Condo Rental - $0 Cash Flow - Appreciation Play

[Peter Austin]

Hello All,

First time poster, just getting into RE investing. Wanted to pose a scenario to get your thoughts if you don’t mind. Thanks for reading.

SHORT STORY: Bought a 2 bed/2 bath condo 5 years ago. Looking to rent out next year, however: $0 Cash flow; 0% CoCROI; ROI: 13.6% (10 years @ 2% growth/yr). An appreciation/pay down play. Is this worth it?

Details:

SCENARIO: Bought a 2-bedroom/2 bath 5 years ago in Hoboken, NJ (across the river from Manhattan). At the time did a 10-year ARM @ 3.125% thinking we'd sell and move on 5-7 years down the line. However, after reading about rental properties and the low interest rates I decided to refi to a 30-year @ 2.875% last month.

CASH FLOW/CoCROI: I ran the numbers and including all fixed costs (mortgage, taxes, HOA, etc) and variable costs (repairs, capex and vacancy) I am break even (math below). If I include property management, I'm in the red but I plan on managing the place myself leveraging a handyman. Needless to say the CoCROI (cash on cash) is basically 0%.

Monthly Cash Flow

$3,500: Rent

($2,045): Mortgage

($626): Taxes

($325): HOA

($37): Insurance

($150): Capex

($150): Repairs

($175): Vacancy @ 5%

($8) Cash Flow (w/o property mgmt)

($350): Property Mgmt

($358) Cash Flow (w/ property mgmt)

ROI (rough math): The place is worth $725k today. If I assume a conservative 2% growth rate for the next 10 years (arbitrary # of years):

$901k: Sale Price 2031

($70k): Sale Expenses 2031

($367k): Loan Payoff 2031

($197k): Invested Capital (initial 20% down payment + accumulated equity up to 2021 less fees if I were to have sold it)

+267k profit

ROI = (267/197k)/10 years

ROI = +13.6% (if I assume a 3% growth it's closer to 28% to 29%)

Is it worth getting into if you’re breakeven on cash flow? Again, thanks for your thoughts.

Peter

[Mack Benson]

Coming from a mindset of "if it don't cash flow, let the grass grow," I'm not a big fan of a $0 monthly return and counting on future appreciation. That is especially true today when the future is very uncertain. I'm not saying this is a horrible deal but it is a risky play and for a first deal it could cost you in the end. What happens if things go down the crapper in the next year and your property loses 10% of it's value, now rather than starting at $725k you are starting at $625.5k. What if, because of the pandemic, rent goes down 5%, that's a conservative approach some of us are taking in the multifamily world? Now rather than taking in $3,500 you are only taking in $3,325. I know some operators are underwriting to a 5% rent decrease and 10% economic vacancy over the next 12-24 months.

Now, in a different hypothetical, how much is left on your mortgage, do you currently have any equity, and what would it look like to sell the condo and use the proceeds to purchase a rental that has a decent positive cash flow? This may require you going out of state because two of your numbers look to be killing the deal, the taxes and HOA.