Is this a good deal?

Question

Hello,

As a brand new real estate investor, I am about to do my first deal.  I am a little apprehensive so i just want to bounce it off those who are more seasoned to see your thoughts.  I'm dealing directly with the seller who needs to sell as a result of personal health problems.  This is a condo that currently has a tenant and is in a location where there will always be an abundance of tenants.  This is an investment property.  I am purchasing it for $77k and I have a private funding source that will lend me the entire $77k at 6 points for 15 years at a payment of $877.25 per month. The tenant is paying $1025 per month in rent but I still have to pay the monthly condo fee of $250 and $2500 per year for taxes.  I may not totally break even and have to pay a little per month but according to the seller, this property was valued at $115k 3 years ago.  Is this a good deal?

Any feedback would be greatly appreciated.  Thank you!

Christian

Jeff G. · Answer

A deal that costs money every month out of my pocket is not a deal at all.  in my opinion.

Christopher Brainard · Answer

This deal is terrible.

Based on your monthly payment, it looks like your APR is somewhere in the 11% range? 6 points upfront? By the time you figure in condo fees, taxes, insurance, vacancies, CapEx, special assessments, and repairs, you're probably going to pay $800 a month on average for the privilege of being a landlord plus what you pay upfront. Before you take the plunge, I would highly recommend that you educate yourself extensively on being a landlord, as many of the costs go well beyond PITI.

-Christopher

Manolo D. · Answer

77k x 2%/month is your dream minimum monthly rent. You're looking for cash flow, not equity for 15 years. In 15 years, that 77k will be 40k today. And you're cashing out 100/mo for 15 years, that's 1200/year or 18,000 for 15 years. What if you renovate? You might break even after 15 years whatever you spent the whole time.

John R. · Answer

I have to agree with the other responses listed above.  You are going to have to feed $ into this place monthly, and it should be feeding YOU the $!

@Austin Carroll gave you a good list of some expenses to consider.  Don't forget about capital expenditures (Cap Ex-replacing worn out items-dishwasher, water heater, etc).  And what about 'special assessments' from the condo association?  Maybe they come up with a project next year and you have to put in ANOTHER $1000.  Bottom line, you need to try to have a very solid handle on all the expenses (when you say 2500 for taxes, does that also include insurance?  I'm not sure how insurance works in a condo, but I'm sure you will be paying for it somehow!).  You also need to have a solid handle on what income you can expect.  Is the current rent rate a 'lucky high' rate, or could you bump it higher with some simple and inexpensive upgrades?  How long will it be empty between renters?

If it is worth 115K (and in 3 years the price may have changed a lot!  You need to investigate this data point for sure!), why would this seller walk away from all that money?  He could be aggressive and list if for $100k, pay all his broker fees and still be way ahead of the deal he is offering you.  But I understand that circumstances can motivate someone to leave equity behind and maybe there is more to the story here.

If it is a building and area that you love, and you have solid data to back up the value at 115k (accounting for whatever repairs/renovations you may need to make to justify that valuation), could you be in a situation to refinance to a lower rate or longer term note in the near future?  That might get you to cash flow positive.

Personally, I am reluctant to get into a property that has extra layers of 'government', unless that condo association is really providing a value to you that makes your rental business in this location work better.  I've heard of people who love condos b/c they have a built in exterior maintenance program for the property.  But you could buy that with a management company also and then you have more control over what maintenance gets done and when.

You need to remember that there are LOTS of deals out there.  It is always fun and exciting to work them up and consider what they might do.  Circumstances may bring you one that looks like a once in a lifetime deal...and I can tell you that a deal you have to feed monthly is not a once in a lifetime!  That's an easy 'deal' to find!

Maybe this is a relative of yours, you want to help them out, and they are offering to give you 100% financing?  That might make it less purely about the numbers and more about your relationship.  In any case, you should also map out multiple exit strategies for yourself before you get into the deal.

I hope this is of some help.  Best wishes to you!

Austin Carroll · Answer

Hi Christian,

I do private investing and work full time for a development company and one thing that alot of people forget about is the other costs associated with a rental property. An example of this would be when the tenant moves out the cost of turning the unit (cleaning, replacing carpet, painting, etc.). In addition to this if/when they move out factor in the cost of not having a tenant for a month, and the cost of replacing them (marketing, paying an agent, etc.). On top of that you probably also pay some increased amount for someone to do your taxes, or will have to pay legal fees if you take them to court if they stop paying. As others have mentioned I would be very hesitant to buy a property where I was losing money each month, unless there was guaranteed appreciation. I would find an agent that can pull comps for you in the area and let you know what the condo is worth in the current market and how fast you could expect it to sell. Also, don't forget recordation fees and anything else you may have to pay at settlement if those costs haven't been worked out yet. This deal sounds more like it could work for a flip. Depending on tenant rights you could notify the tenant that you would like them to vacate and sell the condo for the 110k and put some money away for a future investment hold that cashflowed. Remember though you'll have costs associated with selling the condo (I factor in about 8% on the sales side), so make sure you net positive at the end of the day even if you sit on the market a couple months.

Personally, if I had a private lender willing to lend me at 6 points, I would find a deal that cashflowed, as there are tons of them out there! There are a ton of calculators where you can run a pro forma to see your yearly return. Hope this helps.

Daria B. · Answer

Btw, welcome to the forum, good luck in your invest-ing-ments. :)

Daria B. · Answer

I would not say regardless of the value, but more of what are your total expenses against the rent. If you are putting some toward your expenses then "for me and just my opinion what I would do" it's not worth it. Your rent should cover the expenses and you should be getting cash afterward.

As far as what the seller said about value, that was 3 years ago and values change over time. Some people don't invest in condos because they say they don't appreciate.

Is this a good deal?

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