How to choose a rental property?

Question

Hello everyone!

I am currently searching for rental properties and wanted to get some opinions on rental income.  How much do you look for in monthly rental income?  $500?  $1000?  $1500?  The housing market right now is making this decision very difficult!

I am currently looking into purchasing a condo, but there is a HOA which brings up my monthly payment.  I am confident that I could make at least $500 a month on the property but possibly up to $800.  (Mortgage would be around $1750 and rental price would be somewhere between $2200 and 2500 a month.)

Is this a good decision?

Thanks!

Chris Freeburg · Answer

@Katelin M Barson

You're more likely to make serious money in Denver with appreciation than cash flow. The March stats were just released and because competition is especially fierce with less than two weeks of inventory, these numbers are not typical... we saw an almost 7% increase in price from February to March and almost 20% price increase year-over-year. Those are significant gains. Condos won't appreciate as fast as detached single family homes, but it's not a bad way to get in the market.

If I was looking at a condo, I would also consider other factors beyond cash flow; specifically amenities that will attract tenants and maintain the rent at market rate (things like off-street parking, outdoor/patio space, storage, office spaces for remote workers, etc).

As far as the numbers go, definitely budget for repairs and reserves. 5% vacancy (1 month/year) is typical. Read the HOA documents, but typically they cover anything beyond the condo walls, so you may be able to budget less for CapEx.

Here's a quick way to analyze your deal: Let's say it's a $500k condo with a 15% down payment, so $75k. If you're netting $500/month, that's $6,000/year, so the cash-on-cash return is 8%. If the net is $900/month, that $9,600/year and a 12.8% return per year. For comparison, the historical average stock market return is 10%/year.

Nick Cooley · Answer

Hey Katelin, this question is very subjective and the answers you’ll receive will vary largely on investor strategy, preference, risk tolerance, and 100 other variables.

Personally, I prefer Cash on cash returns to be the best metric for qualifying a rental property. Assuming I can safely get 8% compounded returns in the market, a real estate deal that can net me 10-12% is worth looking at.

Jose Fernandez · Answer

@Katelin M Barson I share the sentiment of many people on this thread that condos generally aren't as good of an investment as a SFR or an attached unit with a party wall agreement (no HOA).  I like to focus on Denver when purchasing investment properties, and I look for a number of things to determine the ROI.  1. Can I get the property at a reasonable price and add value myself (ie a property that doesn't show well, but has potential by maybe redoing some flooring, and upgrading the appliances) 2. Are there other areas of intrinsic value within that property (ie large garage, large lot, favorable zoning for future development, etc).  If a property meets those criteria, I can usually cashflow somewhere in the $600-$800/month range, which translates to a 7%-9% cap rate (the cap rate would depend on what you pay for the property, as well as your monthly rents).  Also, the reason I stay away from condos is that even if you find a condo with a low HOA, you don't have much control over future assessments and increases in the monthly HOA, which would negatively affect the cap rate on that investment.

Da'Shawn Murphy · Answer

Hey Katelin, like the other's mentioned, it is solely based on what your goals/intentions are. The few hundred (which actually sounds pretty good) is relative to how much money you actually put up to acquire the property. Like I've been helping my grandmother and brother look for properties that have at least a 10% cash on cash return because, they want some of the short-term gains now.

It also depends on how long you plan on owning the investment as well. In Denver, I have learned that it is a market that has appreciated pretty nicely so hanging on for the long-term could be promising. Ultimately, the property you are considering can be a great investment depending on your numbers as well as your exit strategy.

Hope this was helpful!

Matt Leber · Answer

@Katelin M Barson I like to see $300 plus in cash flow per month after paying PITI and putting aside reserves for capex, repairs, vacancy. I find myself looking for 10% or greater cash return on my cash invested. If I were analyzing your condo investment, I would make sure you factor in some sort of reserves for capex, repairs, and vacancy.

Brandon Svitak · Answer

Like Nicholas said it’s very subjective as there are many different strategies for investing, so just the cash flow metric depends on a lot of other variables.

As far as your condo goes If you’re cash flowing a few hundred a month, including covering your expenses plus reserves that might be a decent place to start. You’ll also be gaining appreciation and loan pay down which is a big piece in a market like Denver

How to choose a rental property?

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