New Member. First Post. 33 YO. Should I sell rental condo for MF?

Question

Hello Bigger Pockets Community!

New Member. First Post here. I'm 33 years old and I would like to reach a point of generating $10k monthly passive income from rentals by 2030.

I currently co own a single family home in Burlington, VT that I bough with my fiance in Jan 2021 and a condo in Burlington VT that I purchased in November 2018. Both are in a highly coveted neighborhood in the south end of Burlington.

I just wrapped up my first FY as a landlord. My net profit was $1100 for ~2% cash on cash return. I bought the condo for $278,000. I put down $56,000 for 20% and closing costs and another 4k to build a pass through bar from kitchen to dining/living area and moved laundry to the master closet.

Similar units sold last year for $350-400k. I own $218,000 on the condo still. In the next 5 years I anticipate $15-25k in special assessments to replace a second roof (two building association and the first roof was replaced last year) and reside both buildings.

After those long term maintenance projects are complete I project ~10-15% annual cash on cash returns. In the meantime I anticipate rental income to be able to cover all or most of the long term maintenance costs.

I have $150,000 in cash and stocks. I'd like to add a multi family into my portfolio next and stay in the same county. I'm curious if more experienced investors would consider selling the condo for more capital and avoidance of paying assessments and parlay that into cash for a multi family... With the way the market has moved and the neighborhood that the condo is in, it seems to make sense to hold and use cash for leverage into a multi family, but deals are hard to find in the area.

What advice would you have for someone in my position looking to achieve my goal of $10k monthly passive net profit in the next 7 years. What next moves would you consider?

Thanks in advance for the discussion!

Zach

Scott E. · Answer

I'm not a fan of condos based on 2 things:

1) The HOA dues tend to eat up the cash flow

2) The appreciation rates, at least in my area, are SIGNIFICANTLY lower than a SFR

If your condo is bringing you 2% returns now, and you don't anticipate 10%+ returns for another 5 years, and your goal is cash flow, sounds like it's time to sell your condo. You'll walk with around $150k after commissions and closing costs, and I'd aim to 1031 those funds.

It's a tough time to get into multi family in most areas. Very competitive. But as a buyer you can afford to pay a little bit of a premium in a 1031 situation (not overpay, just pay a premium). So that may give you an advantage as a buyer.

Tim Herman · Answer

@Zachary Cowan that is not cash flow. I assume your condo has floors, appliances, hot water heater, hvac. Most of those are not covered by HOA dues and you need to have a capex budget. How about a clogged drain, furnace stops working, etc. You need a repair budget. You haven't mentioned vacancy. When the tenant moves out, do you think a new tenant moves in at the same time. It usually takes me 2-4 weeks doing turns. That is another cost that has to be figured

Now onto the HOA. A properly funded association would have built in the correct assessment for the roofs and should not have to do special assessments. What usually happens the fees are low in the beginning and later owners have to make up the difference. They don't build reserves to cover all the costs and require special assessments. Is there a parking lot. are there reserves for that. How about siding or tuck point or exterior paint, etc. All of those should have reserves set aside. How many more special assessments will there be in the future. A single family home you can control when you want to do the major capex items, unless it is an emerrgency.

Zach Cowan · Answer

@Martha Nowlan thanks for the thoughts. I'd love to connect for a little bit this week to learn more about what's working in the counties east of Chittenden that you mentioned.

Please DM me if you'd be willing to set up a virtual meeting sometime during the next week.

Thanks!

Zach

Martha Nowlan · Answer

Hi @Zachary Cowan! Surprised no one else in VT has seen this! It really depends on your goals, but if your goal is that amount of monthly passive income and you know these special assessments are coming, selling could make sense. You're going to get better cash flow outside of Chittenden County, like in Barre. I'm happy to chat with you more about that in this market in particular (I sell in Chitt/Wash counties and own property in Waterbury and Barre Town). $1100 profit indicates low cash flow I'm guessing, unless that's just what the numbers are on your schedule e after taking into account depreciation etc. You could probably cash flow a lot more with a multi family and it sounds like that condo in particular is going to be eating up your cash. Condos around Burlington are great for kind of easy rentals, but they don't appreciate as much as SFH and they aren't going to cash flow like a multi.

Benjamin Aaker · Answer

Selling the condo means starting over on the timeline to make a multifamily profitable. If you have cash flow in the condo, consider getting lines of credit on them and using that money to purchase the new multifamily along with your cash. This way you keep them all. Just make sure you can make the LOC payments on the condos with their cash flow.

Emily And Eric Erickson · Answer

Zach

Biggest thing that jumps out in your post is emphasis on the sales price and amount invested and not a lot of detail on the cashflow numbers even though your stated goal is cashflow long term

This is a common trap, especially when making the jump from a retail buyer to an investor. Retail buyers only look at the list price and obsess on how much their house has gone up on Zillow. This is an appreciation focus and is entirely market driven. Great in a strong market, painful in a market that doesn't appreciate (think Midwest).

As an investor, it is all about the cash flow. Active real estate investors are currently getting 15-20% cash on cash returns right now in many markets and that doesn't include any backend appreciation estimates. Every deal you look at you need to forecast what your monthly cash flow to see how quickly you will get your down payment back so you can go do it again.

In my market, I don't look at anything that doesn't cash flow at least $750 per month. To get to $10K per month, you would need just over 13 of these type of properties which in 7 years would be just 2 a year - totally doable. You have a great goal, time to execute the plan.

Emily And Eric Erickson · Answer

I can't speak to the VT market. In Tucson, I pass on anything with less than $600/month cash flow. All deals are made on how you buy which includes the cash flow projections.

Zach Cowan · Answer

@Eric Erickson

Thanks for your advice!

I'll expand a little bit on my cash flow. Mortgage, Tax, Insurance, HOA and management fees (I pay 8% gross rents to a property mgmt. company) are $2337.50 per month this year. The rent I collect is $2,600 (up from $2,500 the first year.)

Taxes increased significantly in 2021 due to city wide property reassessments and I have an escrow imbalance payment of $169/mo. through January of 2023.

The special assessment for this year will cost me $5,146 leaving me with a negative cash flow for the FY2022.

In 2023 I'm considering ending the contract with my property management company and self managing. This would add $208/mo. revenue and another $169/mo. Raising rents another $100/mo. would bring me to a total monthly cash flow of $730.90 beginning in March 2023. Pretty close to that goal.

The only variable will then be the cost of special assessments for the siding. We are still in the process of gathering final plans from the architect and structural engineers. I anticipate the total cost being somewhere between $15,000 to $25,000 total here. This would mean it would take ~3 years to pay off in total.

So, considering these projects, this property could begin to provide significant cash flow towards that goal in 2025.It's time to start seriously analyzing more singly families and multi families in VT to look for a property that could provide better cash flow in the more immediate future. However, deals in VT right now that provide that cash flow can be difficult to find. What are your thoughts?

Thanks!

Zach

New Member. First Post. 33 YO. Should I sell rental condo for MF?

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