dual purpose condo purchase - live then rent

[Jason Renda]

Hello All,

I'm not known for being succinct so please bear with me!! 

A person finds a suitable 2 bedroom condo which meets nearly all of his/her PERSONAL occupancy criteria.  It's proximity to kids, close to work, safe neighborhood, clean units with high owner-occupancy and long-term tenants, etc etc.  The initial plan is to reside there for a year or 2, however because the place meets all these criteria a longer stay will work if needed.  There is an unfortunate urgency to needing to find residence.

The person also is considering a future scenario by which the unit can do double-duty and eventually rent out.  After much due diligence the following info is determined:

Condos in the area show a continued even-paced growth in both sales price and rental rate increases.  Currently 2 bedroom properties in the area with heat and hot water included (not including luxury items like pools, gyms, etc) are renting between $1650-$1900 with similar sizes and layouts and with purchase prices between 220-240k and an average of 5-9 days to offer on market.  This place does have a pool and an updated kitchen/etc that should help push it to the higher end of the rental rate scale.  As a backup plan the current Section 8 rental rates cover the mortgage and expenses and there is no shortage of need for a 2 bed unit.

The maximum cash available for a down payment on this place is 5% (adding more just isn't an option). After all predictable monthly expenses are accounted for there would be a net cash flow of around $140/month (LPMI mortgage, HOA, etc etc = roughly $1,660/month) if the unit was rented on Day 1 at the average current rental rate. The total cash outlay to get into the unit would be about $16,500 inc closing costs.

So after all that - i warned you I am very wordy - the question is: 

When buying a property with owner-occupancy in mind FIRST but with an eye on the future to be able to rent, is a return of roughly 10% annually ($1,630 annually) on an investment of $16,500 a wise idea?  Assuming the owner occupancy period lasts 2 years and the average rental rate for the area climbs by $50/month over that time, the % return would climb to 13.5% (or $2,300 annually). Nothing to retire on by any means but does it make sense as a part of an overall portfolio to generate small but consistent growth?  By comparison the person's 401k has grown at 6.94% this year.

Thank you very much for reading my novella and i appreciate any insight.

- jason

[Kevin Siedlecki]

@Jason Renda

I did exactly what you are planning to. You are thinking about it the right way, because you are considering what it will look like as an investment after you move out. In real estate, two years is a very short period of time.  

For this particular deal, a 10% cash on cash return number would work for me, but did you include capex and vacancy in your predictable expenses? If not, then you need to go back and check your numbers again. I wrote a blog post a while back that might help: https://www.biggerpockets.com/blogs/6815/45137-my-...

Another thing to consider is that HOA fees will probably go up, and the association might decide to add a special assessment at any time. One broken appliance and a special assessment could eat your whole profit for a year. Since you are putting so little into it, maybe you don't mind that risk, but I like to consider more than just ROI. I want enough cash to be able to handle small "unexpected" (but should be expected) expenses. Some of them I've had to deal with in just the last few months are clogged drains, pest removal, minor plumbing fixes, and dryer duct cleaning. These expenses often don't make it into the analysis, but you should expect to have them once in a while. When you're only clearing a couple hundred a month on a building, it can go away very quickly when stuff like that happens.