Flip or Hold? Analysis Help for 1 Bed/1 Bath Condo in Redmond, WA

[Omar Ongoco]

Hello BP World,

I recently acquired a condo in Redmond, WA just north of DT Redmond/Redmond Town Center. The purchase price was $150k. It was built in the 80’s and it is a 760 square foot space with 1 bedroom and 1 bathroom. This is my second investment property so I am still very new to the process.

I believe that the work that needs to be done to it consists of replacing the vinyl kitchen flooring (there is a burn mark on it), new paint, stainless steel kitchen appliances, and professional cleaning. I figure it will cost me around $6k - $8k for the listed fixes. Given the comps I researched, I believe it can be sold for around $200k-$220k.

This is a deal where I can potentially pocket $12k+, but I am slightly discouraged on the fees that are associated to closing (my assumptions are 3% to buyer agent, 3% to seller agent, and 3% for excise tax, closing costs, and miscellaneous fees). I am also aware that there are tax implications for flipping also.

All the taxes and fees associated with flipping is painful to see, which is why I'm also considering renting it out. I calculated that the principle and interest will be $750, the HOA is $325, and I assuming that the property management fee would be around $120/month and taxes and insurance around $150/month (please check me on the latter two costs). This comes out to $1345/month, which doesn't even include the set aside for maintenance costs and special assessments (how much should be set aside for this?). I could possibly rent it out for $1400/month. Obviously this margin is very slim - I'd like to see more of a $200+/month income. Is the Redmond real estate market worth holding onto? - Can I count on the instant equity I've gained, future appreciation, and rising rent alone? Is renting out a condo feasible or should I stick with my plan of building enough equity through flipping to be able to rent out a SFR?

Thank you in advance,

-Omar

[Tatiana Gershanovich]

Omar,

Congratulations on the buy!

I would strongly encourage you to do a flip and buy a SFH as a buy and hold (in the area where you have a cashflow and appreciation. Tacoma is a good area for it).

There are a lot of downsides with holding a condo. As @Ben Meisel mentioned above, rental cap is one of them (some condominiums allow only certain percentage of all units to be rented out). If that cap is reached, you can't rent out your unit. And that can be reached at any time, for example, when you are between tenants, and you are stuck with a condo you can't rent out. Absence of rental cap is also a problem. When you decide to sell, your buyer will have limited choice of lenders if there are more units rented than the lenders like (I think a lot of lenders require ore than 50% of the units in the building to be owners occupied), so might be harder to sell. Another issue is an assessment. When some costly items in the building need repair, the owners of all condos have to chip in (most of the time there are not enough money from home owners dues in the reserve and the money are very mismanaged). Also, the maid up rules of what you and your tenants can and can't do in the unit (for example, what color of curtains are allowed). You can't choose your neighbors and bad neighbors in the condominium can affect your rental income much worse than bad neighbors of SFR.

If your calculations are correct and the condo can be sold for 220K and you can get away with putting only 6-8K into repairs, I would say flip it. You don't need to use a listing agent at 3% to get on the MLS if you are ok to sell yourself (you can send me a message and I can tell you more about it), your closing costs will be around 2.7% including title/escrow/excise taxes. If you bought it with bank financing you, probably, will stand to make about 35K+ if your ARV and repair numbers are right and you can do repairs and sell within 3 months.

If you, indeed, decide to hold, I can recommend you a great property manager who charges only 8% management fees.