Condo in Mesa, AZ Deal Analysis

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Condo in Mesa, AZ Deal Analysis

Paul G.
Gilbert, AZ · Member since 2017 · 119 posts · 101 votes

So,

I'm (finally) under contract and the seller has accepted my offer.  Here are the details

2bed / 2bath 1000 sqft 

Purchase Price: 98K, Seller paying 2K towards closing costs

HOA: $175

Vacancy: 1/12 (8.33%)

Taxes: $400/year

Insurance: $450/year

Debt Service: $390 (25% down)

Maintenance / CapEx: 5% of Rent: $495/Year

All Expenses: $675

Comparable rents in the area: $900 (same complex), with some upgrades could get to 950-1000.  But for this analysis I'll use $900 because I know I can get it.

CoC: 6.6%

Cash Flow: $150

DSCR: 1.38

GRM: 9.07

So, I know, not GREAT numbers.  But things have been flying off the market for my properties that I'm interested in.  I've lost about 8 properties so far, and while this isn't great, it's definitely in a good location with plenty of upside.  Here's the rub.

There is a renter already in the unit.  She's paying $740 a month, on month to month with no current contract and would like to stay if possible.  She knows that rent will be increasing, but she can't afford too much more. (This is probably the main reason why it hasn't gone off the market).

As I see it, since she's currently there, I was going to keep her at $740 until Dec 1. During that time, I would let her know that the rent on Dec 1 will be increasing to $850 a month. If she stays, then I technically have a 0 vacancy rate with Cash Flow of $170 starting in December (and CoC of 7.4%). For the first 2-3 months, I would only see a Cash Flow of $50ish (which sucks). But, I don't have to do any of the major upgrades that I was planning (floors, electrical, counters, paint) immediately and can get positive cash flow immediately.

If she decides to move on, then I make the improvements and put it back on the market at $900-$950 within 2-3 weeks. and get what I talked about above.

So.  I guess my question is.

1. Knowing the market is extremely hard right now (for those not investing full time, and not coming in all cash) is this a decent enough deal?

2. Would you keep the renter in there using my information provided above.

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Kuba F.Pro Member
Real Estate Investor · Los Angeles, CA · Member since 2013 · 2k+ posts · 694 votes
9y

If you're planning on holding it for more than 5 years then 5% capex is inadequate.  Over 27 years for example you are likely to need to cover over 75K+ in expenses, whereas at 5% of receipts and 3% rent growth rate starting at 900/mo you're only likely to reserve 20K....so your reserves should be closer to 20%. You're starting off in the red, your only option to be the least in the red is to raise rents as much as possible as fast as possible.

Using your numbers and some other assumptions such as starting at 900/mo rent I get a 7.24% IRR. Changing to 20% reserves changes IRR to 4.47% over 27 years with a 2% appreciation rate.

Your appreciation rate might be higher which could help.

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  • Paul G.
    OP
    Gilbert, AZ · Member since 2017 · 119 posts · 101 votes
    9y

    bump

    0Reply
  • Kuba F.Pro Member
    Real Estate Investor · Los Angeles, CA · Member since 2013 · 2k+ posts · 694 votes
    9y

    If you're planning on holding it for more than 5 years then 5% capex is inadequate.  Over 27 years for example you are likely to need to cover over 75K+ in expenses, whereas at 5% of receipts and 3% rent growth rate starting at 900/mo you're only likely to reserve 20K....so your reserves should be closer to 20%. You're starting off in the red, your only option to be the least in the red is to raise rents as much as possible as fast as possible.

    Using your numbers and some other assumptions such as starting at 900/mo rent I get a 7.24% IRR. Changing to 20% reserves changes IRR to 4.47% over 27 years with a 2% appreciation rate.

    Your appreciation rate might be higher which could help.

    1Reply
  • Kuba F.Pro Member
    Real Estate Investor · Los Angeles, CA · Member since 2013 · 2k+ posts · 694 votes
    9y

    Even worse if you figure you'll have to spend 5k initially on paint and flooring to turn it over, and that's without a PM expense:

    Property analysis

    0Reply
  • Paul G.
    OP
    Gilbert, AZ · Member since 2017 · 119 posts · 101 votes
    9y

    I don't use PM and wont for this property.  I still enjoy being the PM. 

    How did you come up with 75K in expenses?  In 27 years that's 2 AC units, 4 water heaters, and maybe 2-3 sets of appliances?

    so 4K (x2), 400 (x4) 1K (x3) = 12K + little things here and there IE 3 flooring redos at 2K a pop, so 18K total over 27 years.

    That's assuming I hold it for 27 years, at which point now it's free and clear so my cash flow turns into $600 a month.

    Your property analysis adds $213 for utilities I'm assuming that's HOA/Insurance?

    And $250 for CapEx for a condo is waayyyyyy to high.

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  • Kuba F.Pro Member
    Real Estate Investor · Los Angeles, CA · Member since 2013 · 2k+ posts · 694 votes
    9y

    Not knowing anything about your property broad strokes:

    You're going to pay for the capex in one way or another, so if you don't reserve ahead of time, you'll just end up pulling it out later or selling at a discount.

    0Reply
  • Paul G.
    OP
    Gilbert, AZ · Member since 2017 · 119 posts · 101 votes
    9y

    Yeah, I saw that at the bottom of your report after I posted.

    We still like doing everything ourselves, so a lot of that is quite a bit cheaper.  

    What we've found in our current rental is our floors will probably last 8-10 years minimum.  We lay our own flooring and it's holding up extremely well at this point.  

    Water heaters in Az Run about $400-$500 (12  year warranty, 40Gal, $499 at Home Depot) , and I can install it myself.  $1500 for a water heater seems high.  Is that for a house with a family of 4+? 

    Appliances also seem high.  We go to either the Outlet for scratch and dent, or buy used for super discounts, depends on our timeframe for replacement.

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  • Paul G.
    OP
    Gilbert, AZ · Member since 2017 · 119 posts · 101 votes
    9y

    Also, if I had it professionally painted, it's $1/sqft.  I play hockey with a painter :).  If I want to do it, it's $100 of paint and a day with my paintsprayer.

    0Reply
  • Cortney Jones
    Real Estate Investor · Chandler, AZ · Member since 2009 · 111 posts · 114 votes
    9y

    @Paul G.

    The real question is . . . Do you feel okay with this? 

    If on 12/1/17 you take her rent to $850 then you're really only losing $600 a year (based on your projecttons) plus as you stated you won't have to do all the other work.  Is that ok with you or is it always going to bug you?

    Some people would be great with that and knowing that they are helping someone else and still getting the mortgage buy down and some slight cash flow.  Others want to completely maximize and squeeze out every bit.  

    I would look at a few things: how long has she lived there? what is her payment  history like? If the $850 increase makes it tough for her to pay, are you always going to be having to send your a notice to vacate month after month, therefore increasing your frustration and work load?  

    Answering some of those questions may help you decide. 

    0Reply
  • Kuba F.Pro Member
    Real Estate Investor · Los Angeles, CA · Member since 2013 · 2k+ posts · 694 votes
    9y

    Many assumptions were made, certainly.  Although I love getting my hands dirty, I generally expect that I will have the work done by others. More power to you if you have ways to save on these things or do it yourself.  

    Water heater is what it just cost me to get it done last week.   Granted those are SoCal prices.  I don't play hockey with my painter and I'm lucky to get it done for less than $2.50/sqft.  

    Appliances is what I do brand new on sale mid grade stainless.  

    Here's the thing though.  You're squeezing every dollar out of this thing doing your own PM and work, and still barely making anything, so I don't see this as much of an opportunity.  

    I understand that you're somewhat committed to it, so I wish you well with it though.

    0Reply
  • Paul G.
    OP
    Gilbert, AZ · Member since 2017 · 119 posts · 101 votes
    9y

    @Cortney Jones I believe I am ok with it.  While I'm in this to make money, I also still like helping out where I can.  She's been there for 3 years and has a perfect payment history.  I won't go into the details, but I believe she could afford the $850 increase.  She's been very forthright with us in our dealings with her so far, and I have no reason to believe she wont be in the future.

    I understand the concept of squeezing every penny out of a rental, and I don't see a problem with that, but I personally like to put a little good karma into the world.  :)  Hopefully one day it will come back around to me.

    @Kuba F.

    @Kuba F. Yeah, I agree with you.  I would be doing a lot of work myself to squeeze money out of it.  But with the connections I have for plumbing / paint / Electrical / HVAC I can cut my custs down pretty significantly.  And to be honest, doing the work myself is fun for me.  Now, in 5 years it may no longer be fun.  At that point I'll probably sell it and move on to something bigger.  But right now, with the amount of cash on hand I have, it's not feasible.

    I probably should have prefaced my statement outright with the fact that it's kind of a loaded question :).  

    1Reply
  • Michael Boyer
    Investor · Juneau, AK · Member since 2015 · 980 posts · 741 votes
    9y

    Related to the CAPEX, I might check into the association some. 

    You can control and budget your own CAPEX some for interior elements (like your own floor laying and the above schedule, for example) but for the association not so much.

    Condos are odd ducks, too. I would look at two things--condition of the place and reserves (sort of two sides of the same coin).

     First, I would check the actual reserves of the association, usually pretty easy to find out in the buying process (required resale cert etc). Are they adequate. Ask around and compare to other similar associations.

    Then I would see if these reserves are adequate in light of the real needs of the place.

    For example, does it look like the place has some major capital costs coming (roof, parking lots, windows/doors, decks, HVAC, siding, grounds, common areas, etc)? Check the actual condition of the place and the minutes and HOA documents. Any reserves may be accounted for and then some..... (not uncommon).

    Sometimes you'll see a place in good condition (but with low reserves, indicating they spent the money to renew the place); or one with high reserves but in dated condition (sign of a tight fisted board). But the worst is an association with about everything at the end or near its useful life and very low reserves (which means an increase in dues or even a special assessment is coming--which will tank even the best laid rental plan!)

    Best of luck!

    1Reply
  • Cortney Jones
    Real Estate Investor · Chandler, AZ · Member since 2009 · 111 posts · 114 votes
    9y

    @Paul G. - I agree with the putting good Karma out and helping people out.  Someone who has been a tenant that long is probably worth taking a risk on, in my humble opinion.  If I were in your shoes, I would go the route of raising her rent to $850 and taking a chance on her.  You never know, she may stay there 10 more years and pay down 1/3 of the mortgage for you without you ever having to replace carpet, paint, etc.  :-)

    Sounds like a decent deal.  Yeh!

    0Reply
  • Amy KendallBusiness Member
    Real Estate Broker · Lehi, UT · Member since 2016 · 397 posts · 318 votes
    9y

    @Paul G. - I also like to invest in my local market, even when I know returns are potentially better elsewhere. I say go for it as long as it will align with your long term goals. If you are looking to move faster and acquire more units, you may want to consider only putting 20% down. This will boost your CoC return and leave you with a $5,000 headstart for your next property. Just a thought. Best of luck to you!

    0Reply
  • Paul G.
    OP
    Gilbert, AZ · Member since 2017 · 119 posts · 101 votes
    9y

    @Michael Boyer Yeah, I'm definitely going to scrutinize the HOA pretty heavily. That's a good call to get the HOA minutes from the last meeting. I was planning on just sifting through the CC&R. I may bring my big ladder to the inspection tomorrow and see if I can get up on the roof to see what the roof looks like.

    I can compare them to another property I own who has a pretty active and well managed HOA and see how they compare.

    I didn't notice any major capital repairs when I drove through the past couple times I was in the neighborhood, but I will definitely do more due diligence now that I'm on the clock.

    0Reply
  • Jake Saliba
    Flipper/Rehabber · Mesa, AZ · Member since 2012 · 38 posts · 19 votes
    9y

    Take your cash investment to upgrade the unit. (3000-7000?)

    Divide by your annual loss from keeping rents under market ($600-1200?).

    This is the number of years until you lose money on raising rents. If you can do 3+ years, could definitely make sense to keep the existing tenant.

    0Reply
  • Shiloh LundahlPro Member
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    8y

    @Paul G. What ever happened to this condo?  Did you end up purchasing it?  How has it been working for you?

    480-206-1209Podcast Guest on Show #287
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  • Paul G.
    OP
    Gilbert, AZ · Member since 2017 · 119 posts · 101 votes
    8y

    @Shiloh Lundahl we ended up closing on this property 10/6.  The appraisal came back much lower (which actually worked out better for us).  It came in at 87K, which we lowered our offer to (and they accepted).  We know why the offer came in low, so I'm not worried about it at all.  Another property in the complex just sold for 106K in 4 days, with the same upgrades we plan on doing.   Sorry I missed the get-together btw.  Got hung up at work :(.

    Our tenant agreed to (and will start paying) an increase in rent next month of $800, with no changes to the property beyond adding 3 ceiling fans (a reasonable request).  I decided the raise to $850 immediately wasn't worth the month or two of vacancy I would incur + renovation allowance if she left.  We settled on $800 with the agreement to raise again in 6 months.  So, that way I can slow roll out the raise in rents.

    I don't have the actual numbers off-hand, but our total Debt Service (PITI) is about $414 a month.

    My tenant doesn't want to leave, but I have transitioned her to a month-to-month lease.  So, I've factored in 0% vacancy.  I know this is unrealistic to maintain, but for this year, that is what I'm banking on.  My tenant has been on time so far with the rents, so unless something crazy comes up, I'm going to assume she will be a long-term tenant as she has done everything she possibly could to make sure she doesn't give me any reason to kick her out... LOL

    CoC: 7.1%

    Cash Flow: $175

    DSCR: 1.51

    GRM: 9.06

    Not great, but not bad. Definitely upside potential when we want to put a little money into the property. Similar units that have some upgrades can be rented around $900 (the return from the upgrades I don't think would be worth it though as the break even at this point would be about 7-8 years). More importantly though, a second property under my belt with a ton of upside to BRRR when I decide it's time. And, because we had to put less down and don't need to do the upgrades now, I'm already looking for my next :).

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  • Cara Lonsdale
    Realtor and Investor · Scottsdale, AZ · Member since 2017 · 1k+ posts · 1k+ votes
    8y

    So sorry to be coming to the discussion so late, but I wanted to reach out.

    $150 cash flow is small, but to many investors, the greater picture of appreciation can round up the investment to still be a good one.  Others may determine that cash flow is key, even though appreciation will not happen.  So, it really is a deal to be determined by the investor making it.

    With that said, I would suggest looking at properties without an HOA or lower HOA. That HOA takes up alot of your cash flow potential. You may be able to charge some of it back to the Tenant by having a flat fee for the water/sewer/garbage that is most likely included in the HOA fee. The HOA can kill cash flow too. Sometimes it is raised significantly, and suddenly your $150 cash flow, is now $100. Ug. So, be careful there too. Make sure the HOA is healthy and reserves are strong when researching communities.

    Regarding the Tenant, don't feel bad about raising rents.  This is a business.  You have to treat it like a business.  The tenant most likely is aware of the increased rent that they will pay at another place, so they are expecting the increase.  If they can't make it work, then move them out and place a new tenant in who is expecting the higher rental rate.

    CLEAN YOUR UNIT THOROUGHLY!  I can't tell you how surprising it is to walk rentals and see how dirty they are.  No wonder they are sitting on the market, and get lower rental rates!  Make your unit sparkle like a new penny and you will get top dollar for your area.

    Just wanted to share my thoughts.

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