condo investment

[Account Closed]

I am thinking of buying a condo in Maui, Hawaii. I have an offer in for $42,000 2/1.5 mountain/ocean view. It has tenants in place paying $950/mo. The HOA fees are $668/ month, this includes elecricity. the bank is counter offering at $45,000. This is fee simple property in Kahului. This is definatley a buy and hold. These proerties were close to $200,000 in 2004. They were $160,000 about 3 years ago. Is this worth investing? I am partners in one unit already with a positive cash flow of about $150/ month including all the expenses.

[Jon Holdman]

Conversely any property will look OK when you're doing an analysis and ignore some of the very real costs of owning rental property. If you say, "this will cash flow" but ignore costs you WILL have, then you're setting yourself up for trouble. These are real costs that you will incur. There is no "risk" in the sense that these might not happen. They may not all happen at once, but these are inevitable costs associated with owning property.

Read in the Rental Property forum about the "50% rule". That rule states that over time, all the expenses, vacancy, and capital improvements will eat up 50% of your gross scheduled rents. From the remaining 50% you have to pay your debt service (if any) and take a profit. In the case of a condo, some of these expenses, such as exterior maintenance, get baked into the HOA fees.

In a good month, your only expenses (on a normal property, not this condo), might only be taxes an insurance. Those are the months we all like. Then there are months like this one for one of my properties. My tenant vacated at the end of Jan, which really turned into Feb 1. I had to rip out three year old but totally destroyed carpet. Thanks to the billing cycles, they owe me $200 for water bills. I had to haul off a bunch of trash they left behind. Repaint. Install new flooring. Fix other minor damage. All told I'm out about $2000 on this property this month. Their $800 security deposit covers some of it, but hardly all. But I recognize this is the reality of landlording. This is not the normal month, but it is the kind of month I KNOW will happen once in a while and I'm prepared for it.

Normally I would say the 50% rule is a little pessimistic for HI, because your climate is so mild (barring hurricanes). However, when you say the HOA is $668 and you've omitted a bunch of very real expenses, then I just don't see any way at all this could make any money.

Yes, there are many locations in the US that will generate true cash flow even after taking into account all the expenses. And there are lots of other locations where owning rental property makes no sense.

Keep in mind we're just talking about averages and projections here. Reality will be whatever it will be.

That may be OK, if you think there's a speculation play. If your friend bought in 2000 for $50K and sold for $120K in 2006 I think you will be extremely hard pressed to repeat that feat. You've missed the bubble. OTOH, if he bought a short sale recently for $50K, fixed in up, and sold for $120K, he's doing fix and flips, not buy and hold. Do that instead. If you buy for $50K, put $20-30K into making it nice and can sell for $120K you'll make a nice profit. Around $15K +/-. More than that if you have enough cash to avoid borrowing money to do the deal. That's a very valid business model.