sure how much it would jump up to. Any idea on what the increase would be? Thanks again

Okay, here you go.  A three-unit property in Anderson, CA listed for $139,000:

http://www.realtor.com/realestateandhomes-detail/1...

Anderson is a decent little town.  I just moved from Redding in November.  It's a low cost of living area, but Anderson is a decent town with less problems than Redding as far as homeless, etc., although Redding is pretty nice, too.  I only moved because it's too darn hot there for most of the year.  

You would need to provide air conditioners.

Anyway, this is just one example of the entire state is not expensive.  The ad says they rent easily and that there is cash flow.  You'd have to make sure that is true for what your purchase price would be, of course.

Check out rentals on the Redding Craigslist to see what they're going for:

http://redding.craigslist.org/

Just food for thought.

Originally posted by @Andrew C. :

Also, the taxes have been $800 im seeing, not sure how much it would jump up to. Any idea on what the increase would be? Thanks again

 The taxes would be based on the purchase price, but would only go up something like 1%/year after that, because of Prop 13, as long as they own it.  You can call the tax assessor for the city/county and ask how they determine taxes on a new purchase.

It sounds like a nice condo.  That doesn't always make the best investment.  I think the price/condo fees are too high for it to work well as an investment.  Are there other condos in the area with lower fees?  Do you see it having significant appreciation potential?

What do you think is an accurate repair/cap expense estimate?  

What are good estimates for taxes/insurance?  I would be wary of having property management for only $50/month - unless they have a very good track record.  I would budget for $130.

Is 5% an acceptable rate of return?  You may get pretty close to that if you can get the price down to $130/135K.  Also an easy offer to present - say I am an investor and I like to buy properties that make 1% of the value in rent per month.  You could even use the condo fee to push a little lower.  If you are targeting a 6 to 7%(or more) return you will likely have to look elsewhere.

Thanks for the great input everyone, I'll let the individual know what has been discussed. He knew he would need to come in lower, and I told him I didn't like that HOA amount. I doubt he'll move forward with any offer.

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