condo deal good idea?

Question

I am pretty exciting and looking onto my next investment. I wanted to  ask everyone's opinion on this. There's 5 condos for sale for approx. $225k  total the condos bring in $3650 in rent roll. There's a monthly fee of  $147 per unit which includes water, sewer, insurance, trash and  maintenance. Tenant pays electric. Taxes yearly on each condo is $700. I  would put be investing with my two other brothers and they would put  down $25k each and I would pay the mortgage till I have reached $25k. We  can get a private mortgage for $175k at 2.5-3% Do you think this would  be a smart move for me? I would not be making anything for the first two  years cause I would be putting nothing down. Mortgage would be about  $950 monthly. Would appreciate everyones input. thanks

Ciro LoCascio · Answer

Another option I have is putting down $25k each for a total of $75k and we will net $2650-mortgage($700)=$1950 total and it would be split in 3, so $650 each month cash flow for a $25k cash investment. That's $7800 a year on $25k investment.

David P. · Answer

@Ciro LoCascio, I'm confused; are you only considering 3 units or 5 units?  If the only 3 units, then $70 per door isn't bad for no money down, but... you can do better.  Depending on the market your target should be $100 per door.  Also, the other thing to consider is if one of these units go vacant, do you have enough funds to cover the mortgage and HOA?  I expect the answer to be no.  So then I would walk away from this deal unless you have other properties that can support your vacancy with these units.

Good luck,

Phil Z. · Answer

I'm not too experienced in rentals .. but $212 /mo for all 5 units doesn't sound appealing to me ..

Ciro LoCascio · Answer

Your right, my calculations are a little off. The net income without mortgage would be $2650 divided into 3 would be $884 a piece and my mortgage payment would be $672, it would be private lending at only 2.5% and would be considered a cash deal to the seller. It would cash flow for me, $212 monthly

David P. · Answer

Ciro, although the "Sniff" test seems like a good deal, run the numbers yourself.  BiggerPockets has a spreadsheet to analyze the property and can be downloaded at: great http://www.biggerpockets.com/tools/REIPropertyAnalyzer.xls

Figure out what your CoC and CF for these properties should be to make it worth your time and investment.  Although you are not putting any money down, you want your other investors to make money as well.  You say you will not make any money for two years; how did you arrive at this figure?

Some things to think about: Be prepared for special assessments; this is where deferred maintenance that the HOA has put off gets charged in a one-time fee to each of the property owners.  This can be substantial if you own 5 units within the same complex.  Although this doesn't happen often, I am hearing more of this happening now that the economy is recovering.  For a while, HOAs were having a hard time due to so many foreclosures; homeowners were not paying the dues, and when the bank took ownership they would defer payments until the property sold.  HOAs had to take from reserves to keep the property, pay utilities but now they may want to try replenish these reserves.

One other thing to think about is that some HOAs often limit the number of rentals within the community - a certain percentage needs to be owner occupied for FHA certification (for others to obtain loans).  I would check into this; get the HOA bi-laws and all other documents and analyze this information prior to moving forward. I own two properties in two different communities and they do vary in what is covered and what is not covered such as the roof.

I am not saying this is or is not a good deal; only you and your partners can make this decision. But having the right information will help you to determine if any properties are good or bad deals!

Good luck,

Sally Peltz · Answer

Ciro I am also looking at 5 condos in a blue collar neighborhood with a great location.  Your deal looks great.  Cash flow of $3650 per month is nice.  The only reason I am still shy about condos is the tenants and tenant turnover.  Consider the turnover vacancy percentage into your calculation.  Also, advertising rental will that be you or a realtor.  If it's a realtor, I think they charge 1 months rent to find a tenant, plus the cost of rehabbing the condos with paint and cleaning for tenant changes.  6 month leases on 5 units may cause a lot of leg work.  I'm looking at 4 plexes with 1 year leases.  Good luck.