Is this a good deal or not?

Question

Three condos are being bundled together and sold for 115,000 total. Each one is a little over 1000 sq ft and can rent for 650 each. Using the famous "50% " rule, these still look like a good deal. The only problem is I dont know if that takes into account HOA dues. and these dues are about $200 per unit!!! That could make or break this deal. The HOA dues do cover : ext. maintenance, area lights, water, waste mgmt., fire insurance, pool (un-opened).

I'll let the pros look at this one and tell me what you think. I have yet to visit the property. I will look at it this Saturday. This would be my first deal if I bought it so I wanna make it a good one. I and my partner have good credit and good jobs so we should get a good mortgage.

Michael Rossi · Answer

Considering this is non-owner occupied, I think 7.5% is about the going rate now.

Mike

David Carter · Answer

Thx for all the input. I will probably stay away from this one. I do have one more quesiton though, do you think the best 30 year fixed mortgage I could get with good job and credit is 7.5. Cause this will affect how i calculate if its a good deal or not. Thx,   David

Scott Ficek · Answer

I can tell you that I own 5 townhouse/condos.  They cash flow (barely) and are easy maintenance with long term tenants (and they were built in 2005).  I used a builder discount to buy them no money down.

Despite that, if I knew then what I know now, I would run from them.  I am sure I will never make any capital appreciation on them as their are too many rentals in that development and some are now going into foreclosure (driving down the market value of mine).

I would only buy them again if I had really high cash flow and that was my goal.  If Mike's numbers are right (I am sure they are), they are too skinny.  I you have to replace a water heater, you would spend your entire $684 net income!

Michael Rossi · Answer

Bigdave19,

I am NOT an expert on condos.  However, I don't think the numbers work on this deal.  Without considering the HOA fees, here is how the deal looks:

Gross Rents:  $1,950
Operating Expenses:  $975
NOI:  $975
Mortgage ($115K, 30 yr, 7.5% NOO):  $804

Cash Flow:  $171 per month or $57 per unit per month, which is a little too low for me.

Now, let's consider the HOA fees.  That $200 per unit per month covers exterior maintenance (the minority of the maintenance), the water/trash, and fire insurance.  In my experience with similarly priced rentals, the maintenance would be about $50 per unit per month (inside and out); the insurance would be about $40 per unit per month; and water/sewer/trash would be about $25 per unit per month.  If you subtract these from $200 per unit per month, that leaves $85 per unit per month that would not be correlated with normal operating expenses.  Unfortunately, the insurance here is only fire insurance and therefore you will still need to purchase landlord liabillity insurance.  Let's say that is only $20 per month.

If these assumptions are correct, then you would have $105 per unit per month expense that is over and above the normal expenses.  Again, if that is true, that turns this deal from a positive cash flow of $57 per unit per month to a loss of $48 per unit per month.

I would like to hear the opinions of some of those that own or manage condos.  Maybe Beachbum could weigh in here.

Mike

David Carter · Answer

2 are already rented, they go for about 650 like i said.

Scott Ficek · Answer

Great!

Scott Ficek · Answer

Are they rented now?  Maybe throw out a an ad on Craig's list at the proposed rent amount and see if you get any takers.  Otherwise, see what the rentals in the area are going for.

David Carter · Answer

The neighborhood is ok. I dont think the area is overrun with rentals either. There are a lot of these condos for sale, and i am not sure why. If I look on mls, there are like 6 of them for sale individually ( all around 60k each). So i figured 3 for 115k sounds like a good deal. Thx for the input, any 1 else have suggestions?

PS my market area is Raleigh, NC and its really not doing bad unlike much of the US.

Scott Ficek · Answer

Have you done anything yet?

I can't imagine the $200 HOA is included in the $650 rent.  Be wary of townhouses as you can find some associations that are over-run with rentals and competition is impossible.  Alternatively, I have seen HOAs starting to outlaw rentals which would put you in a bad situation.

How's the neighborhood?

Just my $.02.