About to purchase a condo! Have had mixed feedback. Do I backout?

Question

Hi everyone this is my first post hopefully in the right forum!

I am looking to purchase my first rental for a buy and rent long term strategy.

Rundown as follows:

-It is a foreclosed condo in an HOA that allows rentals.

-All in investment of 90k after closing costs / light refresh (property comps for approximately 100-107k) - My monthly fees will be $500 (HOA, insurance, taxes) with rental comps for 1200-1300 = Return of about 700-800 monthly (10% yearly return)

-Purchasing for cash - from what I hear can not get line of equity for investment props so this will tie up 90k liquid capital?

Any thoughts or insight on whether I should commit to this property? Any advice before I sign and make the purchase final? I was hoping to get into the rental side after my first flip. I have read mixed reviews regarding buying condos in associations.

Any advice is very greatly appreciated before I learn a hard good or bad lesson ;)

Michael Boyer · Answer

Some good advice here Derek.... One other item I have seen....

Keep in mind the dues are not locked in place or entirely predictable (nor are assessments), and there is no guarantee they will even rise in tandem with inflation (they could go up much higher than inflation, depending on the association, building condition, and the board).

I like that you are forward looking on planned projects, reserves, and deferred maintenance, if any.

Having just wrapped up my Schedule E, I see my dues from a 2002 condo purchase  (once a nice "on paper" cash flow property) is now the largest expense by far, eclipsing mortgage interest etc.

It's a whopper. And it ticks up periodically (with the insurance, utilities, management, maintenance, materials, reserves, and labor it covers)....

One often looks for certainty in running the numbers in your due diligence (think fixed rate in terms of a mortgage, etc)--but think of the dues like an adjustable rate factor in your equation. I would maybe run them in the future-- heading upward at least on par with past average increases (be 2%, 5%, or 10% annually) or  higher if you have major deferred CAP EX, very low reserves, lots of maintenance, etc.

Yes, a condo is perhaps a low maintenance and fairly easy to managed proposition--but it can come at a cost.

Last point, my deciding factor might even be your landlord lifestyle factors. For example, are you a busy professional and not so handy --a condo may be a decent fit for a rei investment (maybe not that condo but the theory in genera).

Got spare weekends and good with a drill and paint brush--the dusty duplex might be alright (and you have a greater level of  control over some of the costs).

Best of luck!

Mindy Jensen · Answer

Hi @Derek Sziga , from a former Homer Glen resident.

To tag someone, type in @? and a scrollable list of people who have already commented will appear. Click the one you want to tag.

The condo being more than X% non owner occupants is called an unwarrantable complex. Once a complex becomes unwarrantable, your buyer pool shrinks considerably. Most owner-occupants don't have cash to buy a property, and most owner occupants buying condos are first-time homeowners looking for an inexpensive property.

In addition to a property possibly being unwarrantable, a complex can be FHA approved, meaning FHA loans can be used to purchase the property. If the complex is not on the FHA approved list, your buyer cannot use an FHA loan, also limiting your buyers pool.

I am not a fan of Condos, the HOA is out of my control and every year I have lived in a condo I have had a special assessment.

Derek Sziga · Answer

Not sure how to tag you guys but.

Initially priced at market for 99k then I offered 82 was told it was a multiple offer situation so I bumped my offer to 85k thinking I'd try my hand at renting. Not ridiculously under market but it's been difficult to purchase property recently around here.

Attorney was told no back hoa fees and 8months ago they had a little over 40k in reserves. I'll find out tmrw what the number is now. Will also look into planned projects and planned ones for the special assessment portion.

Back at end of 2015 there was Zillow listings for 1250 rent in the association. I am also being told a lot are "agent owned rentals."

One question I have is for an exit plan at some point. What if indeed there are over 50% investor owned units which exempts the fha loans, Will that put me in a pickle if for some reason I decide to sell? (Property was on the market for about 180 days with multiple loans falling through)? Most recent unit was sold for 99k identical to this one but 8months ago and I believe the loan was conventional.

I'm seeing some of the bylaws require hoa approval of your renters lease agreement and things like that. I was told by my realtor that they were pretty lax about all that with the other unit he sold to another first time investor as well.

I'd have to spend 130k to see the 14-1500 in rent with nearly the same expenses. So say 900-1000 monthly return with a +40k investment on a single family.

The HOA idea/ part has me worried the most to be completely honest.

Zana Blue · Answer

Sounds like a good deal...are you sure there are no back HOA dues that you would be responsible for...and @Stacey M. has a good point about any assessments on the horizon

Andrew Johnson · Answer

@Derek Sziga A couple of things:

1.) I'd hope you'd get more of a discount than 10% if it's foreclosed and you're paying all cash.  Maybe it's not possible (especially at this point) but usually all-cash yields more benefit.

2.) Does the HOA have reserves?  If they don't you might be looking at periodic special assessments in addition to your monthly dues.

3.) If the HOA allows rentals, odds are more than one is rented so you could get darn close to an "actual" number for a rent projection.  Are the comps that you've looked at specific to your complex?

Sri Voodi · Answer

HOA is always a pain in the neck with the rules and regulations. But that should be last of your worry. The tricky part is the maintenance of common areas. Depending on how demanding the tenant is, they will put in a tough spot when they demand a common area repair that is effecting them, though they know there is nothing you could do other than go thru the association. The coordination and communications will take its toll. I was in this situation more than ones and it is no fun (HOA Hot water/bees outside the unit/ roof leakage/ common plumbing issues/garbage disposal). Most of the HOA's are non competent and very unprofessional depending on the number of properties they manage

Having said that I think you should go ahead with the deal. It is good return. If I were you, I would hire a property manager and have them manage the property. They charge you 7% - 10% of the rent per month and lease signing 1/2 of month's rent - month's rent. It is worth the peace of mind. I promised I would never manage a property myself again.

Tip - get a home warranty. Never send a contractor to the property for any repairs, they tend to find other non serious issues and blow them up to your tenant and make the tenant request for the repairs. What should have been a $100 job will much more than that. So always go thru home warrant, pay $75 and get the repair fixed. It is in the best interest of both parties.

The biggest challenge is getting a GOOD TENANT. Good Luck

Carolina E. · Answer

@Derek Sziga You should be able to take a loan out on your property, I believe you would have to wait 6 months for title seasoning with most banks.

About to purchase a condo! Have had mixed feedback. Do I backout?

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