Small 1 bedroom condo 400sqft for $90K. Good investment?

Question

Hello everyone! I've done my share of fix and flips (12), and am now looking to get into rentals. I have a lead on an off-market condo in downtown St. Paul, MN prime walking distance to a ton of happening things, concerts, hockey games, etc.

It is very small about 400 sqft, but is on the top floor and I believe is a corner unit. Seller has a tenant in place paying $800/month. I am finding out if tenant pays the HOA of $225/month. Owner has had it for 10 years with zero vacancy. The condo has very minimal upkeep (terrazzo floors, no carpet, no furnace, no a/c, no water heater to deal with. The only 3 appliances are fridge, stove/range dishwasher).

I could put 25% down which would be around $22,500 plus closing costs. And if it makes around $9,600 a year gross, or even $6,900 (if owner pays HOA) I think that would be a decent return? I know there are other factors, but just trying to gauge if I should pursue it more.

Please chime in with thoughts! Thank you!

Mark Sewell · Answer

The thing about condo associations is that the numbers/assessments can change, from what I understand.  The numbers as they are today might not be that tomorrow.

John Woodrich is right - have you used the BP calculators here on the site?  Worst case, you get good using the calculator tools here - not a bad thing.

John Woodrich · Answer

A deal to someone isn't necessarily a deal for someone else.  First thing I would do is look at comps to see if $90k is a good price for the unit and if the HOA allows for rentals.  Top floor, corner unit, whether there is an elevator, etc will all affect value.

On the investment side - gross rents don't tell much.  You should start at gross rents, subtract your mortgage payment, share of property taxes (should be small), estimate for repairs, replacements, vacancy, etc.  At the end of the day you have to figure out whether the property makes sense for you.  I have a feeling that after considering the above this property won't cash flow much but you won't know until you run the numbers.

Alan Grobmeier · Answer

@Gus Muller, the tenant is not responsible for the HOA fees.  You, as the owner, are responsible.  The HOA is not going to put a lein against your renter.  It will be against YOU and the property.

As a result, you can bet the HOA fee is NOT included in the $800 per month rent.

The Math:

Income:  $800

Outgo:  HOA $225 + Financing costs (probably around $375 a month, CapEx, etc

Your down:  $22,500

It really depends on the age of the property, condition, etc.  Just because it has been rented for 10 years with minimal CapEx doesn't mean YOU will experience the same.

It looks to ME that your 'blue sky' return is about $100 a month, $1200 a year.  And your cost is $22k.  About a 5.5% cash on cash return, based on 'blue sky'.  Which NEVER happens.

You don't have enough margin for me.  I'd pass.

Javier D. · Answer

@Gus Muller

Every 100 in hoa fees is more or less the equivalent of additional 20,000 financed.

I stay away from them. Hoa approvals, assesments, reserves required for financing, hoa politics...No thanks.

Mark Sewell · Answer

Good man!

Well, listen, not going to lie - I started a similar thread a year or two back, about some low-cost condos here in one part of Houston.  Came to same conclusion, as far as treating it as a rental.  It 'might' work, however, as an owner finance play, where all the fun 'variables' of the deal get transferred to your buyer, but I never really investigated that or pursued that any further.

David Barnett · Answer

I agree with John.  I had a condo in Uptown that had higher gross rents ($1,050 a month), less of a condo fee ($167 a month) that didn't cash flow.  I also had a property management fee and tenant placement fee that ate into the cash flow, which might be different if you were planning to self manage.  Frankly, I don't like the numbers all that much.  The association would be one special assessment away from you losing big money on this deal.

Adam Gollatz · Answer

Hi @Gus Muller, I went through a nightmare with a condo investment in Chicago not too long ago and from my experience the biggest piece of advice is check the condo association. You arent buying a property as much as you are basically buying into a business, and a business run/managed by volunteers. Assessments can change, even worse special assessments can be levied, and they can change rules at almost any time. The building I bought in to had .5 months reserves, a small association of 11 units, poor management (the board was being run by non owner occupants), you name it-- so it was definitely an outlier.

Ive also noticed that condos tend to seek their own level pretty well between associations and FMV of rents of apartment buildings. In the uptown area for instance, Ive looked at condos and noticed prices ranging from 90k to 150k in different buildings for comparable 2bd/1ba ~1000sf units. When I looked at the 90k unit, it had a substantially higher monthly assessment making the total monthly payment approximately the same as the 150k unit and the total monthly payment came in usually slightly above what apartments were renting for, likely because condos tend to have high property tax and insurance burdens.

I think if you are going to win with condo renting its on a short term scale. So it would be for a substantial appreciation play, you bought at a huge discount, or you are renting it for a short period before you move in/after you move out. A 90k 400sf unit in st paul doesnt really fit that description from what Ive seen on the MLS.

Account Closed · Answer

I don't own any studios, but have  a one bedroom that is ALWAYS OCCUPIED.  People love well-located deals.  IMHO it is the hipster way to go.  Some of the downtowns rents are unaffordable these days and people want the "happening scene."  I say go for it.  I run into a lot of resistance from brokers and managers about this, but they do not own one.

Gus Muller · Answer

Thanks everyone for the advice! I did run it through the BP rental calendar and it doesn't make sense as an investment. Especially spendy when the HOA is such a large chunk of the income. Good practice!

Small 1 bedroom condo 400sqft for $90K. Good investment?

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