Newbie, local investment option whats everyones thoughts ?

Question

I found a condo in my area that sparked my interest. I just wanted to see if Im missing anything and what everyones thoughts are on this. It is a new unit built in 2006 so all the appliances and everything are pretty much new, comparables around town are renting for 1 k to 1250. I did my monthly income off a low ball of 1000. Here are the specs below

Building Cost: 75K
Initial Investment: 11,500.00

Potential Rental Income: 12,000/year

Minuce Operating expenses
     Vacany: 450.00
     Taxes; 1,500
     Insurance 450.00
     Condo fees 2,220.

Total: 4,220.00 expenses

I came to a Net income of 1,431.00. That gives a cap rate of 9.79%

I'm not really excited its a condo but from a numbers stand point it seems to be a good investment. What do you guys think ?

I have the actual excel sheet I used to calculate everything out if I left out any vital info let me know and I can add more.

Thanks!

Rob L. · Answer

Your right Jon, I have left out alot of misc expenses, I think i fell victim of not knowing what it would cost so I just left it blank instead. I will do some research and add the expenses you mentioned above.

Your right for any NOO loan I will probably need atleast 20% down I've even had some local places say 30% for a condo that would be a rental. The 11.5k was wishful thinking and this is why I owe everyone here for all this great info.

Thats is a great point...I didnt think about that when I took comparebles. Thanks Mark. I looked up some of the other units that are renting in the building with the same specs and they were last rented out for 995.

All of the numbers I have are ones I have derived not the seller...which as you can see allows for alot of the mistakes that Jon pointed out.

Your absolutetly right Travis...I know I can run all the excel calculations I want but when it comes to real life its full of pleasent surprises. One of the reasons I love this site is because of the vast knowledge of the people in here. I plan on taking everything everyone has said and try to learn from it as much as possible.

Thanks everyone again for the imput, its greatly appreciated.

Travis Bontrager · Answer

Rob,
An important point to remember when looking at deals is that Excel is the biggest liar in the world. The numbers will NEVER be what you put into Excel. I know from personal experience. I also know that getting into your first deal as a landlord might be a mistake. I would suggest you listen to Jon's analysis, it's dead on and learn from it. Personally I would get more education on income property before diving into buying a rental at this stage of the game, especially a condo. What is your exit strategy with the condo anyway? If you need to sell quick, how will you get out of it in a hurry? I would look at single family homes, there are plenty of those out there to wholesale to other investors. Becoming a wholesaler will be the education you need to get into the landlord game. Just my two cents.

Mark Saenz · Answer

I'm with Jon.  He is right on point.

The only thing I would add is:
I have a question about your rental comps...

You say the comps around town...
what about in your complex?

How many other condos are for rent?  Is this a complex where sales ceased and now everyone is trying to rent?

What are the condos in your complex renting for?

The thing about condos is that your rental comps, sales comps, etc. will usually (almost always) come from what's happening in that complex alone.

Now there are always exceptions to the rule; however, things you should definietly be aware of.

Last thing...(just in case)  if you are getting your numbers from the person trying to SELL you the condo...uuummmmm

It doesn't sound like you are...but just want to make sure.

Best of luck to you!!!!!

Amigos,
Mark

Jon Holdman · Answer

$75K for $1000 a month in income may be an acceptable deal.  But probably not much better than break even.  You're underestimating expenses.  You've left out maintenantce (mostly caused by tenants), property management (which you could earn by doing it yourself), special assessments, legal expenses, make ready expenses (cleaning and fixup between tenants), special assessments from your HOA, CPA expenses, etc.  Normally I'd quote the 50% rule, but someone recently said I sounded like a broken record.  And, I think that rule is optimistic for a condo because of your out-of-control partner - the HOA.

You're miscalculating cap rate.  Based on your expense estimate of $4220, you have an NOI of $7,780 ($12,000 - $4220).  Diving that into the $75,000 purchase price you get a cap rate of 10.4%.

You say an initial investment is $11,500 on a purchase price of $75K.  Not sure how you get that.  You're going to need 20-25% down on a NOO loan.  That alone is $15-22.5K.  And you have closing costs.

$1000 to $1250 is a HUGE range for the rents.  You need to figure out what it really is.