Buying my first rental.
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Investor · Middletown, NJ · Member since 2008 · 2k+ posts · 1k+ votes
15yMitch Kronowit said "I've owned a condo for almost 2 decades now and it's been one of my best investments. I really don't care that I don't own the "dirt" because 1) I didn't pay for the dirt, 2) I don't rent out the dirt, and 3) I won't ever be selling the dirt. Besides, if banks consider condos "real" property, unlike a manufactured home on concrete piers, that's good enough for me."
I agree. I've owned/lived in my condo for 15 years. It's extremely well managed in an excellent area, great school system. HOA fees have gone up maybe $150 in all that time. Our only special assessments have been for extra snow removal the last 2 winters. Can't be helped, Mother Nature whacked us. We do have foreclosures here, and have found ways to reduce our operating costs rather than just constantly raising the fees. Taxes in NJ always go up, regardless of owning a condo or SFR. Doom and gloom in condo investment is not a given.
If the HOA is strong and the property well maintained (you can find out these things before you buy, request financials too), you should be fine.
SFR properties, and we own 2, are not bulletproof either. People complain about HOA fees and maintenance issues, but SFRs have unforseen problems too, and when things break, they break big. There is risk in real estate as in everything else. My SFRs are in a city where the property taxes have gone up nearly 20% the last year, thanks to our new governor cutting state aid to that city and property values having declined by more than half.
Have a good reserve fund for these things and think long term.
We've bought several condos in FL. Last one was $42K cash, taxes $700 a year, insurance $750 a year, maintenance $280 a month, rent $900. The maintenance fees are similar with all of them in that area. All excellent areas, and we're holding for the long term. Property values will go back up eventually, but our plan is to buy and hold for at least 15 years.
Don't let analysis paralysis take over. Good luck!
27 Replies
- Residential Real Estate Broker · Payson, AZ · Member since 2009 · 3k+ posts · 1k+ votes15y
Are the HOA's monthly, quarterly etc...?
You didn't mention financing so I'm assuming you're paying cash for property?
Break down your numbers and see if they fit within famous 50% rule and post them up.
I've never bought a condo before because I don't like that I don't own any land(cubage only/between the walls, no land) but that's not to say its not a good deal ya know.
- Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes15y
Originally posted by motiv8td:
Break down your numbers and see if they fit within famous 50% rule and post them up.My guess is that if the $220 HOA fees is monthly, it's going to take his expenses above (perhaps well above) 50% of the gross income over the long-term.
In fact, given the $220/month in HOA fees, I'm not sure this is a great deal, despite the fact that those fees should cover some insurance, some maintenance, and some capital costs.
But, there's not enough info to be sure...
- Residential Real Estate Broker · Payson, AZ · Member since 2009 · 3k+ posts · 1k+ votes15y
Originally posted by J Scott:
In fact, given the $220/month in HOA fees, I'm not sure this is a great deal, despite the fact that those fees should cover some insurance, some maintenance, and some capital costs.
But, there's not enough info to be sure...
That's my thinking as well.
- 15yLafi S.Real Estate Agent · North Jersey, NJ · Member since 2008 · 287 posts · 51 votesOP
Yes the fees are monthly. Tell me more about the 50% rule?
I mean if my taxes are going to be about 116 a month plus 220 that would put me at 336 a month.
The deal is cash also, the mortgage broker I know said they wouldn't even lend unless the loan was up to $40,000.
- Residential Real Estate Broker · Payson, AZ · Member since 2009 · 3k+ posts · 1k+ votes15y
Originally posted by Lafi S.:
Yes the fees are monthly. Tell me more about the 50% rule?I mean if my taxes are going to be about 116 a month plus 220 that would put me at 336 a month.
The deal is cash also, the mortgage broker I know said they wouldn't even lend unless the loan was up to $40,000.
The 50% rule is plastered all over BP. I think there are even some stickies on it. Its more than worth the read if you haven't already. Your expenses don't stop at $336 a month unfortunately, that's where the 50% rule comes into play. Remember, its more rule of thumb than it is bible in landlording.
Also, another big debate among the investing community is paying cash = good or no good
Sure, it makes the fact that you're making X amount of dollars cash a month but you're taking forever to get back to even, let alone positive cash flow right? The idea of having debt is less out of pocket(i.e. loan) and having the rent cover the debt therefor positively cash flowing sooner while debt is being paid down.
No offense, but seriously consider reading up a bunch more through the landlording section of this site. Of course, ask a million questions. The seasoned guys will chime in.
- 15yLafi S.Real Estate Agent · North Jersey, NJ · Member since 2008 · 287 posts · 51 votesOP
Yes I will do! The bank is giving me until 6/3 to close so I want to know as much as I can before I make the move. I really would rather not pay cash, but I know it's going to be a PITA if I try to get a loan, and the mortgage brokers I talked too don't seem too excited about doing a loan for 35k.
- Residential Real Estate Broker · Payson, AZ · Member since 2009 · 3k+ posts · 1k+ votes15y
No one is really making much money on a small loan. Look for a private investor, offer a fair for both sides % and you'll have some capital to make more purchases, have reserves etc...
Keep at it, you'll be fine.
- 15yRobert AdamsBusiness MemberReal Estate Broker · Henderson, NV · Member since 2009 · 1k+ posts · 373 votes
sorry duplicate...
The Adams Team at Rothwell Gornt Companies4.970 Reviews - 15yRobert AdamsBusiness MemberReal Estate Broker · Henderson, NV · Member since 2009 · 1k+ posts · 373 votes
Originally posted by J Scott:
Originally posted by motiv8td:
Break down your numbers and see if they fit within famous 50% rule and post them up.In fact, given the $220/month in HOA fees, I'm not sure this is a great deal, despite the fact that those fees should cover some insurance, some maintenance, and some capital costs.
But, there's not enough info to be sure...
My guess is that if the $220 HOA fees are monthly, it's going to take his expenses above (perhaps well above) 50% of the gross income over the long-term. Agreed $220 a month is high for a condo HOA and messes up the inflow ratio. Usually condo HOA's are much lower even if the include insurance etc. The only time I have seen Condo HOA's over $200 a month was in Luxury High Rises.
It seems even with the high HOA payments you will be making positive cash flow at the moment, but you need to consider decreasing rental rates in the future as well.
The Adams Team at Rothwell Gornt Companies4.970 Reviews - Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes15y
While you have taxes and HOA fees in your expense list, what you're missing is:
- Insurance
- Maintenance Costs
- Vacancy
- Rental Loss (non-payment, concessions, etc)
- Capital Costs
- Property Management
- Turnover Costs
- Utility Costs
- Potential Legal/Accounting CostsOnce you add all those things together, I'm guessing that more than 50% of your gross rent is going to expenses, leaving less than 50% of your gross rent to go to debt service and profit.
Btw, The 50% Rule says that, on average and in general (certainly not always), about 50% of your gross rent will go towards expenses, rent loss and capital items. This will tend to hold true over many units and over a long period of time.
- Investor · Atlanta, GA · Member since 2011 · 22 posts · 9 votes15y
Some mortgage brokers will not loan less than $40k, others will, you will just have to call around. I was able to get a conventional 15-year fixed loan of $31k ($38.7k purchase price 20% down). The lender might hike the rate up a bit or add a bit to the origination to compensate for the small loan amount, but these are usually negligible. For reference, my 15-year note was at 4.75% with .9% origination (locked in last week) - it probably would have been around 5.25% with .5% origination for the 30-year option.
My hunch is that you're going to have a harder time on getting loan approval for the condo. The waters are extremely muddy with condos today and there are a number of things that can make the unit ineligible for financing, including % of owners vs. renters (can't be less than 51%), % of owners late on HOA payments (can't be more than 10% or 15%), if one individual/entity owns more than x% of the building (I believe it's 10%), etc. These are rules for conventional financing (Fannie/Freddie), but the (super) majority of the loans for residential are going through them. I have heard quite a few mortgage brokers who claim they are able to get portfolio loans in order to get around these requirements, but none of them were able to come through. A couple of condos I entered escrow on fell out of escrow due to these exact reasons.
The lender typically submits the questoinnaire to the HOA, and you might not get a definitive answer until you open escrow. I was fed up after the second time escrow fell apart so I started looking at recent closings of units in the buildings I was interested in to see how they were financed. If the majority were cash deals, then that raised a major red flag.
Victor
- Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes15y
Lafi- you know how terrible the NJ piece of crap is. I'd STILL pick it over this condo presented. BTW, I think we closed, but haven't seen funds. Would you take a look at HUD? I think it is incorrect. Good luck on getting your first deal. I've found some of the BEST deals for me were ones I avoided. This condo may be the same case... Rich
- SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes15y
Originally posted by motiv8td:
I've never bought a condo before because I don't like that I don't own any land(cubage only/between the walls, no land) but that's not to say its not a good deal ya know.I've owned a condo for almost 2 decades now and it's been one of my best investments. I really don't care that I don't own the "dirt" because 1) I didn't pay for the dirt, 2) I don't rent out the dirt, and 3) I won't ever be selling the dirt. Besides, if banks consider condos "real" property, unlike a manufactured home on concrete piers, that's good enough for me.
The important things I've learned with condos are:
- Stick to middle-class developments or better.
- Ask around about the HOA and management company.
- Make sure the HOA owns the land and does NOT lease it. - 15yLafi S.Real Estate Agent · North Jersey, NJ · Member since 2008 · 287 posts · 51 votesOP
@JScott- Thanks for the breakdown of the expenses, i'll be working out getting final numbers regarding utilities and what the HOA fees include and be sure to post them up
@ Victor- I've heard from two mortgage brokers so far that said they won't lend under 40k. I'll be researching all the financing problems you mentioned. I certainly don't want to be stuck with this thing if I have to sell in the future.
@ Rich- Yes we closed on Wednesday evening. I am not sure why you didn't receive the funds yet but I can take a guess(the buyer's attorney is a moron)
But can you please explain to me after all that you went through with the Orange property why THIS deal is worse? I can't imagine how that's possible.@Mitch- I will be speaking to the HOA on Monday and will be sure to ask them these questions as well as do some research on them as well. Thanks for the assurance on the condo investment, although this deal is geared more towards low-income tenants.
- FL · Member since 2009 · 2k+ posts · 357 votes15y
Hello Lafi S,
Here is a link to the 50% rule as a guide for rental properties:
http://www.biggerpockets.com/forums/52/topics/18371-help-me-understand-this-deal-and-5-2-rule
Raymond
- 15yLafi S.Real Estate Agent · North Jersey, NJ · Member since 2008 · 287 posts · 51 votesOP
Ok so based on the 2% rule a descent purchase price for this property would be $55,000.
The equity is there b/c short sale comps are upwards of 80k and normal sales can be near the 100k range.
I'm a bit worried though about the fact that the rent is above market, that's great for now but once she's gone I will have to settle for less.
- Residential Real Estate Broker · Payson, AZ · Member since 2009 · 3k+ posts · 1k+ votes15y
Originally posted by Mitch Kronowit:
I've owned a condo for almost 2 decades now and it's been one of my best investments. I really don't care that I don't own the "dirt" because 1) I didn't pay for the dirt, 2) I don't rent out the dirt, and 3) I won't ever be selling the dirt. Besides, if banks consider condos "real" property, unlike a manufactured home on concrete piers, that's good enough for me.All good points. I guess for me personally, it would really have to be an attractive deal. Different strokes for different folks.
Lafi, surely we're all interested in the #'s so when you get them figured out, post them up :mrgreen:
- 15yLafi S.Real Estate Agent · North Jersey, NJ · Member since 2008 · 287 posts · 51 votesOP
I spoke with the president of the association yesterday and here are the numbers I figured out:
7 Units in the building, 3 are absentee landlords including mine and 4 are owner occupied.
2 Units are delinquent, the one I am purchasing and another b/c the owner passed away recently and the wife wants nothing to do with it.(Probate Opportunity??)
The Condo Fee of 220 actually includes an outside management fee in charge of common areas as well as building insurance, garbage, snow removal and laundry units in the basement.
Replica unit in the building was purchased in 2009 for 159k!
Utilities are covered by my tenant according to the lease which expires this October.
The president of the association also told the reason the fee went up to 220 is to compensate for the 2 delinquent units, the probate one which has been behind for over 2 years now.
The only other fee I am expecting would be my property insurance, since the current owner already has a policy it shouldn't be that difficult to get one as well and that should be around 50-70 a month.
- Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes15y
Hi Lafi,
Yes, I received the whopping check! Now for this thread. You kinda made my point with your recent post. The HOA FEES mean you'll NEVER own this property free and clear. The fees will be raised many times, but what kills you are the "special assessments". These are unknown till they happen. Will nearly 50% currently delinquent (and nothing can be done to make them pay with current economy) guess what happens if this is the time any of the following need replaced: parking surfaces due to deterioration of assphalt-Carport covers due to rust or excess snow crushing them- roof finally gives up the ghost and only 3 owners are currently paying their fees. Will all of those be willing to pay double their portion for the repairs. My guess is no.
Don't get too excited about previous sold prices. I had a 90 unit here in Ft Myers ON the golf course that I had an offer accepted on in amount of 2.9 (32K per unit. Some of those had sold for 200K. After due diligence, I walked.
I just don't like condos. The HOA is an unknown that you just can't factor in, imo. Rich - Investor · Middletown, NJ · Member since 2008 · 2k+ posts · 1k+ votes15y
Mitch Kronowit said "I've owned a condo for almost 2 decades now and it's been one of my best investments. I really don't care that I don't own the "dirt" because 1) I didn't pay for the dirt, 2) I don't rent out the dirt, and 3) I won't ever be selling the dirt. Besides, if banks consider condos "real" property, unlike a manufactured home on concrete piers, that's good enough for me."
I agree. I've owned/lived in my condo for 15 years. It's extremely well managed in an excellent area, great school system. HOA fees have gone up maybe $150 in all that time. Our only special assessments have been for extra snow removal the last 2 winters. Can't be helped, Mother Nature whacked us. We do have foreclosures here, and have found ways to reduce our operating costs rather than just constantly raising the fees. Taxes in NJ always go up, regardless of owning a condo or SFR. Doom and gloom in condo investment is not a given.
If the HOA is strong and the property well maintained (you can find out these things before you buy, request financials too), you should be fine.
SFR properties, and we own 2, are not bulletproof either. People complain about HOA fees and maintenance issues, but SFRs have unforseen problems too, and when things break, they break big. There is risk in real estate as in everything else. My SFRs are in a city where the property taxes have gone up nearly 20% the last year, thanks to our new governor cutting state aid to that city and property values having declined by more than half.
Have a good reserve fund for these things and think long term.
We've bought several condos in FL. Last one was $42K cash, taxes $700 a year, insurance $750 a year, maintenance $280 a month, rent $900. The maintenance fees are similar with all of them in that area. All excellent areas, and we're holding for the long term. Property values will go back up eventually, but our plan is to buy and hold for at least 15 years.
Don't let analysis paralysis take over. Good luck!
- 15yLafi S.Real Estate Agent · North Jersey, NJ · Member since 2008 · 287 posts · 51 votesOP
@Rich, Yes I am glad this deal is over. I hope next time we do business it will be under better circumstances.
I agree with what you are saying and I may not ever own it completely free and clear, however I do think this is a great deal to hold on to for at least 3-5 years if not more. The exit strategy is there if needed and the tenant has already indicated they want to renew the lease which gives me a bit more security at least for another year. As you know taxes here are extremely high and I can say the same for the prices, it's very hard to find a deal that will cash flow like this from the start in North NJ. Also, the only other unit delinquent is from the owner who was newly married that passed away from an illness. I'm currently getting in touch with the widow for another potential deal. It's a sad story but also very confusing but I'll save that for another thread..@Aly- Where as you mentioned can I get the financials of the HOA and weather or not they are strong like you mentioned? What should I ask for specifically? I've been emailing the president for the past few days and would like to mention this to him. Thanks for the advice from a fellow KW agent :D
- Investor · Middletown, NJ · Member since 2008 · 2k+ posts · 1k+ votes15y
Hi Lafi,
We have a management company and they provided the financials. You will likely have to pay a fee for them unless you're under contract.
Ask if there are any special assessments coming up, if there have been in any in the past, any big projects looming (parking lot repaving, roof work, pool/tennis court repairs, etc.). Are the properties professionally managed or run by the condo board? That's a red flag if the latter, as the board has control of the checkbook and fraud/mismanagement is a major concern.
And I agree about northern and even central NJ, prices/taxes are always high but so are rents, and places close to the city will increase in value.
Glad to meet another KW agent too!
- Real Estate Investor · Cold Spring Harbor, NY · Member since 2011 · 104 posts · 16 votes15y
Originally posted by Aly L:
We've bought several condos in FL. Last one was $42K cash, taxes $700 a year, insurance $750 a year, maintenance $280 a month, rent $900. The maintenance fees are similar with all of them in that area. All excellent areas, and we're holding for the long term. Property values will go back up eventually, but our plan is to buy and hold for at least 15 years.Aly,
Hello to a fellow central NJ'er! I've followed some of your posts and would love to hear your experienced opinion on some of your situations.Based on the #'s you provided above, it appears as if you have positive cash flow by a few hundred $ (not sure what you pay mgmt fee but I assumed 10%), and since you paid cash, at the end of 15yrs you would have accumulated ~$70k in rental income and any property appreciation, on the 42k you paid for the condo to begin with.
How does this compare with your SFH's, where hypothetically one puts 30-50k down on a $150k'ish property. Here is a hypothetical situation: http://i970.photobucket.com/albums/ae184/thecentfamily/property150k.jpg for a house in NJ. Assuming only a nominal 10% appreciation after 15yrs.
I am in analysis paralysis currently!! and would love to hear how you compare/prefer either situation speaking from experience..thanks!
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