Condo Deal - is my math right?

Question

Working on my first deal to dip my toe in the REI world. I've done a lot of reading and lurking here and I think I've identified a deal with potential.

Caveat: these numbers could be completely wrong or a very bad deal (VBD). If you feel that way, speak up! You won't hurt my feelings. This is my first time so I'd like to learn what I might have over- or under-estimated.

Condo is a 2/1, 767 sqft, located in Arizona. Built in 1981, original owner is selling. Used rarely as a winter home by the owners. It's in a good neighborhood and near a university which makes for better rental potential. Average rents in the area are between 700-900/mo. HOA covers a lot of the maintenance cost but it could use a paint job inside, new kitchen appliances (stove, fridge, DW, vent hood), new window coverings, paint on the kitchen cabinets and new flooring to replace dated carpet/linoleum (again, original 1981 owners). Biggest community amenity is a pool (big deal in AZ)

One thing to note below: I could probably forego the appliance replacement in the kitchen until year two. I am estimating $1500 to replace all three major appliances in the kitchen. This changes my CoC and cash flow pretty significantly in year one. I'm including them as a 'worst-case' if I feel that it just absolutely will prevent me from getting a renter.

Initial Costs

Cost is $75,000 putting 20% down.

Closing Costs: 1% of purchase price

Repairs: $2,500

Annual Expenses:

P+I: $60,000 @ 4.5%, 30 year conventional = $3,648

Taxes: 1.5% = ~$1,125

Insurance: ~$500/yr

HOA: $1,440 (covers exterior maintenance, landscaping, common areas (pool, parking), trash and some other smaller)

Property Management (10%), Repairs/Maintenance (3% - HOA covers much), Capital Expense (10%), Vacancy rate (7%): $3,500

Income:

Rent: $9,600 @ $800/mo to one renter. If rented to students could get $12,000 @ $500/mo per room

For calculations, I'll assume $800/mo

Maths:

NOI: $4,800

CoC: 5%

ROI: 11.1%

Cap Rate: 6.4%

Cash Flow (year 1): $-1,500 (due to repair costs)

Cash Flow (year 2): $1,594

Exit Plan:

Assuming a modest 2% appreciation, 4% annual rent increase and a 10% vacancy rate I calculate after 5 years I could sell the property and have a 62% overall ROI. My plan is to hold onto it for more like 10-15 years.

Worst case, I calculate I would break-even on selling the property after 3 years of ownership and rental income should I need to unload it.

Alexander Merritt · Answer

@Jimmy Mooney

Good decision. To answer your question, I actually look at both. In my analysis even if I'm getting a 15% return but I'm only actually making $3k or something like that, it's not worth all the time and effort for that little money. My personal goal is 10%+ and $7k+ but I'd settle for $5k if I know that it's a B+, A area and I won't have very much problems with tenants.

This is why BP is great because we can present an idea and get different points of view which helps us to evaluate potential deals. On to the next one.....

Jimmy Mooney · Answer

Found out the HOA fees don't cover as much as a thought. Very barebones for the monthly fee.

PASS!

Jimmy Mooney · Answer

Another question - what do you consider a good ROI on a rental? Are you looking at percentages or raw dollar amounts? 8% in the stock market doesn't sound half-bad to me.

Jimmy Mooney · Answer

Thanks for the advice - sounds like the general consensus!

Jimmy Mooney · Answer

Good questions. Primary goal is buy-and-hold - sorry that wasn't clear. I just put in possible exit strategies if something went south and I needed to exit quickly - it's my first deal so I'm just making sure I have some room to maneuver.

I'm definitely going to low-ball them. I've looked up tax rates for the area and it's within a few hundreths of a percent.

Flipping is an idea worth exploring although the Tucson market isn't moving super fast these days. I'll check it out.

Alexander Merritt · Answer

What is your primary goal? Are you looking to keep this as a rental? I'm confused when you say you want to hold onto it for 5 years and then sell with your assumed appreciation. Everyone says that you can't predict the future so it's best not to plan for time appreciation. If it happens great, if not, you weren't depending on it anyways.

If your looking at a rental, $1600 isn't worth it to me. You could invest your $20K in the Stock market and make the same 8% return for far less risk.

What is the asking price? What happens if you low ball them? Also, you should be using real Tax information and not an assumed percentage. You can find that at the county tax assessors website/office. Have you explored flipping the condo?

Jimmy Mooney · Answer

Thanks Crystal. It is in Tucson but far enough away to be 'on the edge' of student rental or not.

I lived in Tucson for 26 years, born and raised, so I'm pretty familiar with the neighborhoods. This one is far enough away to not be considered a campus rental (I lived in the block in my early 20's!).

I also think the purchase price here is higher than I should pay for it. It could use some serious updating and with a discount on the price I could do it justice.

Thanks for your advice re: vacancy rates, rental rates and HOA fees. All great information!

Crystal L. · Answer

I wouldn't do it. I think your math looks right - I'm just not sure about your assumptions.

You said the condo is near a university and was used as a winter home which means it's either next to ASU (Tempe) or UofA (Tucson). I would disagree that all Tempe and Tucson university-surrounding neighborhoods are good, so make sure you have gone there at night and you would be comfortable having your mother/daughter/etc live there alone.

I'm also not sure about your $800/month assumption. If nothing else you need to increase your Vacancy Rate % (student tenants have high turnover). I'd also suggest lowering the $ amount you think you can get per month. Just because something is on craigslist for $800/mo doesn't mean it will be rented. That number seems high to me. And in Tucson specifically (if that is where it is), they are building a ton of new student housing on campus so there will be less demand for student housing off-campus.

Lastly, as a rule of thumb places with HOA fees are generally not the best investments. HOA fees never go down and it cuts into your cash flow.

Just my 2cents - Good luck!