Is this worth it? Low risk investment?

Question

I have the opportunity to purchase a 2b/2b 1300 sq. ft townhome for 200k. 5.5% interest rate and 25% down. Monthly payment is $1350 before vacancy and capex. There is an existing tenant who has been there for 5 years, agrees to pay $1500/mo and says she intends to never leave, she loves the place. Is this worth it at the current rates?

I appreciate any help or feedback as i start my RE investing journey!

Thank you,

Matt

I appreciate any help or feedback as i start my RE investing journey!

Thank you,

Matt

Bjorn Ahlblad · Answer

Since you asked..........I don't think condos do as well as SFR and duplex. I distrust HOA's. Last but not least that property probably won't CF so no, not for me. But we all have our own goals and standards. Read a few books, attend some podcasts, join an REI group, learn to underwrite, and don't be in a rush.

Account Closed · Answer

Being confident doesn't assure us of anything.  Its a guess.  We shouldn't invest on that.  Fine if it helps us and we're on the fence bu you don't hinge your investment on the presumption things will always increase.  They may stagnate for years and we need to weather the storm during that time.  Many, many financial advisors are pessimistic right now.  Especially as everyone and their dog is looking to buy property now.  As they say, fools rush in. This is probably the worst time to buy something like a condo in several years.  Haven't prices risen suddenly in the last year or two?  What happens usually when there is a sharp rise in prices?  They usually correct themselves and sanity returns.

Nicholas L. · Answer

@Matthew Hamilton only you can decide, but you will be tying up $50K plus closing costs in exchange for almost no cash flow.

Who pays utilities?  What if HOA costs go up?  Has anything been replaced since 2004?

And... what would you next move after this be?

Bud Gaffney · Answer

@Matthew Hamilton yes.

Marshall Leipprandt · Answer

@Matthew Hamilton It doesn't look like an awful deal, but by your description, I wouldn't expect it to cashflow. Is there an HOA? Who will pay for the utilities? It sounds like you already have a tenant in place who is interested in staying long term which could minimize your vacancy over the years along with costs of turnover, etc. but I wouldn't call this deal a grand slam by any means.

Is $1,500 market rent? If you were to buy and keep this tenant, you'd have to be sure to raise rents in step with market rates not to fall back too far. Is it in an area with a quality tenant pool in the event the tenant falls through? Is the area growing and does it have potential to appreciate over time?

Bottomline is that although it doesn't seem like this deal will put cashflow in your pocket year one, it could be a decent start to your investing career. You will certainly learn a lot in the process. With that said, I personally would not buy it because you will be getting little return on your 25% down payment and closing costs investment.

Corby Goade · Answer

Are you confident that this area will appreciate? Are you confident that rents will rise? Do you have it in you to raise rents as the market allows?

This could turn in to a good deal over time, but it will take guts and professional management to get there.

Greg M. · Answer

Doesn't sound like a bad deal. Your vacancy cost sounds to be low, but remember the tenant can leave at any time. I'd make sure $1500 is market rent and if the unit becomes vacant, what is the typical turnaround time.

Since it is a townhome, I'm going to assume that there is an HOA. If so, most major repairs are going to be covered by your dues. Therefore your CapEx is likely going to be low. However, this also depends on the unit. Is it remodeled or outdated?

Basically you put $50K down and year 1 get $2000 back as principal reduction and $1800 as cash in pocket, for a return of 7.6%. Is the area appreciating in value? Are rents increasing? If so, those are a major boost to your return.

I don't know your area, but 5.5% interest on an investment property with 25% down seems a little high. Have you shopped around? I'd assume you could do better than that, possibly 5% with 20% down without much problem, which would dramatically change the numbers for this deal.

Matthew Hamilton · Answer

@Marshall Leipprandt @Corby Goade

Thank you both for the feedback. I have not seen a 2b 2b sell for less than 220k in the immediate area. Schools are 8/10 and i do see strong growth moving forward.

The HOA were included in my 1350. Market rent is a great point, i think it is right on with FMV. Also will include rent increases yearly. Thank you for the tips!

Matthew Hamilton · Answer

Thank you for the wonderful feedback. I included P+I, taxes, insurance, and HOA totaling $1350. This is a nicer unit built in 2004. See pic for ALL rentals even available in the area, maybe 5-7 at a given time in a city of 35000. She did agree to sign a 1 year lease.

I am choosing to put the 25% down.

Is this worth it? Low risk investment?

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