By sales comps, the "ancient" past of 2007 is completely irrelevant. The rule of thumb is to find closed sales (not listings) in the last 6 mths and within one-half mile of your property -- preferably condos. Your agent can pull these numbers very quickly using the MLS.
Condo associations create a lot of unknowns and extra risks of special assessments and mismanagement, particularly when numerous units are vacant, as people have pointed out. If you can make $5-10K from flipping that would be my course of action, then find a better property.
Your cap rate (net yield on your 73K investment) will be a paltry 5% if you hold this:
1600 rent per mth
- 750 HOA
- 225 taxes/insurance (est).
- 20% of 1600 for vacancy, repairs, prop mgmt
=305/mth NOI
That's poor in any context. Please consider moving on.
It's a 3 bdrm 2 bath condo in a nice working class area of the Washington DC/MD suburbs. 1300 sq ft.
I paid $68k cash at closing. No financing.
The HOA fee is high at $750 which includes building maintenance and all utils. Interior maitenance in my responsibility.
I'm almost finished with a minor renovation which included a rip-out of ugly paneling, a re-paint of everything including walls, doors and trim, replace some window treatments, repair and clean carpet, new dishwasher. Plus I replaced the water turn-offs on all the sinks and rehab'd the toilets.
The renovation cost was about $5,500.
I'm in contact with a property management company and they are telling me the property may rent for $1,500 - $1,600 a month.
I did a CraigsList check of rents in that area, and the rock bottom for a 3bdrm 2 bath is around $1,500.
I'm thinking of having the property management company manage it for me for 10% of collected rent.
If the HOA takes care of the outside, and the inside has been renovated, you should not have much in the way of maintenance, etc., given that it's a condo, so I'm not sure why you would pay 10% of your rent to a management company to basically collect your rent.
Generally speaking, I don't like condos as investments. There seems to be little appreciation, even in the DC area.
Does the $750 HOA fee (that's monthly, right?) cover your property taxes? I assume you're still liable for property taxes and insurance, is that right?
You'll hear about the 50% rule which is that, if managed, a property, on average, will consume 50% of the rent in expenses, including both the current expenses and a set-aside for capital expenditures. In your case, though, you should not have too much in that regard given that it's a condo and the HOA is presumably taking care of the roof, systems, etc. Of course, maybe they are not reserving enough money for these things and you are exposed to a potential special assessment.
Overall, I don't think your deal is terrible. It probably does not cash flow as much as most people here would like, but I know in the DC area that can be hard to do.
The good news is that you don't have any debt on the property, so even if you end up keeping only 30% of the rent as your real profit, you're making $5K a year on a $73K investment. Not a home-run by BiggerPockets standards, but better than you'd get parking the money just about anywhere else.
One thing about associations is that you have people managing your asset that may not be good at it, namely a board of directors. The condo I live in keeps me awake at night for many reasons. When I bought here I thought out of 340 units there should be some able people to manage things. I was wrong. I had my home and 2 rehab/rentals when a special assessment came my way. Since 1 was in esrow being sold my profit was slimmed.
Check out the board meetings and the reserve study in particular. Most associations are underfunded. If your property is 30 years old or so siding and windows can become issues. My board wants to do a complete reside and reroof for around 10 million. We have 1 million in reserves. This economy, insane!
Management companies can profit from your problems making money on your repairs. Their goal is no future problems and no liability so bring in an engineer to examine all jobs including paint and gutters.
$68K for $1500 in rent would normally be fine. And probably is if the HOA fee is annual. If its monthly, this is not going to cash flow. Some expenses are covered, but some of those, utilities in particular, are ones you would push to your tenant anyway. Much of the maintenance is caused by the tenants, so being fixed up inside and out will help with some items, but won't make your unit maintenance free. And you still have all the other items in the 50% rule - management fee, vacancies, tenant damage beyond security deposits, capital items (mostly in the form of special assessments from the HOA), CPA fees, legal fees, etc.
If half the rent truly goes to the HOA, and then you have to pay these other items out of the remaining half, this probably isn't going to make much money.
Thanks Jon. Of course to sell we have to disclose the real possibility of future assessments.
I would advise Ken to go to finance meetings and architecture meetings. When you can get on the board and become the treasurer if possible. The learning curve is steep but an interesting world all in itself.
I've done that but then threw the ball to see where it would go. It went right back to where things were when I got on board. I give.
Another thought for Ken. Those dues (assuming monthly) are very high but could be enough to curtail future assessments. That is a good thing. If everything else works and you understand where all that money is going maybe ok. My dues are $375 mo and would be over $600 if we can finance repairs, which is doubtful.
Another thing is we are picking up the tab for over 10% of the owners not paying during these times. You want to check that out to.
You say you comped rents at 1,500 on CL. Since your unit has all utilities paid, hopefully you can get 1,800 or so. You'll need to stress the utilities in your advertising, of course.
Not going to be a cash flow winner, but if there is one area that might have above-average appreciation going forward, it's the DC suburbs.
You may consider trying to flip it, since you've made some improvements such that it might sell for near retail, and it sounds like you got a good price for a 3/2 in a decent area of the DC suburbs. You could then look for better cash flow. Have you evaluated sales comps?
Yes, the condo fee is charged monthly, and it is quite high. Which would perhaps exlpain the low selling price.
There was a special assessment back in 2004, but none are planned going forward.
Also, the association banks about $250k a year for a rainy day fund, with that fund currently with a positive balance of one million dollars.
There are a number (not sure how many) foreclosed/empty properties on the premisise that currently causing the other owners to pay a high monthly condo fee.
One good thing is that the neighbors seem active and friendly and the condo office staff is helpful.
I'm responsible for property taxes and insurance.
The property assessed for $110k a couple years back, so I'm going to try to contest the assessment and see if they can reassses it for what I paid for it.
I figured that I'd pay the 10% to the property management company and they'd know how to find good tenents. Though I've seriously considered handling that part myself.
Any thoughts on handling the rental myself instead of going through the property management company?
Also, forgetting for a second that I already bought it, I'm trying to figure out what I should have paid for this property. Any ideas?
Yes, I've briefly considered selling it as a flip, but I was thinking that I'd keep it and make of it as a landlord.
The sales comps are hard to get a handle on.
There was a run-up to 2007, then a big fall-off like some other areas of the country.
It was purchased in late 2006 for $160k and then sold in mid 2007 for $220k.
When I found it, it was listed as a short sale for $90k, and I offered $65k.
The bank rejected my offer with the comment that the offer didn't reflect current market conditions for the area. I had my agent send the sellers agent an email making the point respectfully that my offer was for all cash and requesting that they reconsider. I forgot all about it, and 3 months later they came back and accepted my offer, but I'd need to pay the they're half of closing costs.
The entire settlement cost me a bit less than $3k, which is where I got my final price of $68k.
By sales comps, the "ancient" past of 2007 is completely irrelevant. The rule of thumb is to find closed sales (not listings) in the last 6 mths and within one-half mile of your property -- preferably condos. Your agent can pull these numbers very quickly using the MLS.
Condo associations create a lot of unknowns and extra risks of special assessments and mismanagement, particularly when numerous units are vacant, as people have pointed out. If you can make $5-10K from flipping that would be my course of action, then find a better property.
Your cap rate (net yield on your 73K investment) will be a paltry 5% if you hold this:
1600 rent per mth
- 750 HOA
- 225 taxes/insurance (est).
- 20% of 1600 for vacancy, repairs, prop mgmt
=305/mth NOI
That's poor in any context. Please consider moving on.
Ken-If you get a chance to view the year end budget for 2010 take a look at the bad debt write-off. For comparison, ours was about $85k. Divide that by 12 months and 340 units I am paying $20.83 per month to cover unpaid dues. I am thinking a small association could quickly get into trouble when a hefty percentage can't pay putting too much pressure on others, a domino affect taking place.
Another measure is your total outstanding past dues (receivables on balance sheet) that should not (according to our lender) exceed 10% of your yearly dues. Our is 13%.
Hope that helps
Typically property management runs 10% of gross collected rents. In some areas, a PM will charge a half to a full months rent to fill a vacacncy. Assuming one turn over a year, half a month fee to re-rent and half a month for make ready, then you're looking at half a month vacancy ($800), half a month's rent for the PM ($800) and 10% of the remaining 11 months of rent for the normal fee ($1760).
Repairs are unpredictable. You can go for quite a while with no repairs then have a big one. Even though the HOA coveres some things, they won't deal with anything inside the unit.
Every now and then you have to do something major. While the unit may be good now, sometime in the next 20 years you'll have to replace cabinets, countertops, appliances, redo floors and paint. If you have your own water heater or furnace, that gets replaced at some point, too.
$3600 a year on a $86K investment is not very good. Certainly not for the hassle of rentals.
Have you verified the HOA will allow you to rent it? I assume you have by this point, but if not, you should check. Some HOAs prohibit or limit rentals. They actually do have an impact, as a project needs to have a fairly high percentage of owner occupied units to be "warrantable". Non-warrantable units are very difficult to finance, and the reduces their value.
To answer you question-
I would definitely not hire a property manage. They would charge $150/mo to collect the rent.
You can hire a property management company that will place a tenant (basically give you applications for your review) for 1/2 a months rent of a full month. That should be much better for your situation.
If you are set on a property management company 10% seems high and is usually considered in areas where rent is under $1,000 per month. 6-8% is the range I would expect for $1,500/mo.
About the HOA-
$750 is extremely high as everyone has mentioned. How many units are there? Have you reviewed the financials, where is the money going (you said 250k/yr into reserves)?
If you have more time than money you may consider getting on the board so you can have a say in the madness. Maybe an investor is trying to raise the fees to devalue the units so they can buy all of them.
Any suggestions on how to find and screen a good renter?
Here's my plan for finding a renter -
- Go to a hardware store and buy a bunch of "For Rent" signs, put my cell phone # on them and place them around the neighborhood.
- Place an advert on Craigs List.
- Charge a $25 application fee to run a credit report.
- Call their employer and confirm employment.
- Call previous land lords.
Getting a good renter is probably the best thing that I can do going forward, so any suggestions from the group on how to find then then screen them would be great appreciated.
you can pay 10 bucks a sign at a local hardware store, or you can go online, pay in bulk, and get a great deal..i just bought 50 blank signs yesterday for 70 bucks online...but yes, i love putting for rent signs in the area to attract someone who is aleady familiar with the area, and usually the property as well
I never get much luck with signs. My tenants are a younger crowd though.
My thought it to find a good realtor and have them come in an tell you what they think you could sell the condo for. If you can come out even or maybe a few grand down, I would do it. I see this $750 HOA fee killing you in the future.
I hope you think hard. about it. that HOA fee is a huge percentage of your gross rent. You have to also consider that you have alot of your own money tied into this "deal". so the longer you wait out, you may ending up losing even more money. Be cautious.