Condo with high HOA a good/bad deal?

Question

Hey guys bout to close on my first deal and just wanted to hear some peoples viewpoints.

Purchase price - $45K Condo 3/2.
Cash outlay - 20-25% down with $3K CC/fees - ~$14.250 out of pocket
Revenue - Currently rented at $1000 a month(other rentals around 1100-1200)
Expenses Yearly
HOA Fees - $4176 (includes structure insurance, water,sewer,trash,basic cable)
Taxes - $850
Insurance - $300?(Since I only need to insure the inside of the property? Don't know if this is reasonable or not)
Repairs/Maintenance - $1600(nothing needs to be replaced/fixed right now all appliances water heater/ac in good condition. Need to budget more?)

Total Revenue - $12,100 (1100x12-1100)
Total OP Expenses - ($6826)
Less Debt Service - ($2,000)
CF Before Taxes/Dep-$3174 - $265.5/month

CF / Initial Investment - #3,174/$14,250 = %22.27%

I will be buying as an OO cause I need a place to live for now while I look for a house to buy. So I won't move out till I can rent it out later down the line.

Have you guys who own condos would you reccommend to do this deal or to look for a SFH instead? I was worried about the high HOA but I guess I dont have to worry about replacing the roof, sinkholes or termites or anything like that because thats covered and my agent who owns 2 properties in the place says hes rented 1st day listed and they like that some expenses were included already. I am currently waiting on the HOA to furnish financials and a condo questionaire for my lender but if they approve the loan I shouldnt have to worry about any large assessments in the future coming my way which scares me the most probably? Also they just lowered theres HoA fee by $30 this year which I assume is a good sign.

Appreicate any type of feedback that can help.

Joe

Joseph L. · Answer

Appreciate the responses as I just got a copy of the budget and YE financials over the weekend. I beleive the reason for the high HOA is because theres only 46 units utilities and misc repairs are 26% and 26% going to insurance for liability/property and 14% going to the replacement Reserves. All %'s are derived from total yearly income. Fence and pool were just recently redone with Paving due next year and Roof in 13 years and painting in 4 more years. Budgeted Bad Dept exp is only for 2 units so I believe everyone is paying there fees which is why they decided to lower it but when I get the condo questionaire back it will give more information about people paying. I think I will pull the trigger as the ROI of 22% seems attainable based on the current condition of the unit. I am in Florida so I am not sure how much insurance is going to cost but I don't believe it should be much more than $300 as I am not in a flood zone and it only has to cover the inside of the unit. Is this a reasonable estimate? thanks for the responses guys, Joe

Jeff S. · Answer

There is a lot that can happen over the course of a long-term buy and hold. HOAs can be mismanaged so there are risks going forward. Condos can be a great place to live if you are busy doing other things, like taking care of rentals. If our market rebounds as it looks like it is it could be a good candidate for appreciation. The trick is to get out at the right time. Be especially careful with siding issues. If you have T-111 and it is aged (30 yrs or so) you can be a candidate for residing. This is amazingly expensive because you start bringing in engineers and high end contractors which requires attorneys and consultants. It can get crazy. Other issues are windows and roofs. While there may be enough in reserves, there may also not be. Also with aged complexes you can have underground water issues with leaking sprinkler systems and plumbing problems in general.

Mitch Kronowit · Answer

I own two condos and those HOA fees seem excessive. They're higher than one of my condos that's worth 4x as much. What area is this? And how do these HOA fees compare to similar condos nearby?

Don Konipol · Answer

You need to evaluate the age and condition of the building, find out about any issues of deferred maintenance, and study the HOA's financials. All things being equal, sounds like a very low price vis a vi the rental income. Refer to 2% rule, which your exceeding.

Al Williamson · Answer

Joseph L. Yes, lowering HOA fees should indicate healthy reserves, and that would indicate good planning. I spent several years writing reserve studies for HOAs. So, I would like you to look at your condo’s reserve study to see if it is less than 3 years old and find out their percent funding for 2012. Also, as a rule of thumb, condos are the last to appreciate and the first housing type to lose its value. Having said that - check the disclosure carefully. Best to you. Best to you.