My First Post: Condo investment / rental analysis. "Decent" investment?

Question

Hi everyone,

My name is Scott and this is my first post on BP. First, I'd like to say how incredible this site is. I can't  believe how much I've learned in the past few weeks just cruising through the forums. Thank you to everyone who contributes.

I'm 33 and my wife and I just had our first child. Working in sales with no pension, the thought of paying for my daughter's education seems overwhelming. I had this thought of buying an investment property for mostly a buy/hold strategy (a little cash flow would be great obviously).

I was initially looking at mf homes, but the amount of possible work, maintenance, and upkeep really scares me. So, I started looking into condos due to the fact that the hoa takes care of exterior  maintenance. I know most of you don't agree with condo rentals, but let me know what you think of this.

The condo I would purchase is a 2br, 1 ba, 1050 sq ft, roughly $70k in a nice suburban neighborhood . Renters in this area generally seem to be responsible. Taxes are about $1500 per year. HOA fees are $200 per month. Liability insurance  is only $150 per year.  I'd put down 20% so my mortgage would be roughly $265. Rental income is going to be approx $925 . I spoke with the head of the hoa and they're very well funded. Special assessments are rare and the highest has been $19/month. They're currently 88% owner occupied and they keep  a very close eye on that.

I used J Scott's rental analysis spreadsheet (awesome spreadsheet by the way) and it looks like I would bring in cash flow of about $2,500 per year and the tenant would be building about $1000 of equity per year. Is this a good investment? I know it doesn't fit the 50% or 2% rules, but it seems somewhat safe.  My thought is this; I'm building equity that I can cash out in the future, not to mention the small extra cash flow, with minimal headaches or stress. My goal would be to buy a few of these over the next couple years.

As a newbie, I'd like to hear from you pros out there. Am I totally missing something or is this a reasonable low stress first investment? Let me know what you think. Thanks!

Scott S. · Answer

Hmmmm that's a great point. I never even thought of that. I'll definitely check it out. Thanks again!

Account Closed · Answer

Haha.. ya.. the forums w all the content and live interaction make for a very engaging focus of time :)

As for alternative investment, I meant niche or focus in r/e.. I'm biased to r/e. Where else can u have leverage and an investment that cannot go to 0 overnight?!

As for other ideas.. I'm sure you'll eventually find something the more you explore bp... hopefully before it becomes an issue w the wife.

BTW, if you or ur wife or both have a 401 or ira,  might want to consider further into your calcs how to turn that into a resource and leverage for your r/e investing.  Might b better than where it's currently invested.

Good luck! And ya, if you search for self directed ira on this site, you should find more about what I'm talking about if you're not familiar.

Scott S. · Answer

Thanks Kelvin. That's a question I ask myself all the time, but I keep coming back to real estate.  I also feel passionate about real estate and I feel like it's a relatively safe investment in my area. I'm open to any ideas though. I just want to do the right thing for my family.

BTW I can't believe how addictive these forums are! My wife is getting upset that I'm on here all of they time. She thinks I'm obsessed...

Scott S. · Answer

Thanks Rich. I appreciate your thoughts. I actually don't mind the 2 bedroom situation. Most people that live in this condo community are young professionals or older and retired.  Most tenants I've spoken to stay about 3 years or more. I just wish the numbers made a little more sense.

However, I don't understand how people on here buy properties so cheap. Maybe it's because I don't know enough about foreclosures and short sales. Property here  in upstate NY is relatively cheap and stable, but I still can't find anything that wows me in terms of potential cash flow.

Account Closed · Answer

hi Scott, welcome to the club!

I've been kicking around the idea of condos for the reasons you listed.  the next question(s) becomes: if you didn't have this, what else would you be considering? what's your opportunity cost? how much better can you do?

good luck!

Rich Weese · Answer

Scott- I'll never be a fan of condos even though #'4 look ok. I also consider 2br as functional obsolescence in this day and age. They have much more turnover and down time since most tenants use a 2 br as temporary stopping point. I'm not familiar with your area, so this may be what you need to start with. I don't necessarily agree with the 50%-2% "thoughts". They are guidelines which some don't use and certainly not rules. Good luck. Rich

Scott S. · Answer

Thanks Tim. I also feel Luke warm about it, but my gut tells me it's safe for a first investment. However, when I lay out nearly $20k I'd like to feel like it's a no brainer.

My numbers include one month of vacancy and maintenance. I plan to self manage. By 1.5%, do you mean the rent should be a minimum of $1,050? Thanks.

Tim Czarkowski · Answer

I would keep looking. It's not terrible but it isn't all that great either. I'm not sure what returns are where you are at but at least here I can do much better than that. Most investors I know steer clear of condos for rentals because of the HOA dues. There are some out of state investors buying them here because they are easy for them to take care of though. I think you should get 1.5% at a bare minimum. Do you numbers include management, maintenance, and vacancy? If not you returns will be much lower.