Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes
9y
@Naveen Kumar. You have a $800 annual return on $20,000 invested. And that is a confirmed 'maybe'. You will run out of money if you rinse/repeat that model. You need more cashflow per 'door'. A bunch of ppl have been saying condo fees are killing, but really ALL the fees are killing you.
Repairs ~ For example. If this is a nice house in a nice area, you should be able to get good renters. I get home warranties on all my properties. The cost is about what you have budgeted for repairs. The best part is then I don't need a property manager. I can manage my properties from Mars. ;-) Save $125 a month on PM. ;-)
Property Manager ~ The ONLY reason you need a property manager (IMHO) is to take the 3 am 'my toilet is running' calls and to collect rent. I collect my rent via ACH on the 1st of the month. And I use home warranties for repairs. No one EVER calls me for repairs until AFTER the warranty company comes out and does their thing and it's beyond them. Besides, a property manager is a risk in itself. Who is going to watch your 'baby' better than you? They may put some clown in that trashes the place. You are out the same amount of money if a PM chooses them vs YOU choosing them. I'd rather say 'I didn't choose well' than blame someone that doesn't have my interests at heart. But that's me.
Vacancy ~ 8% is about one month out of 12. To me that is 'ouch' material. My HIGHEST vacancy rate on one of my places is a little over 3%. I have a number of them at ZERO. I have a friend/business partner in the difficult multi-family world and he runs less than 5%. But he kicks ***. If you do 2 year leases you are automatically lowering the vacancy rate to less than 5%. And if you don't think you can get a 2 year lease, perhaps you are in the wrong area? I've just saved you another $50, maybe $75 on the vacancy allowance.
Now it is 'better'. Your cashflow is $250 a month, $3,000 a year. Much better ROI when you consider your risks. ;-) Since it is condo, the association PROBABLY pays for the roof and a lot of the other stuff. But you need to find out.
One problem many investors have is they think it is better to make $100 a door on 50 doors vs $500 a door on 10 doors. Each property takes about the same amount of work unless you bought a 'dog'. And each door has about the same risk attached to it.
Flipper/Rehabber · Mechanicsburg, PA · Member since 2013 · 189 posts · 84 votes
9y
It's simple, those realtors,lenders and sellers all get paid when you buy the property. They don't care what your real cash flow is... Also most of those people probably don't realize the costs associated with owning rental property. Most people think rent-mortgage=cash flow. Unfortunately that's not how it works
Contractor · Magnolia, TX · Member since 2016 · 279 posts · 155 votes
9y
Short answer, they're lying to you. Slightly longer answer, double check your expenses. The condo fees may include capex, repairs, insurance etc. Or it may just be overpriced.
Ashburn, VA · Member since 2017 · 85 posts · 28 votes
9y
Thats what I thought @Jeremy S. - when I tell them of the BRRRR strategy, and that I have to buy at 30% below appraised value, they almost laugh in my face.
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
9y
I agree with every comment here. The Condo fees are killing the deal. Look for deals without condo fees. Properties with Condo Fees are usually the death null for the deal.
...and those that are telling you it's a good deal have a strange definition of a good deal. This isn't even a bad one...it might be defined as a suicide deal.
Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes
9y
@Naveen Kumar. You have a $800 annual return on $20,000 invested. And that is a confirmed 'maybe'. You will run out of money if you rinse/repeat that model. You need more cashflow per 'door'. A bunch of ppl have been saying condo fees are killing, but really ALL the fees are killing you.
Repairs ~ For example. If this is a nice house in a nice area, you should be able to get good renters. I get home warranties on all my properties. The cost is about what you have budgeted for repairs. The best part is then I don't need a property manager. I can manage my properties from Mars. ;-) Save $125 a month on PM. ;-)
Property Manager ~ The ONLY reason you need a property manager (IMHO) is to take the 3 am 'my toilet is running' calls and to collect rent. I collect my rent via ACH on the 1st of the month. And I use home warranties for repairs. No one EVER calls me for repairs until AFTER the warranty company comes out and does their thing and it's beyond them. Besides, a property manager is a risk in itself. Who is going to watch your 'baby' better than you? They may put some clown in that trashes the place. You are out the same amount of money if a PM chooses them vs YOU choosing them. I'd rather say 'I didn't choose well' than blame someone that doesn't have my interests at heart. But that's me.
Vacancy ~ 8% is about one month out of 12. To me that is 'ouch' material. My HIGHEST vacancy rate on one of my places is a little over 3%. I have a number of them at ZERO. I have a friend/business partner in the difficult multi-family world and he runs less than 5%. But he kicks ***. If you do 2 year leases you are automatically lowering the vacancy rate to less than 5%. And if you don't think you can get a 2 year lease, perhaps you are in the wrong area? I've just saved you another $50, maybe $75 on the vacancy allowance.
Now it is 'better'. Your cashflow is $250 a month, $3,000 a year. Much better ROI when you consider your risks. ;-) Since it is condo, the association PROBABLY pays for the roof and a lot of the other stuff. But you need to find out.
One problem many investors have is they think it is better to make $100 a door on 50 doors vs $500 a door on 10 doors. Each property takes about the same amount of work unless you bought a 'dog'. And each door has about the same risk attached to it.
Investor · Downers Grove, IL · Member since 2015 · 28 posts · 8 votes
9y
You can usually factor in a lower Capex number with Association fees. If there is anyway to lower or eliminate your management fee then you have a decent deal IMO.
Investor · Takoma Park, MD · Member since 2016 · 166 posts · 147 votes
9y
Sounds like a great cash flow situation for the real estate agent who wants you to buy. Be careful with condos. In addition to that hefty fee that is killing your cash flow, you also need to pay attention to whether there are any condo association rules about renting it out, etc. Also, you really should be thinking about your exit strategy when you buy a place. Condos can be hard to sell, especially if things evolve to where there is relatively low owner-occupancy. Banks just don't like to finance condos like that. In sum: you should probably keep looking. Best of luck.
Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes
9y
@Naveen Kumar There are a TON of home warranty companies. I've used 4-5 DIFFERENT ones. Since they work by zip code, a good one in one location may suck in a different zip code. And I have had that happen. It's, unfortunately, more of an art than a science. And I prefer science. LOL.
The home warranty company will usually fix something for about $50-$75 callout fee. There are items that will cost more like air compressor, freon, stuff like that. But I felt that it was less expensive as I have a full-time job that required me to work a LOT of hours. You pay for convenience, one way or another. But I want the tenant to feel some 'pain' if they break a garbage disposal (for example).
I have made the tenant responsible for the callout fees, but I didn't start out that way. It's just a way I do business. It gives the tenant an ownership to an issue. Also, it gives them control of their issues. No calls for me.
I've never had to do an eviction, I've only had 1 LATE payment over a 10 year period. My friend/former partner is extremely well versed in evictions, so I'd probably have him help me out.
I have steered away from Condos. They are the last thing that rises in price and the first thing that falls. The price point is less. And I think someone else said that they are more difficult to sell than a SFR. I would ONLY get a condo if it was a 8-10 school district. Single mom's will want 'Johnny and Jamie' to go to good schools. If Johnny is 6 when they move in, they MAY not move out until Johnny is 18. Especially if the single mom isn't 'hot'. ;-)
Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes
9y
@Naveen Kumar BTW, you SHOULD have gotten a 1 year home warranty when you bought the condo. If not, negotiate for it. ;-) They are usually about $450+ per year, depending on the provider.
@Jeff B. - I have seen Capex and Repairs as 2 different expense items in calc worksheets - around 5% allocated to each. Is that overkill?
That is the correct way to do it ... CapEx is to REPLACE items as they reach the end of their useful life ... repairs are, well, repairs ... typically fixing stuff that breaks without replacing it. One is expensed and the other is typically depreciated ... they are in fact two different things and should be treated as such.
Real Estate Agent · Garden City, NY · Member since 2016 · 3k+ posts · 1k+ votes
9y
Naveen Kumar
Ignoring PM choices, which I recommend if don't have any experience being a landlord, you can't really BRRRR a condo.
Condos have a price uniformity to them as long as they aren't foreclosed. So, you aren't going to find many at a substantial discount, which is the whole point of a BRRRR strategy.
@Jeff B. - I have seen Capex and Repairs as 2 different expense items in calc worksheets - around 5% allocated to each. Is that overkill?
You are correct to this under normal circumstances. Given you are in a condo changes things.
Do you really need to repair the roof or will the association do that? Check out your agreement and find out what you are responsible for. Your maintenance is less too since you don't have an outside to maintain or basement, etc... Your Condo fees might cover a good portion of your repairs. You might have the leaky toilet, but if you only have 1 toilet as opposed to a SFH with 3 bathrooms, then it changes things.
If you recalculate to lower your maintenance, capex and even vacancies (which I think are high) then your numbers look better.
@Jeff B. - I have seen Capex and Repairs as 2 different expense items in calc worksheets - around 5% allocated to each. Is that overkill?
That is the correct way to do it ... CapEx is to REPLACE items as they reach the end of their useful life ... repairs are, well, repairs ... typically fixing stuff that breaks without replacing it. One is expensed and the other is typically depreciated ... they are in fact two different things and should be treated as such.
Where those repairs are posted in your accounting system is a separate issue to budgeting money for repairs / replacement and certainly unrelated to what is or should be depreciated. Attempting to evaluate a possible purchase has nothing to do with your accounting.
While it can be seen as a conservative approach to evaluation, this case is a good example of how you evaluate can adversely over estimate IMO. Regardless, the cash flow is still too thin whichever way you look at it.
Syndicator and Fund Manager · Victor, NY · Member since 2012 · 760 posts · 345 votes
9y
Naveen Kumar I Own a property with near identical numbers to what you posted so thought I'd comment.
Based on the above the numbers don't look great but doesn't mean it's an awful deal.
Of course over the long run you will need to account for some of the figures you have listed but maybe not as much if the homeowners association covers most of the exterior repair and maintenance.
I mange it myself so save a lot, it's in a highly desirable area so almost never vacant and when someone moves out I rent it immediately. I screened my tenants well and I've been lucky so I have minimal (read almost $0) capex or repair requirements. So my property with numbers like yours above actually is pretty decent.
Of course I have reserves set aside for any vacancy, capes needed ect.
Point being, look a little deeper and it may have other characteristics that are appealing that a quick glance at a proforma wont tell you.
Troy, NY · Member since 2017 · 48 posts · 11 votes
9y
@Naveen Kumar check out the financials of the HOA which you should be able to access before buying. How many members are there? Are there any big expenses coming up like roof replacement and exterior painting? Does the HOA have enough in savings to cover these expenses or will they have to do a special assessment? If the HOA is well managed they may have saved enough to cover these expenses, but if not you will be hit with a special assessment and/or dues increase. With this info you can get an accurate number for Capex.
Real Estate Investor · San Antonio, TX · Member since 2016 · 143 posts · 167 votes
9y
@Naveen Kumar as previously mentioned, be very careful with condos. Find out what the allowed percentage of non-owner occupied units for the building is. Investors have gotten burned by forgetting that detail and then after closing on the unit, finding out that the limit of non-owner occupied units has been exceeded and now they can't rent theirs out.
Also, be wary of "special assessments". I know someone that owns a condo with a monthly association fee of $150. But last year, they got hit with an assessment for an additional assessment of $80 per month through the end of 2018. Ouch!