Condo as a rental?

Question

I've found a condo foreclosure that was built in 2003 and sold new for $135,000.  The current asking price is $24,500.

Assuming I can't get people lined up all day long to pay $850/mo, is there any reason not to buy this property.

Taxes=$2K/yr
Asociation fees-$100/mo.
Insurance=$50/mo.
H2O=$50/mo
Mortgage (if financed)=$100/mo

Just not sure how you guys feel about having the HOA fees.

Jon Holdman · Answer

"Payment" is just P&I.  It doesn't include taxes or insurance.  Taxes and insurance are included in the 50% set aside for expenses.

In IRS terms, taxes, insurance, and a bunch of other stuff are "operating expenses".  Subtract those off the actual rent received and you get "net operating income".  Then you subtract off depreciation, which could be for the property as a whole as well as individual capital items, and the interest you paid and you get the taxable income.

Strictly speaking, it would be better to use the term "debt service" rather than "payment"

Jon Holdman · Answer

The "50% rule" would indeed include all the expenses you list.  For the analysis, you would assume 100% financing.  6.25% is quite good for an investor loan, you got your timing down well on that one.

Rent: $850
Expenses: $425
NOI: $425
Payment: $110 ($18K, 6.25%, 30 years)
Cash flow: $315

That's excellent.  Cash flow will be a bit higher thanks to your down payment.   In reality, its likely to be a bit lower because HOA fees will tend to push you above 50%.  The other issue might be vacancy.  I can't tell if you have tenants lined up or not.  You imply tenants will be tough to find.  Still, seems like a good deal.

Rich Weese · Answer

I hate condos!!! They are NEVER free and clear. You always have the HOA fee and there are ALWAYS special assessments. New asphalt drives, pool repairs, carports, paint exterior trim etc, etc, etc. I've been lucky enuff to own over 1000 homes in my career and I still wis I hadn't bought the 2 condos I did. Your over advice you received was all good. Rich.

Jim Wineinger · Answer

I really do appreciate it Jon, I really do know all about each different type of expense and their catagories as I am an auditor. I just missed the reference that MikeOH almost always puts on his explanations of the 50% rule. After mentioning to subtract the payment he always puts (P&I) in parenthesis without the other T&I which is what I missed.

May be also why I have not found any deals that I was willing to give a second look at yet!

Sounds like I may be absent from around here because of being busy.

Thank you House21 for starting this and allowing me to learn even more.

Jon Klaus · Answer

I owned a condo as a rental for 12 years.  It cash flowed prettyy well, but I came to understand I really didn't own real estate, but had partial control of an improvement on someone else's real estate.

I paid $30K for it and eventually rented it for $725.  Not bad, right?  Well, the HOA fee went from $86 to $204.  I sold it for $30K (same as what I paid) after 12 years, but if it had been a SFR down the road I would have been able to sell if for at least 2X.

Jim Wineinger · Answer

Somehow I double posted that last post, so I deleted it.

But seriously, if taxes (normally included in a mortgage) are 2k a year then how can someones payment be only 100 a month.

Mark Yuschak · Answer

Prepare to be surprised....flipping is going very well for me in the Grand Blanc area.

Jim Wineinger · Answer

Like I said, it was my first attempt to help in this area, and I do believe that I missed a few things.

But from what I have read and understood the 50% rule includes all operating expenses. But then you must subtract PITI which is the payment interest taxes insurance. The payment should be based upon full purchase price without any downpayment subratcted and is suggested that it be for 30 years at 7% to get the best picture.

So I get 850 rent
expenses 425
NOI 425
then for the payment I used your figures in the mortgage calculator found here on BP and came up with a monthly payment of 366+

noi of 425 minus piti of 366 only leaves 59. From that you would have to cover your association fee which is not included in one of the normal operating expenses.

I do not see how your mortgage payment can be as low as 100.00 a month when you list taxes as 2k a year which is 166.67 a month by itself. Plus you say insurance is 50 a month.

Please, JON/MIKEOH are someone else knowledgeable in this area show me why I missed on helping with this one.

Condo as a rental?

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