9 Condos in Milwaukee WI Yes or No?

Question

Hey B.P Family... I'm currently working on a deal. The seller wants to sell nine condos in Milwaukee, WI, in the Brown Deer Area (nicer side). Each unit for $30,000. All are in good condition and nicely kept. One unit is a 2-bedroom and the rest are 1-bedroom condos. Currently, two units are vacant. The seller has owned the condos for the past 30 years. He's 65 years old and ready to let it go. These are the numbers: All units are making $6,357.00 a month when all are occupied. HMO for all nine units is $1940 (water, electric, insurance, fees). Taxes: $6,792 for all the units combined. Seller is offering financing for 20% down, good terms. Question: What do you guys think about condo investing? I've never done it would like to get some feedback.

Michael Boyer · Answer

You would have a lot of chips down on the health of one association. So closely check the association with lots of due diligence: ) check the owner occupant ratio as it may mean there are fewer financing option, hence owner financing may also be your only exit strategy; ) will dues eat most of your cash flow? recheck association monthly.) any special assessments pending/needed?) are there reserves?deferred capital projects (i.e., has it been milked)? remember with no reserves, a 5 K per unit special assessment (be it a roof, parking, plumbing, disaster etc) would be 45K to you due on demand (and there may not even be financing)..) is there an active maintenance program? professional management?) are there rental restrictions (sounds like previous owner did, but can you) or any anti-investor policies (fees etc)?) are they in demand at the rate you'd need to charge? or are there cheaper substitutes (like nearby apartments)? check the market, especially for 1 bedroom) check parking, pets, smoking etc.) association politics? check that--some are lukewarm and collaborative, others open warfare.My view, condos can be lower fuss management propositions, especially for newer investors unable to do exterior maintenance, but can slow you down and take away control if you are a more advance hands on landlord (read: potentially frustrating) If you are new, why not take a smaller bite of one or two units. Give condos a try. If it works well, you could always buy more later (probably from the same guy as buyers may be scarce). Remember, the exit strategy might be you also having to pay them off and owner finance them yourself if you can find some person willing to bite in 30 years (so you may be stuck till 65 on this proposition, too). Best of luck..

Amir B Erez · Answer

@art Art G. Thank you for taking the time to run the numbers. Highly appreciated.

Art G. · Answer

I have been thinking about these results all day. I had to come back and double check them. I didnt include the taxes first time, and I am sure that there will be minor costs with repairs along the way but that shouldnt effect it much as the taxes being included didnt effect it much.I also saw you initially said 20% down and then later said 10% down. So I ran them both ways.9 units at 30k each= 270k. making $6357/mo. HOA 1940/mo taxes 6792/yr30yr @ 3% fixed amort., 20% down or 10% down, balloon in 15 yrs for balanceNet Operating Income Annual Gross $76284 less annual HOA $23,280 less annual taxes $6792= $46,212 NOI(10%Down) 270k less 10% (27k)= 243k @3% Annual Payment= $12,294Loan Constant 5.1% = 12294/243000= 0.0506Cap Rate 17.1%= 46212/270,000= 0.171Spread 12% = Cap rate 17.1% - Loan Constant 5.1%Break Even Ratio 56% = (Loan Service Annual + Operating Expenses) $42,366 / Gross $76284 = 0.555Debt Coverage Ratio 3.76 = Annual NOI $46,212/ Annual Loan Service $ 12,294 = 3.76________________________________(20%Down) 270k less 20% (54k)= $216k @3% Annual Payment= $10,928 Loan Constant 5.1% = 10928/216000= 0.0506Cap Rate 17.1% = 46212/270,000= 0.171 Spread 12% = Cap rate 17.1% - Loan Constant 5.1%Break Even Ratio 54% = (Loan Service Annual + Operating Expenses) $41,000 / Gross $76284 = 0.537 Debt Coverage Ratio 4.23 = Annual NOI $46,212/ Annual Loan Service $10,928 = 4.23

Amir B Erez · Answer

@Michael Boyer Thank you for the information and food for thought. I currently own 20 units in Milwaukee but never dealt with condos. my exit strategy is overseas investors that are lined up and waiting to get their next deal from me. I'm just trying to see if condos can be an investment that will be suitable for them. They have no control over the property and rely on my due diligence and that i will take look out for their best interest when it comes to making the right decision. So thanks again for the valuable information.

Art G. · Answer

My pleasure buddy

Art G. · Answer

@Amir B Erez Well it just goes to show you always got to run the numbers, at first glance it didnt look safe but the math is solid on this one. 4417/ mo NOI x 12= 53004 NOI/ 270k= 19.6% Cap Rate30yr @ 3% amor= Loan Constant 5.06%DCR= 4.31BER= 46.63Ideal DCR is 1.2 or better, ideal BER is 80% or lower. Excellent spread at 14%Nice find! I ran some projections with a higher down payment to see if that helps your security and there was very little change, except a drop on your ROI. Current ROI is 150.46%. With numbers like that you should be able to get a bank to refi balance in 15 yrs, although probably at a higher interest rate...Great work locating that deal. Now go get it under contract ASAP, lol.

Amir B Erez · Answer

Art Gutierrez 10% down, 3% interest, 15years, amortized over 30. Interest and principal. Ballon at 15. No prepayment penalty.

Art G. · Answer

Condos are the next step up from mobile homes and apartments. But it all depends on the kind of community. Call the local police station and ask them if they get called out to that location. That will give you a good idea of the quality of renter.So far your numbers look good, assuming the HOA gets deducted from your total rents then: $4,417 NOI x 12mo = $53,004 NOI/ $270,000 = 19.6% Cap rateBut without knowing the terms of the loan itself its hard to fully analyze if the deal is solid. Seems to be a pretty close margin so far based on a $706/unit average per month. And with only 9 units that does not leave a lot of room for vacancy as that relates to risk on the overall debt.How long is the term and what interest rate? Would it be amortized or interest only?