All Forum Posts by: Account Closed

@Sam R. In the best case scenario this type of arrangement can work out great and result in much more personalized care and attention. However, in a worst case scenario things could go very wrong. A few things I would consider are:

1. Washington does require workers compensation insurance for this type of property manager. 

2. If the management relationship does not work out you are in an awkward situation with potential wrongful eviction type lawsuits. 

3. The live in manager probably doesn't have as broad a skill set as a professional property manager and almost definitely does not have strong relationships with electricians, plumbers and other skilled contractors that will likely be needed at some point and therefore may be expensive.  

I just closed on my second property. The property is a condo unit in one of the wealthier suburbs in the St. Louis area and is within walking distance from the downtown district. I am haopy with the deal but would like to see what others think as far as risk return.

The unit is a 2 bedroom 1 bath, 900 sq ft, 450 sq ft storage space, balcony, in unit washer dryer, outdoor parking, brand new paint and carpet, with appliances that are far from new but good condition.

I analyzed the deal using the rental rates others are getting in the complex and subtracting all of the known expenses. After that I increased "other" expenses as a % of rent until I got to 10% cash on cash. 

Cash Down: #22,000

Rent         $1,100

HOA $145

Taxes       $101

Loan         $339

Insurance $15

Total:        $600

Balance: $ 500

$500 - Monthly Cash Flow Needed to get 10% $183 = $317 or approx 29% for vacancy, capex, maintenance & (even though I am self managing I am including management as an opportunity cost).  

I estimated CapEx without the items paid for by the association at around 5%. I think 5% for maintenance is reasonable as well since I have no landscape or exterior maintenance duties. I assume standard 10% vacancy and property management fees at 10% each and I am right at the 10% cash on cash mark (15.2% after adding back the property management).

I am more than happy with a 10% cash on cash return for a rental in a b+ to a neighborhood. I do not assume any appreciation in my analysis and look at the potential for appreciation as a potential upside. 

LyNetta Hill Inpulled up the listing you are talking about and it may be the most over priced property I have seen in our area. Hazelwood in general is prob not the best area to look. If your a risk taker there are plenty of deals in the city with huge potential. I am more comfortable with lower tier units in places like kirkwood, Brentwood and Webster that offer consistent 7-10% returns with almost no chance of depreciation.

Tiffany S. I would suggest calling a few agents and having a 10-15 minute conversation where you ask all the questions you have and choose the agent that fits your personality and seems trustworthy. Getting quotes from multiple agents just creates a circus of competing sales guys trying to make a sale.

@Chris Lucas I am going through something similar right now and what I have found out definitively is that if you are getting a personal loan (if its 30 yr fixed its prob personal) there is all ways a due at sale clause and the lender can technically call your loan at anytime. However, your lender likely knows they are going to sell your mortgate off in the secondary market before the ink drys on your closing docs and no one will ever care about the title of your loan as long as its kept current. If a problem did arise they would likely just ask you to transfer the title back as opposed to calling the loan. However, there is always that risk. 

If you are getting a commercial loan the LLC does not cause issues. However, you still probably have to personally guarantee the loan.

@Heidy Fernandez If you can not achieve an attractive cash flow while paying for property insurance you have a bad investment property that should be sold and put into something more profitable. 

The discount rate you would have to use to account for the increased risk associated with potentially using your entire investment every year would make the cost of insurance worth it every time for a small investor. Even multi-billion dollar REITS have property insurance with a high deductible which shows that their internal calculations do not think going without insurance is a good business decision. 

I would sit down and really put some numbers to paper to see if no insurance is really the best option for you. Taking on some additional risk with high deductibles of ACV on the roof could be something that works for you. I had a client that decided to move from a $2,500 per occurrence deductible on over $20mm in property value to a 1% wind/hail deductible to save around $10k a year. The next year a huge storm caused over $100,000 in damage all of which came out of his pocket. 

@Robert Cummings Additional interest is exactly what you think it means. It gives you notice if the policy is canceled. It is common among mortgage holders and anyone else requiring coverage. Being listed as an additional insured on the policy makes you an insured under the tenants liability insurance. IIn most states as long as the tenant is 1% liable for the claim his insurance will take care of the defense costs and pay claims up to his limit. For example, if a tenants dog bites a visitor and that visitor sues both him and you (or just you) the tenants liability insurance will provide defense for both you and pay settlements up to his limits. 

Keep in mind that if a tenant is liable for damage to your property his liability insurance will pay you for those damages regardless of additional insured status. In that case you are the claimant and he is the defendant.

If you were not named as an additional insured on the tenants policy your insurance would have to provide defense costs and the courts would go through a drawn out battle to determine the percentage of liability you both had (say tenant 80% and you 20%). You would then be on the hook for that amount. 

As the landlord you are going to be named in every suit caused by a tenant regardless of fault since you are perceived to have the deeper pockets. For example, if a tenant murders his neighbor you will likely be named in the suit for negligent screening of tenants.  Apartments notoriously have tons of frivolous claims and an important part of your risk management plan should be requiring a monitoring renters insurance of your tenants. Keep in mind the premium for renters insurance is less than $150 a year so it is not an unreasonable requirement.

@Travis Turnbull I think it's a pretty safe assumption that condos do not appreciate as much as homes. I don't plan on selling any of my investments in the short term so I put a premium on a higher cash flow up-front instead of appreciation. That being said I think looking at it your way is also valid. Either way im sure you'll find a good deal if you keep at it and stay disciplined. 

@Travis Turnbull I agree with @Christopher Giannino that a condo can be a great first investment. The biggest advantage of a condo is that you eliminate the risk of having to shell out tens of thousands for a new roof or faulty foundation. 

The HOA fee is an added cost that you need to include in your analysis along with significantly lower insurance ($50ish a month for $100k property), significantly lower Capex ($75 less a month for $100k property) and slightly lower maintenance ($15 a month) = $140 in total reduction.

In general you can buy a condo that rents for $1,000 for less than a home that rents for $1,000 but the appreciation will be less. The Association should have a professional property manager, have governing docs that were updated within the last 10 (preferably 5 years), have completed a reserve study and have a trend of gradually increasing fees that reflect the reality of increasing costs. 

@Aleksandra U. The best way to determine if it is a good investment is to run some quick numbers. Using your information I come up with 

Rent: $1,100 

Tax: 71

Insurance; $25

HOA: $300

Capex: $50

Maintenance: $50

Vacancy: $100

Mortgage: $280 (assuming 30 yr fixed)

Total Expense: $878

Rent - Expenses $222 x 12  = 2,644

$2,644/ $16,000 Down payment = 20% cash on cash return. Which would make this a good investment at $65,000 assuming you are self managing. 

If you can only get $1,000 in rent this goes down to 11% cash on cash return which is ok if its a stable low risk area. 

If you factor in property management fees you go down to 2% cash on cash which is a terrible investment. Regardless of whether you pay $65 or $60k this investment looks to be ok at best. The $300 monthly association fee is the real killer here. I would look for an Association Fee that is less than 20% of rent but that is just my opinion.

T