Seeking Advice: Sell Condo or use as first investment property?

Question

Hey BP!

I have been reading everything I can get my hands on for the last year and have a decent cushion to pursue my next property with the goal of 15-20 cash flow properties. I did not stumble upon BP until after my purchase of my Condo, so I never intended on using my current home as a rental but i am debating if it makes sense. I live in a nicer B-B+ area in the south Suburbs of Chicago(Orland Park). My Condo has a private entrance, 3 bedroom 2 bath, and allows dogs with NO weight restrictions which is pretty uncommon around here. I currently pay around 1150 per month for Mortgage + HOA. Water is included, and I only need to pay for electric/cable. Based on Rentometer, other hotpad listings, and from what i've gathered from Craigslist ads I suspect I can get around 1500-1600 for my place. The issue I have is that because the Condo is all electric, the bill in the colder months is beyond outrageous for the square footage(around $$450) last month. The price for electric is low during the spring/summer months, but i am nervous that this would cause high turnover should I choose to pursue renting this out even if i make this known. I also have heard horror stories of special assessments and i don't really know how often these can come up. If i sell now I believe I can at least break even. Purchase price of the condo was 143k which meets the 1% rule, but I do not know if this also applies to Condos. I'd love to hear the communities thoughts on what they believe the correct course is.

With that being said, I am planning on purchasing a 2-4 unit property to owner occupy and house hack. Do I find the deal or the lender first?

I really appreciate any input. Thanks!

Eric Hardt · Answer

Hey @Frank Pilipauskas

How much money did you put down on the condo? I'm presuming your 1150 month payment is also with the escrow as well? Obviously the 1% rule is going to be just a rule of thumb as a lot of things vary. 1% could potentially be better ina nice area of Indiana vs Illinois because of the property taxes being 2-3x. Im going to assume you're paying at least 4K in taxes, which will also go up next year with reassessed value, then again the following year when you lose the homeowners exception. I'm guessing that would add about $70 a month to your payment.

My story is somewhat similar. I bought a condo several years ago at a low rate and only put 3.5% down. I decided to rent it out at ratios that are similar to yours. I wouldn't buy again under those same circumstances as an investment, but it made sense to me to keep due to the very limited money I had in the deal and the low rate from buying as a primary. It's incredibly easy to manage as I have phenomenal tenants when take care of the place, so I'm personally happy with the little money it makes + principal pay down + paper losses from depreciation. Others may disagree, but I'm very happy with a lot of what I've learned from that first deal and it really helped me move on bettter cash flowing properties afterwards.

In regards to moving for a new property, from my experience lenders are going to want to make sure you can afford both this mortgage and the new one at underwriting. If you can't afford both, you'll have to make sure you have a lease signed on this one and they'll use 75% of the lease amount. But good luck finding a 2-4 unit if you're looking to stay in the area. There just aren't many out there and all the ones on market are just ridiculously priced. Most are older and going for 130-150k a door and only bringing in 1100 or so rents from my experience.

Good luck in whatever you decide.

Ali Hashemi · Answer

A couple comments -

If you only bought the condo a year ago I don’t recommend selling. You don’t have enough equity to come out ahead after all the expenses of selling.

Rent it out even if you end up breaking even or slightly ahead. For two reasons:

1) you’ll gain valuable landlord experience which will go a long way with a lender in he future.

2) you’ll build equity which will you can use to leverage future deals.

Even though now is a sellers market you just don’t have enough equity to make selling worth it in my opinion.

Good luck!

Eric Hardt · Answer

@Frank Pilipauskas after reading a few of your other posts, I thought I would share a bit more info.

It looks like your condo was bought a bit over a year ago based on a previous post. Assuming you got conventional loan on primary residence. Make sure that only calls for 1 year to live in property. I know mine are only a year, but some lenders I spoke to had 2 year requirements.

I would talk to a realtor about what they feel your place would even sell for as that may even limit your options also. I know the area well and condos haven’t done much of anything in regards to appreciation in the last 2 years, so I’d be concerned nearly all of your down payment will be gobbled up by commissions and closing costs if you sell, unless you got a downright phenomenal deal on the place or made significant improvements. I really think you’re going to see even more downward pressure with the tax bill in states like Illinois and areas like ours that are still prob 20% below 2007 highs, especially on a larger condo that is probably more likely to sell to a couple.

Lastly, I presume you’re talking about properties in aurora. I’m definitely not saying you shouldn’t go that route, I’d just encourage you to be very honest with yourself about what you want to achieve. You’re going to have a very different landlord experience renting in Orland vs Aurora.

Eric Hardt · Answer

Two random things I forgot. Also keep in mind with the 1% rule, hoa's are very expensive. I'm presuming your hoa is about $250 a month, which is roughly $50k in regards to a monthly mortgage.

Also, definitely check out any kind of smart thermostat if you don't already have one. Although electric heat is still pretty meh, I'd hope that would cut some of your costs as well as potentially help renters if that's what you decide.

Seeking Advice: Sell Condo or use as first investment property?

Seeking Advice: Sell Condo or use as first investment property?

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