Deal or No Deal: Condo Potential?

Question

Hey Las Vegas Investors,

I'm a real estate newbie looking to learn.  I'm transitioning career fields in about a year and anticipate a significant pay cut.  I currently own and househack a 4 br/3 ba in the Centennial area.  Prior to leaving my current job, I plan to rent out my current home and downsize to a condo. My intent is to reduce my monthly expenses while simultaneously getting started as a rental property owner. Here are the numbers if I rent my current house (thanks @eric fernwood , I'm borrowing the equations you've used on your posts):

Purchase Price: $275,000Comps: $320,000 (house with exact same floorplan/landscaping across the street sold for $337k on 3/13/20)SqFt: 2,200Beds: 4Baths: 3Stories: 2Financing: 30 yr fixed at 3.25% ($0 down and closing costs were covered by seller)

Cash Flow = (Income - DebtService - ManagementFee - Insurance - RETax - PeriodicFees)

Cash Flow = ($1700*12 - $1150*12 - $1700*12*8% - $528 - $2985 - $49*12) = $867/yr or $72/month
Note: this formula doesn't account for occupancy or maintenance however the house is 5 yrs old, in good shape and I have a contingency fund dedicated to these expenses.

Now here's the info on the potential condo purchase:

Location: Southwest Las Vegas, near 215 and BuffaloList Price: $175,000Comps: $185k-$195kSqFt: 1,167Beds: 3Baths: 2Financing: Pre-approved for conventional 30 yr fixed at ~3.7% with 5% down

The seller currently has tenants with a lease that ends in June. The tenants are students at UNLV. With all the COVID uncertainty, I put in an offer at $160k with contingencies that allow me to back out for any of a multitude of reasons. I anticipate about ~$10k in basic repairs and maintenance when I move in. Here's what the potential rental revenue would be if I decide to rent it out in the future (calculated using a sales price of $165k):

ROI = (Income - DebtService - ManagementFee - Insurance - RETax - PeriodicFees) / ( DownPayment + ClosingCosts + RepairCosts)

ROI = ($1200*12 - $770*12 - $1200*12*8% - $480 - $850 - $170*12) / ($8250 + $2000 + $10000) = 3.1% ROI

Cash Flow = (Income - DebtService - ManagementFee - Insurance - RETax - PeriodicFees)

Cash Flow = ($1200*12 - $770*12 - $1200*12*8% - $480 - $850 - $170*12) = $638/yr or $53/month

I can cash flow positive for both (not accounting for occupancy and maintenance) and downsizing would help to reduce my monthly expenses.  It would take about $20k to buy/fix the condo.  I have $$$ saved up to cover the acquisition costs and also unplanned expenses.

Am I missing anything?  Thoughts on the overall gameplan?  Looking forward to input from the interwebs.  @Bill Brandt I'm sure you've got some thoughts. Thanks in advance!

Justin

Cliff T. · Answer

Justin, I'm not based in Vegas so take my questions/thoughts with a grain of salt, but wouldn't it be better to at least give COVID a little bit of time to settle down before making this huge financial decision? You're trying to decide whether to sell or keep your main asset and purchase a new condo in the midst of all of this, with Vegas being one of the hardest hit markets? I just think it's extremely difficult to know how reliable your sales and rent comps are right given the situation.

But assuming the numbers are accurate, I'd recommend selling your house. I think the situation pretty much boils down to.. do you want to take $50k in profit now ($325k - $275k purchase - selling costs) or let that equity ride in the rental. But the problem is that home is likely to be break-even at best.

And I'd agree with everyone else here. That condo doesn't make too much sense, especially with $170/month HOA. That will really hurt you over time.

Best of luck!

Account Closed · Answer

Just, by the way, HOAs can't say no to ADUs or JDUs under the new laws.

Account Closed · Answer

Condos suck. HOAs suck.  It's like having a bunch of people involved in your investment that you didn't invite and who may have absolutely zero experience in any type of finance or real estate or investing whatsoever.  The only requirement to be on a board of an HOA is that you're an owner.  And who wants to be on a HOA board?  Some control freak homeowner with an agenda.  They're noise nazis or plants on the balcony nazis or anti-rental nazis.

I owned one for about 3 years and made a profit, but couldn't WAIT to get out from under the HOA, and yes, I even got on the board to try and add some experience/sanity to it, but it was a losing, insane battle.  Fee simple rules!

Why not just stay in your SFR and rent out rooms to students or AirBnB?  Are ADUs allowed in LV?  Can you convert the garage or add a MIL unit?  Turn that property into a more of a money maker?

Michael Robbins · Answer

@Justin Ignacio I would suggest staying in your current home and focusing on two things:

(1) Paying down any debt (2) hoarding cash

If the market turns in LV and there is blood in the streets, so to speak, you will be ready to make an acquisition.  This is the only time I believe it is worth using debt to acquire another property when your primary home is not paid off.

If values stay as they are right now then just work on making money and paying down your mortgage (and any other debt).  It is going to take time (faster if you earn more money) but is better than being over-leveraged and having to start from scratch over and over again.

Adam Tafel · Answer

@Justin Ignacio - thanks for sharing. Cashflow will go negative the second you have any repair/capex/vacancy. You seem to have good financial sense, keep analyzing deals and options and sharing them on BP.

David Barnett · Answer

How does the budget of the association look?  How much is in their bank accounts (operating and reserves)?  How often have they special assessed units over the past say 5-10 years?  How old are the major systems (roof, furnance, water heaters, boilers, etc.)?  How big is the complex?  Numbers are a bit slim, and might work if the HOA is in a strong financial position.  Otherwise, you're going to lose money on special assessments.

Bill B. · Answer

Thanks for asking Justin.

Off the to- of my head...

Are the current tenants paying $1200/mo? Is that where you rent estimate comes from?

I assumed the periodic fees were the HOa fees. I’m not a huge fan of $170/mo Hoa on a $160k condo, you’re well north of 1% Per year

That’s said, the condo makes almost as much as your home in these two projections, if the students would agree to renew your lease you’re almost as well off staying where you’re at. Or better yet, buying another house with a zero or sub $50/Hoa.

I’m usually a fan of selling your primary if you have a bunch of untaxed equity available but that’s not the case here. Does the condo have a garage or just covered parking or neither? Is the condo more convenient for your travel to work? I Do have one 1/2 of a duplex here and 1/2 of a duplex in MN, but everything else is SFR, I really prefer the lack of neighbor on neighbor conflict.

Justin Ignacio · Answer

@Cliff T., Thanks for the insight, you've framed my situation into a simple, easy to process way to think of it.

Account Closed, Good insights into HOAs.  I can't add a ADU/MIL unit.  My current house has an HOA that wouldn't allow it and there also isn't sufficient space on the property.  I know logically that staying in my current home and renting 3 of the rooms is the best bet financially but frankly the older I get the less I'm able to tolerate roommate situations.  Roommates are an option but I also wouldn't learn nearly as much about real estate investing if I just rent out rooms.  I love your creativity and thought process though!  Thanks!

Account Closed I'm not a big spongebob fan but those are some wise words.  My point isn't that I'm set on finding a way to buy this particular condo, but rather that I'm set on finding a way to invest profitably in real estate.  Thanks for the words of wisdom.

Thanks everyone for reading my post and offering input.  It's amazing that there's a community out there willing to help a complete stranger!  This is AWESOME!

Omar Merced · Answer

All the smart people said all the important stuff. I just wanted to mention that if I NEEDED to sell anything within the next 3-5 years I would sell as soon as possible. And I heard on a podcast recently a great idea about renting. Reach out to all the AirBNB owners and ask to rent, they might be ok breaking even for a year while things pick up.

Justin Ignacio · Answer

Account Closed, I acknowledge your opinion but I respectfully disagree with the conclusion.  I'm here to learn more and take the right actions so that I can find a way to succeed as a real estate investor.  I'm not here to find cheap rent.  Quoting from everyone's favorite business book, Rich Dad, Poor Dad, "Don't accept 'I can't afford it', ask yourself 'How can I afford it'".  So instead of "I can't afford a $160k condo, I'll just rent instead" I'm going to focus on "How can I afford a $160k condo" (And I'm learning! - The answer is don't buy it for $160k!)

Also I'm confused.  In your first post you advocated for selling the house.  In your second post it seems like you're saying selling isn't worth it after commission, sales costs etc.

Thanks!

Deal or No Deal: Condo Potential?

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