5x Condos Deal Analysis... Good or bad Investment?

Real Estate Deal Analysis & Advice
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5x Condos Deal Analysis... Good or bad Investment?

Ciro LoCascioPro Member
Investor · Queens, NY · Member since 2013 · 135 posts · 39 votes
Hey Guys I need everyone's opinion as I am just a couple weeks away from signing a contract on 5x condos, four are 2 bd and 2ba and one is 1bd and 1ba. The price I got him down to is $45,500 each for 2bd and $38k for the one bed room. Totaling $220k. This investment would be my two brothers and I. Downpayment is 25k each, total $75k and receiving a private family loan for the remaining $145k at 2.5% either 15yrs for $1079 monthly payments or 20yrs at $885 monthly payments. Which would be either $12,948 or $10,620 annually. Each unit is rented currently for $750 and the one bedroom for $600. Annually $43,200. Rent is on the low side of the market currently. Expenses would be HOA fees at $146 monthly and $108 monthly for the one bedroom, totaling $8304 annually. Taxes are $600 annually and $400 for the one bedroom, totaling $2800 yearly. I am also calculating 1 month vacancy at an annually total of $3600 and 10% maintenance repairs at a total of $4320 annually. So if we went with the 15yr mortgage it would look like this $43,200-$31,972 expenses +mortgage = $11,228 profit. Divided by 3 is $3,743 each annually and $312 cash flow monthly. Or if we did the 20 yr mortgage it would look like this $43,200- $29,644= $13,556 divided by 3= $4519 each annually and $372 monthly cash flow each. What do you guys think of the deal altogether and if it's even a good deal would I go with the 15 or 20 yr mortgage. Please advise and thanks ahead of time of anyone's input. If you believe price is too high where should I be to have this deal make sense. Thanks
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  • Adam Johns
    Huntsville, AL · Member since 2013 · 66 posts · 11 votes
    13y

    @Ciro LoCascio

    Since it seems like no one else wants to answer this, I'll take a crack at it. Let's start at the beginning; Most investors use the 50% rule for figuring cash flow. That is that 50% of rent goes to the costs of doing business (maintenance, vacancies, etc.) and 50% goes to costs of ownership (loan servicing, taxes, insurance, etc). Your cashflow is what's left from the cost of ownership. Also, if the owner pays water, this changes to a 60/40 rule.

    Granted, this is a quick rule of thumb for figuring cashflow, and it may be different on different properties, but your numbers still seem pretty low for maintenance. 10% may cover the cost of turning over a unit, but what about when it's time to replace a roof, water heater, or HVAC. What about keeping up the external portions of the properties?

    Using the 50% rule the numbers look like this:

    43,200 (rent) * .5 = 21,600

    21,600 - 10,620 (20 yr loan) = 10,980

    10,980 - 2800 (taxes) - 8,180

    8,180 - 8,304 (HOA, which is a cost of ownership, since it needs to be paid regardless of the place being a rental or a residence) = -$124

    As you can see, you end up with negative cash flow. I also notice that you didn't even mention insurance in your figure, which would make that deficit even more.

    All of that being said, I'm new to REI and own 0 rental properties. I'm only sharing what I know from extensive reading and listening. Someone with more experience may jump in and correct me (and I certainly welcome it), but personally, I wouldn't do this deal.

    -Adam

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  • Ciro LoCascioPro Member
    OP
    Investor · Queens, NY · Member since 2013 · 135 posts · 39 votes
    13y
    Hey Adam thanks for the reply. Your correct I forgot about insurance which is a total of $1008 annually for all 5 condos. The reason I only calculated 10% is cause the HOA takes care of all exteriors also including HVAC units. I will only be responsible for the interior. Giving it some additional thought it would probably be better to stay away from this deal.
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  • Ciro LoCascioPro Member
    OP
    Investor · Queens, NY · Member since 2013 · 135 posts · 39 votes
    13y
    Hey Adam thanks for the reply. Your correct I forgot about insurance which is a total of $1008 annually for all 5 condos. The reason I only calculated 10% is cause the HOA takes care of all exteriors also including HVAC units. I will only be responsible for the interior. Giving it some additional thought it would probably be better to stay away from this deal. Also tenants pays all utilities. Would the 50% rule still apply to condos?
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  • Michael B.
    Apopka, FL · Member since 2012 · 207 posts · 120 votes
    13y

    I would disagree with Adam's numbers.

    The 50% rule is about expenses. But the HOA is just another piece of the maintenance expense. Ditto taxes. Virtually all of the HOA fee deals with landscaping and building maintenance and reserves -- things you'll have to do anyway if you're not in an HOA. So if you pull it out separately you're counting it twice. Taxes fall in the same category. Here's the way I'd look at it.

    43,200 (rent) * .5 = 21,600 --> These are the expected expenses, maintenance, and vacancy.

    The debt service would be $10,620. Actually it would be slightly less than that as you could pull out the principal portion of the payment. Only the interest portion should be here, but in the early years it's too small to think about.

    So I'm seeing a $43,200 - $21,600 - $10,620 --> $10,980 cash flow. A quick return on investment would be (10980 / 75000 ) = 14.6%. Not a bad deal.

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  • Adam Johns
    Huntsville, AL · Member since 2013 · 66 posts · 11 votes
    13y

    I didn't consider that the HOA would cover maintenance costs. It sounds like the 50% rule is probably not a quick answer to this deal. You can check out this blog post:

    http://www.biggerpockets.com/renewsblog/2010/06/30/introduction-to-real-estate-analysis-investing/

    which will give you a good idea on working the numbers. I think that most people use the 50% rule as a good way to make sure they're being someone generous to themselves when figuring operating costs so that they don't find themselves stuck with a big bill when the worst happens.

    If possible, talk to the current owners and/or other landlords in the area. There are always factors that the rules don't take into consideration.

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  • Account Closed
    Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    13y

    I'm with @Michael B. on this. How's your deal compared to your local market? Don't forget that real estate is very local. A quick rule of thumb does not apply across the whole board. That 5 units with that kind of rent numbers would sell for $500k-$700k in San Jose depending on its location. Now, does that make your deal sound cheap?

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  • Adam Johns
    Huntsville, AL · Member since 2013 · 66 posts · 11 votes
    13y

    @Michael B.

    I was obviously a little hasty to throw the HOA on the wrong side of the equation, and considering that it's about 20% of the rent, that was a costly mistake. Thank you for jumping in there and setting me straight!

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  • Aleksey Vinogradov
    Belleville, NJ · Member since 2013 · 85 posts · 23 votes
    13y

    Hi everyone, I'm a newbee here..

    Where did you find a loan @ 2.5%? Everything I see here http://www.biggerpockets.com/currentrates or just googling is about 4.5%..

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  • Account Closed
    Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    13y
    Originally posted by Aleksey Vinogradov:
    Hi everyone, I'm a newbee here..

    Where did you find a loan @ 2.5%? Everything I see here http://www.biggerpockets.com/currentrates or just googling is about 4.5%..

    He got it from a private family loan. It's nice having family members that can help you out.

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  • Aleksey Vinogradov
    Belleville, NJ · Member since 2013 · 85 posts · 23 votes
    13y

    Aa! that's what it means! Thank you very much!

    BTW can you see the signature under my posts? I can't

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  • Emma S.
    SoCal, CA · Member since 2013 · 51 posts · 10 votes
    13y

    @Ciro LoCascio

    Make sure you vet the HOA and not just the individual units that you are considering. Did you ask for HOA docs? Look at how well the HOA is run, how frequently they have increased HOA fees, when where the last capital expenditures & do they have good reserves for upcoming CapEx. E.g. a condo I looked at had cracks in the wall & it looked like there was issues with a shifting foundation. That means a special assessment on HOA fees is around the corner.

    All this to say, try to run your numbers with best/worst case scenarios and maybe try to negotiate an even lower purchase price. The more room in your numbers to allow for some increase in HOA fees, the better.

    Re: mortgage, at such a low interest rate, definitely go for a longer term since that would mean a lower monthly payment and frees up more $ for other investments. OTOH, since the loan is from a family member, I would feel bad giving my family member only 2.5% for 20 years when they can get much better returns on any number of investments. Maybe consider a 5 year loan with 20 yr amortization & get conventional financing later.

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  • Ciro LoCascioPro Member
    OP
    Investor · Queens, NY · Member since 2013 · 135 posts · 39 votes
    13y
    Thank you for that advice. I am reconsidering the deal and I'll try to get a better number. HOA has only raise their fees $25 in the pass 7 yrs. The area is up kept really well. Regarding the mortgage that's actually a great idea. Possible do a 5 yr mortgage with even a 30yr amortization and than refi after. Thanks again for all the great feedback. If anyone has experience on condos please chime in
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  • Mary Joe
    Investor · Brooklyn, NY · Member since 2013 · 254 posts · 28 votes
    13y

    I have looked at a lot of condo in different markets over the years, for condos I actually think you cash flow very well. Some of the things you may want to consider are:

    -how many units are there in the building?

    -does the condo bylaws have restrictions on rentals? some buildings require at least a certain percentage of owner occupied units.

    -have your attorney review the condo financials, find out if there are existing lawsuits,

    -find out from the condo association if they anticipate any capital improvements in the near future, what are they?

    -how many owners are currently delinquent with their HOA dues, for how long, and what have the condo association done about that

    -Is the condo on bank's approved list for mortgages? If banks don't loan to buyers of this building, then you know something is wrong about the building.

    Good luck.

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  • Ciro LoCascioPro Member
    OP
    Investor · Queens, NY · Member since 2013 · 135 posts · 39 votes
    13y
    In the complex there's 84 total units,7 buildings of 12 units each. There's no restrictions on the amount of rentals allowed in the bylaws. Financials are in good standings with no lawsuits pending. There's no anticipated capital improvement. Association is in good standings. Everyone is up to date with their dues and ones that have been behind the association has brought them to court asap. How do I go about finding out if the condos are on a bank approval list? Thanks
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  • Mary Joe
    Investor · Brooklyn, NY · Member since 2013 · 254 posts · 28 votes
    13y
    Originally posted by Ciro LoCascio:
    In the complex there's 84 total units,7 buildings of 12 units each.
    There's no restrictions on the amount of rentals allowed in the bylaws.

    Financials are in good standings with no lawsuits pending.

    There's no anticipated capital improvement. Association is in good standings.

    Everyone is up to date with their dues and ones that have been behind the association has brought them to court asap.

    How do I go about finding out if the condos are on a bank approval list?

    Thanks

    You can go to a local bank and tell them you are thinking of buying a unit in the building, ask the bank if they will give you a mortgage for the building. They will tell you. They won't approve the mortgage if the building is not on their approved list. This will give you an idea if there are some problems with the building that you should be aware of.

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