Buying this condominium in Denver, CO. What's your take on this?

Question

Here is a condo property that I may be interested in investing out-of-state (Denver, CO). To fund this deal, I have decided to use HELOC on a fixed rate of 2.42% for 12 months. Closing cost waived. After that it will be an adjusted rate. If rate is higher after 12 months, I am planning to make a balloon payment to pay it off.

HOA is quite high ($440/mo) The rental base on Rentometer.com is on the high side but all the utilities and amenities are included. My projected monthly cash flow is not great. Your word of wisdom and suggestions are welcome.

Attached is my rental analysis:

Bill S. · Answer

@Tek Chai my condo has fees of $173 and includes all the same as your but electric and it doesn't have a pool. Certainly those two features aren't worth $265 per month. $900 for a sharing an apartment is pretty steep.  My question would be what is your exit plan? In two years what will it be worth? 2 years in real estate is like day trading in the stock market. When your relative is done with school, then what? Who will pay those rates when the relative is done and moved back. Again, I think rent-o-meter is high. Your comparable rents should be within .25 miles of the unit you are considering. The rent-o-meter says 1 mile radius. That is a really large area that could include some high end/new properties that would skew the results. What do you get from Zillow and Craig's List? More data is your friend, seek it's advise and listen to it.

If you want to buy a place for your relative and their friend then do it but it's really a reach to consider it an investment. Why doesn't your relative rent a place and charge the roommate the same amount and pocket the spread. I think you would be money head in 1.75 years. Don't forget your exit costs such as agent commissions and seller concessions.

For the exit plan on the condo, is the complex warrantable? If not the pool of buyers will be pretty thin at your exit.

I would hate paying rent but there is nothing about your situation that says you should buy.

If you insist on buying, I would look for a better complex and a better managed HOA. $440 per month is outrageous even with all utilities included. I'm will to bet that the complex is also short on reserves. It probably also has a lot of deadbeats not paying their HOA fees and the HOA isn't pursuing them for collections.

Dima Suslikov · Answer

@Ryan Scott Isacksen, @Ed E., @Jared Bouzek, @Jean Bolger, @James Carlson, @Bill S. - guys, thank you so much for sharing your expertise for Tek. We do a lot of investments here in Seattle - and Tek asked us about advising him in Denver, which is a market very unfamiliar to us.

It's refreshing to see BiggerPockets community giving an awesome perspective.

Thomas S. - I'd agree with you in terms of renting to relative, but knowing Tek and what he is trying to do here, we decided not to advise him against this plan.

Thomas S. · Answer

Pass it is a investment loser.

It is highly advisable that a landlord never rent to friends or relatives, it very rarely works out for the landlord and is not a good way for a beginner to start.

Jean Bolger · Answer

I know that complex and that unit is overpriced, at least for investment purposes. It is a good lower-end complex for rentals though so it's worth keeping an eye on. For reference, I had a client (owner-occ) under contract for a  really nicely rehabbed 1 bdrm at about 80k a few months ago. you can sometimes get 2 bds around 100-110k.

Account Closed · Answer

I work relatively close to that area....and my Mom lives a little north of that area.

Have you checked with the association to see if they will allow you to rent it out?  I know a few condos in that area that only allow a certain amount of rentals...and many of them have a multi-year waiting lists for people wanting to rent out their condos.

I also agree your rent estimate is a bit high..and price may be a bit high as well.

Just as an FYI - if you take a look at the satellite view on the map, there are two condo complexes on the north side of the street from this location.  Both of those complexes were built (I believe) in the last 3 years if I remember right (maybe the last 5).  They are pretty much brand new.,,and they are located in an unincorporated area (not within Denver city limits - they used to sell fireworks out of the empty lots there because it's between Denver and Aurora) so property taxes (and presumably HOA fees that include property taxes) are going to be lower.

Another thing to consider - the complex my parents (and grandparents before their passing - living in different units) is near Havanna and Alameda.  Currently, the condos are going for upward of $200k.  In 2008, the prices went down into the $50ks and lower...that's happened a couple of times since I've lived here in the Denver metro area.

Ryan Scott Isacksen · Answer

@Tek Chai

Each area and point in the market cycle is different in the vacancy rate.

I am looking at multi-unit buildings and wouldn't put vacancy below 7% in an estimation.  I think that 10% is a better estimate.  This is to take into account both vacancy and non-payment situations.  A single unit/house with no additional units/tenants to help soften the blow from down time will be something you want to be ready for.

I just did a search in Denver, CO on Craigslist using the map feature and specified "condo" in the apartment/housing.  There are a LOT of condos available, but your price range looks to be in line (depending on the neighborhood) with active listings.

I did click on a few and saw one dated 10/26 and another 11/7 as posting dates just to keep in perspective how long you may be once something is listed.

I am in the bay area of California where there is someone waiting to fill an apartment as long as it is not priced too high, and people staying in place due to rent control.  Vacancy is rather low here.

Ryan Scott Isacksen · Answer

$440 doesn't sound outrageously high for an HOA.HOA's must use contractors / roofers insured to work on multi-unit buildings and carry additional insurance that cover them if multiple units and common area are damaged as a result of an error.

The condos also likely pay for management and are required to maintain reserves that cover all of the 'common area' items including water heater, parking repairs, building envelope and foundations repairs.

There are many condos out there that don't fund their reserves well enough.  I can see where condos are attractive to flip, but they don't make a lot of sense as rentals in my opinion.

Jared Bouzek · Answer

@Tek Chai I won't beat a dead horse because I think it has been well covered by the above posters. I will make a comment on your rental analysis more for future reference.

The return numbers on your rental analysis look very appealing because they're based on what is likely a false assumption. Because you're indicating you're purchasing with 100% financing, the returns are being calculated from the $1,000 of initial repairs you input as your only investment into the property.

It sounds to me like the HELOC you want to use has an introductory teaser rate so in my mind the question is not "if" the rate will go up after the 12 months but "how much?". Your paperwork should indicate the drivers behind the HELOC but they are typically figured by Prime + a certain factor (.25%, .5%, 1%). Prime is currently 3.5% and the fed will likely raise that in December.

In other words, in one year you're looking at either paying the HELOC off in cash or trying to get long term financing. If you have all cash invested in the property your Cash + Appreciation return is probably in the 4-6% range. If you attempt to do long-term financing as an investor, it sounds like you will run into warrantability issues. You can still get the financing through non-warrantable programs but the rates and terms will make the property very unlikely to cash flow and you will probably have to "feed it" to make it work even at the $1,700/month rent number.

James Carlson · Answer

@Tek Chai. A quick glance at Craigslist in the immediate area of the condo you're considering (like, a 3-block radius) shows rents for a by-the-room rental between $550 and $700. If you expand a bit, you'll see a few $800 rents for a room, but I wouldn't run calculations based on the higher number. And heck, you have no idea if these people putting up rooms up for that rate are having any success. That HOA is crazy. My wife and I are about to buy a condo with an HOA near that and sure enough, as @Bill S. said, it's because the reserves are low. But we're buying it with our heart, not our head. It's going to be our primary residence, we know we can cover it and we just want to live there. But we'd never buy that for an investment. If this is an investment for you, there are likely better options out there.

Ryan Scott Isacksen · Answer

Rrentometer pretty much tracks higher end places that use the service to advertise and report back.  Rentometer does not track things like your condo rental or smaller properties in the area, so it skews high.

Check craigslist using the map feature and look at similar rents in the area.  Not being flexible downwards on your rental income could be dangerous.  Your vacancy rate looks low.  You give yourself 18 days to turnover and fill the unit once you get past your planned occupancy for family & renter.

Buying this condominium in Denver, CO. What's your take on this?

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