Does this condo fit the 50% rule?

Question

So I'm not buying for some time, but I've been looking at some REO properties in my area to see what's available. I found a condo close by that seems to fit the 50% rule, but I just wanted to double check with the experts:

Price: $54,000 
Rent: $1,100 
Mortgage: $43,200 (w/ 20% down, 7% interest, over 30 yrs) 
Annual Rental Income: $13,200 
NOI 50%: $6,600 
Annual mortgage payment: $3,444 
Annual Cash flow: $3,156 or $263/month

Again, just looking to see if the math was correct here and if you guys would pounce on a deal like this...

Jon Holdman · Answer

I get $3,449 for an annual P&I with Star Office.  The $263/month is the same as I get.  That works out to a 29% cash on cash return, which is quite good in my book.

However, you can't compare the $263 a month to the $100 sometimes advocated, because of the cash you have in.  At $54000 purchase price, your cash flow from the property is $191 a month.  The difference is coming from your cash.

Nevertheless, it seems like a good deal, from those numbers.

Some caveats.  Condos come with HOAs.  HOA fees can be VERY high.  If this has an HOA fee of several hundred a month, you won't even be close to the 50% rule.

HOAs can be in trouble, and have lurking special assessments.

HOAs can have the ability to block using it as a rental or can block specific tenants.

If more than a specific percentage of the project is owned by one person, or is non-owner occupied, the project becomes "non-warrantable" and then its much more difficult to get a loan.  Fannie Mae guidelines on this topic are in flux, so be sure you know what you're getting into.

Realize you're effectively renting an apartment, without the onsite management and maybe without some of the amenities.  Be sure you're comparing to other condos and apartments with similar amenities when determining rent.  Do not compare to SFRs.

Scott R. · Answer

Condo is probablly not your best first investment, even first couple. 
                              HOA is generally determined by some sort of HOA Board, where generally those positions are not paid, and the residents run most if not all of the seats. and they determine the cost needed to run the complex, pay for items such as grounds  keep, water trash and stuff, and then that amount gets split between the units, Alot more complex then that but thats a simple break down from what I understand. Then there is generally a HOA Management company that recieves the money and contracts out the work and such.

The complex can add items they feel are needed, and charge an additional assessment charge, for improvements to the grounds, which you really have no choice but to pay, sometimes they can be outrageous, for items of really no use, trees ect., a big and common approves condo association financial assessment charge is for repavement of the parking lot. Very costly, and dont fairly frequently
                              HOA budgets are often not managed very well, and depending on the HOA sometimes you might not have any say in condo association financial decisions
                              Ive even heard of HOA's where they dont allow you to fix up the condo yourself, your condo, you cannot make repairs or anything without a licensed contractor, unless you go in get permission from the board. HOA fees are generally a ton more if the property has a pool (insurance reasons)
                              Basically you own 1 apartment in a complex. And they tell you what you can and cant do. Biggest concern I've heard is some complex's limit the amount of units that can be rented at one time, so sometimes people are stuck with unrented units and the HOA will not allow them to rent them as the percentage of non OO units will be higher then the HOA allows.
                               -Scott

Scott R. · Answer

This is based off borrowing money for 30 years at 7%,
if you were to borrow full purchase price, (100% Financing) $54,000 your payments would $359.26 a month, 
using the 50% rule, based on 1100 rent, your mortgage (monthly holding cost, we need to include HOA for more accuracy) cant be above $550. $550 - $359. =  $191

Obtaining a mortgage with 20% down, he would get a loan for $43,200 making his payments $287. $550 - $287 = $263

The difference is rounded at $72 / month more, since he invested the 20% down to obtain the property. Cash flow looks alot better, but hes invested $10,800 of his own money.

Hope that made sense?
 -Scott

Sage Jankowitz · Answer

Sounds like a big mess to me and nothing I want to be a part of. Condos are officially off the list...

Scott R. · Answer

Just talked to a buddy who has some condos as rentals, he said his biggest problem was in Arizona the condo assoc. is limited in how much they can raise the fee each year, although they can recieve exceptions., But he said one of his properties they didnt raise it for several years, then raised it a ton, 
          Example:
          100 month HOA
          10% yearly increase
          after 5 years of no increase, they raised the HOA to $161 (10 percent, per year, after 5 years. )
          although they didnt raise it each year, they were now allowed to raise it by that much.

These numbers were just used for example, I think he said they raised it like 5% per year, still can take a huge bite out of your cashflow.
          He also said one of his REO's he purchased, he ended up being responsible for the back HOA fees from before he even owned the property, as they wernt paid and he wasnt told this until after closing. But he also said the fees were less than the cost to fight them would of probablly been (lawyer fees)
           -Scott

P.s. You should recieve and look over the cc&r's for a property with a HOA as well.
definition-
Covenants, conditions and restrictions. The basic rules establishing the rights and obligations of owners of real property within a subdivision or other tract of land in relation to other owners within the same subdivision or tract; and in relation to an association of owners organized for the ...
My parents HOA (non condos, sfr) charges you a fee to transfer ownership, such as when you sell your house, you have to pay the HOA a fee, I believe there community www.ranchosahuarita.com is one of the most restricted and costly HOA's I have ever seen. currently I believe its around 2% sales price to sell your own home, so add a realtors 6%, gets pretty costly to sell in this HOA, never heard of such fees for a condo, or any other HOA for that matter..

Sage Jankowitz · Answer

Scott, wonderful post! You covered literally everything I had in mind. Well done! And condos are DEFINITELY out. No question about that one...

Jon Holdman · Answer

As Scott says, the HOA fees are included in the 50%.  Trouble is they can sometimes be VERY high.  I looked at a listing for a condo here recently that seemed very cheap.  Then I realized the HOA fees were quite a bit more than the P&I.   You also don't really control HOA fees, and they can jump dramatically.

You certainly should buy your own landlord insurance, even for a condo.  Yes, the HOA covers some things, but it won't cover something going wrong inside the unit.  Further, you can have problems, like a toilet overflowing that can damage the building and other units, and without insurance you would be on the hook.  Landlord insurance also gives you liability protection, and loss of rent protection.

You will have other expenses in addition.  You'll have taxes, vacancy, and interior maintenance at the very least.  You also have all the potential bad expenses like evictions or tenant damage.

The HOA fees SHOULD cover things like new roofs.  If the HOA is underfunded, these things can turn into sudden, unexpected bills, though.  Even it if is well funded, they can turn into higher dues in the future.

Personally I hate HOAs.  (That didn't show, did it? :-))  They're OK if you a homeowner, and want to have that degree of control over your neighbors.  As an investor, though, they really do nothing for you.  You end up having to pay for all the same stuff you pay without an HOA.  And, they may choose to do things you wouldn't do, left to your self.  Essentially, you'll always have a partner in your investment.  So, honestly, I would not, and do not, consider a condo.

Robert Mayo · Answer

I like some HOAs for single-family houses, and certainly CC&Rs.

Here in California you'll see a block of nice $500,000 houses and in the middle of the front lawn of one house a guy has his car parked up on cinder blocks.  And then you notice that two doors down somebody has painted his house black and red.

HOAs provide some assurance that your neighborood will still appeal to mainstream tastes 10 years from now, at the cost of a small amount of personal freedom.

Tom M · Answer

Isn't this figure supposed to be $52? 
20% of 263 is $52.6. 
I'm new to property investing myself, so if I have missed anything here would appreciate you explaining it to me.
Thanks,
Tom

Does this condo fit the 50% rule?

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