When Good Deals Turn Great
I recently bought a condo in Santa Monica for $425,000. This included rehab and was a great deal in a very expensive market. I put down $175,000 of my own money and financed the rest based on the $425K value. The only downside to the deal was that the city has a restriction that this unit can only be rented to low income tenants at a price of $1,800. This made it difficult to get an appraiser to look at the unit, because many were unfamiliar with the city’s restrictions. This was also an initial hurdle to being able to rent the unit out at market value – around $3,000 per month. This is where a little creativity comes into play. I charged a separate storage unit fee of $1,200. This is more than a standard storage fee would cost, but it allows me to stay in compliance with the city and still charge fair market rent. It’s important to be completely honest about this with your potential tenants. The breakdown of price should be clearly laid out in the contract.
Once I finally did get someone to look at the place they told me it was appraised on $870,000 – which was fantastic! We doubled our initial investment. This created an entirely new opportunity. I could now get an 80% loan off the appraised valued, which will equal over $400,000. That money will be used for a down payment on a new property without having to use any personal funds.
The downside of taking such a large loan is that the rental property will no longer be cash flow positive. This is why strategy and goals are so important in real estate. My goal was to use this initial purchase to fund something bigger. You may want to avoid the large loan and just use the cash flow from one condo. Both are great.