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Updated almost 14 years ago, 02/21/2011
condo investment
I am thinking of buying a condo in Maui, Hawaii. I have an offer in for $42,000 2/1.5 mountain/ocean view. It has tenants in place paying $950/mo. The HOA fees are $668/ month, this includes elecricity. the bank is counter offering at $45,000. This is fee simple property in Kahului. This is definatley a buy and hold. These proerties were close to $200,000 in 2004. They were $160,000 about 3 years ago. Is this worth investing? I am partners in one unit already with a positive cash flow of about $150/ month including all the expenses.
Condo fees are really $668 a MONTH? I would have said this was a great deal, $42K for $950 in rent, but if the HOA fees are $668 a month this can't possible cash flow. If you pay cash and have no other expenses (you clearly do have other expenses), you're cash flowing only $282 a month. $42K financed at 6% for 30 years gives a P&I of $252, leaving you with only $30 in cash flow and you still have to cover taxes, insurance, vacancy, maintenance, property management,etc.
Please tell me its not really $668 a month.
yes, $668/ month. Without a mortgage and paying a rental agent, all expenses, cash flow is about $150/ month. Would you even consider being Maui and possible value increasing about $50,000 to $100,000 in the future? This building has the history of this happening.
Also, the rents were $1200 up until the past year or so.
$950 - $668 = $282. You say cash flow is $150. That implies $132 for other expenses. I don't believe that. You're covering maintenance, property management, insurance, taxes, vacancy, legal fees, eviction costs, tenant damage in excess of security deposits, etc for $132 a month? No way. Its just not that cheap.
Investing for potential appreciation is a valid investment method. Personally I don't expect to home values to double anytime soon, but it could happen. Eventually it will happen. Just don't know when.
That's scary on the rent. If it was $1200 a year ago and now its $950, what makes you think it won't be $700 a year from now? That's a very bad trend.
I'm surprised Jon didn't bring this up, but I'll use one of the lessons I've learned here on BP (mainly from Jon and J Scott).
You're analyzing it wrong.
Analyzing "cash flow" is only done properly when assuming 100% financing, even if the reality of your purchase is 100% equity. Buying yourself equity will make any property cash flow, but the ability to buy equity does not a good deal make.
Even more to the point, $668 in HOA dues is what puts all the owners in FC, not what causes a meteoric rise in appreciation. I've heard pretty bad things about land leases in Hawaii as well- is this unit subject to one of those or is it fee simple?
Originally posted by Maria Neil:
Jake - you missed this part of the OP.
I did catch the fee simple part, and between that and $42K price I was tempted. Until I saw that HOA fee. That makes it effectively about triple the price. Worse, in reality, since that HOA fee has nowhere to go but up.
There are actually several ways to analyze a property. 100% financed is one. All cash (aka the "cap rate" often used in commercial is another. Or partially financed and then computing a cash on cash is a third. What's not OK, and is often done, is to put in a big down payment and then ignore it.
Buying this would be a speculation play, hoping for future appreciation. That means that at some point in the future, when the value increases, you will want to sell it. To hold it forever you should look at it as Jon has demonstrated in his earlier posts - seems not such a good idea.
Yes, this would be a buy, hold, and sell when the market comes back up. It is a short sale, not sure if it will go through. It is not a good cash on cash return, and probably doesn't seem like a good investment to anyone except Hawaii people. These properties have dropped in the past. My friend bought one for $50,000, gutted it and sold it for $120,000 when the market came back up.
I suppose when you add "vacancy, legal fees, eviction costs, tenant damage in excess of security deposits, etc", any cash flow property will no longer be so great cash flowing. I suppose all realestate comes with some risk. So where are better cash flowing properties? I bought a house in Detroit and wow, talk about a headache. That's why I though sticking closer to home would be better. The condo complex on Maui must be the cheapest fee simple property in all of Hawaii.
Conversely any property will look OK when you're doing an analysis and ignore some of the very real costs of owning rental property. If you say, "this will cash flow" but ignore costs you WILL have, then you're setting yourself up for trouble. These are real costs that you will incur. There is no "risk" in the sense that these might not happen. They may not all happen at once, but these are inevitable costs associated with owning property.
Read in the Rental Property forum about the "50% rule". That rule states that over time, all the expenses, vacancy, and capital improvements will eat up 50% of your gross scheduled rents. From the remaining 50% you have to pay your debt service (if any) and take a profit. In the case of a condo, some of these expenses, such as exterior maintenance, get baked into the HOA fees.
In a good month, your only expenses (on a normal property, not this condo), might only be taxes an insurance. Those are the months we all like. Then there are months like this one for one of my properties. My tenant vacated at the end of Jan, which really turned into Feb 1. I had to rip out three year old but totally destroyed carpet. Thanks to the billing cycles, they owe me $200 for water bills. I had to haul off a bunch of trash they left behind. Repaint. Install new flooring. Fix other minor damage. All told I'm out about $2000 on this property this month. Their $800 security deposit covers some of it, but hardly all. But I recognize this is the reality of landlording. This is not the normal month, but it is the kind of month I KNOW will happen once in a while and I'm prepared for it.
Normally I would say the 50% rule is a little pessimistic for HI, because your climate is so mild (barring hurricanes). However, when you say the HOA is $668 and you've omitted a bunch of very real expenses, then I just don't see any way at all this could make any money.
Yes, there are many locations in the US that will generate true cash flow even after taking into account all the expenses. And there are lots of other locations where owning rental property makes no sense.
Keep in mind we're just talking about averages and projections here. Reality will be whatever it will be.
That may be OK, if you think there's a speculation play. If your friend bought in 2000 for $50K and sold for $120K in 2006 I think you will be extremely hard pressed to repeat that feat. You've missed the bubble. OTOH, if he bought a short sale recently for $50K, fixed in up, and sold for $120K, he's doing fix and flips, not buy and hold. Do that instead. If you buy for $50K, put $20-30K into making it nice and can sell for $120K you'll make a nice profit. Around $15K +/-. More than that if you have enough cash to avoid borrowing money to do the deal. That's a very valid business model.
"Condo Investment" = Oxymoron
Thank you all for your input. I will back out of this one. The rents went down right when we bought a unit in July. That is a direct reflection of the decrease in the amount allowed for the section 8 vouchers. I know there are better investments, I don't know what I was thinking. The ocean view and price got me, but I understand now that there are more factors that make a good investment. Thank you so much!