New Property Calculation Advice

[Cameron Palte]

Hi all, 

I'm planning on investing in my first rental property and want to get some advice on the math I'm doing to make sure I'm not missing anything. For starters I'm anonymized a lot of the information. The location is Chicago. It's a condo in the nice area of the city. 

Property Price: $300k 

Rent Collection (adjusted for 5% vacancy): $34k annualized 

Property Costs (maintenance, insurance, taxes, hoa, management): $25k annualized (~50% HOA).

Putting this all together the best case scenario (assuming a completely paid off property) is $9k in annual income. Given that the property requires a $60k down payment the opportunity cost of that money in the S&P 500 @ 8% is $4800. That means in a 0% interest mortgage scenario the "net profit" of owning the property versus the S&P 500 is $4200. 

Am I wrong for thinking that sounds low? It seems like condo appreciation in Chicago is effectively 0 (the property was sold for the same price 20 years ago). More so in a realistic scenario, interest rates will eat up most of that $4200. At 3.5% mortgage, which is a best case scenario, average interest across a 30Y mortgage is just a hair over $4200 annualized. 

So what's should my takeaway be here? 

1. HOA is simply too high for a property like this to be investable?

2. The only way for it to workout is to get desperate sellers where the price can be talked down to ~$275k to help with (1) and help with interest and down payment expectations? 

3. This is simply what real estate investing is like. 90% of the time you match the S&P 500 on your down payment and that 10% of that time where you get appreciation and growth make it worth it. 

[John Warren]

@Cameron Palte I have always noticed that condos don't offer the same level of appreciation as single family homes or 2-4 units. This is especially true on the first depreciation cycle when they are "new". I feel like Class B or C buildings where the fresh construction has worn off normally offer slightly better values, but they still don't typically have the big swings you see in single family homes. 

On the plus side, a condo allows you as the owner to do very little. If you select a good tenant, you will just have an occasional sink to unclog, etc. The association handles most of the things that would cause you headaches. 

I think the biggest risk people overlook in condos is special assessments. If your board is not good, they won't budget for things like roofs, tuck pointing, etc. If your board is too good, they will want to run the building high end, and they will hire only the most amazing people to do the work (i.e. you have no profit).