Good Idea/Solid Rental Property?

Question

Hi all.  Was hoping to get some advice as simply reading these forums to this point has been great help!

My long story short is that I've been considering real estate inventing (focus on hold and rent) for a number of years but haven't felt the time was right to start.  In the meantime, my wife and I have saved a sizable amount of money and do our best to live on 60% of our income.  The opportunity that has presented itself is to purchase a condo and immediately fill it with a renter (sister) who is moving to NH and looking to rent.  My thought was "hey, if she can be my tenant, maybe now is the right time to get into my first property".  To be clear, she is perfectly capable of qualifying as a renter on her own and in no way would this be a favor.  We've got clear heads and I'll only be entering into this arrangement if I am 100% confident this deal would stand on its own.  Of course, even if it all works out, she isn't staying forever.

My main hesitations are that this is out of my area and the suitable property we found is a condo.  Both things I didn't want but I was hoping for a sanity check from the community before deciding to make an offer.  Without further ado, here is what Iâ€™m looking at:
	
Income	
Gross Rent	   $900.00
Vacancy Factor    $54.00
Net Rent	           $846.00
	
Expenses	
"60% Rule"	   $540.00
	
NOI	                   $306.00
Debt Servicing    $262.61
Net Income	      $43.39

The constant variables for reference are: Association Fees: $220 and Property Taxes: $180.

My goal to get to these numbers is a final purchase price of $65,000 after closing costs and am factoring $20,000 down @ 5.75%  Iâ€™ve used 60% expenses rather than 50% to account for the Association Fees increasing, (they have been steady at about 6% per year for the past 5 years).  Also, while Iâ€™m factoring a vacancy cost, this should NOT be an issue year 1 due to my automatic tenant.  This condo is currently listed at $89,000 and similar units are renting between $900-$1100 per month.

I hope you can tell Iâ€™m trying to be very conservative here so please be sure to let me know if Iâ€™ve left anything out and of course, ANY FEEDBACK IS GREATLY APPRECIATED!

Thanks!

-Joe C.

Account Closed · Answer

My first thought is that I would annualize the numbers.  
 
Gross Rent                      10,800
Vacancy @6%                    -648

Net Rent                         10,152

Prop Tax  (180/mo)            2,160
Insurance (est.)                    500
Repairs & Maintenance(5%)  540
Prop Management (8%)        864
HOA (220/mo)                  2,640

Net                                  3,448
Debt Service  (262.61/mo)  3,152

Net before considering
capex or assessments         296

I don't know what your insurance, repairs & maintenance, or prop management cost will be but I suspect these are fair estimates.  What you have left needs to cover any capital expenditures or special assessments you may have over time.  It is easy to think that the HOA fees will cover all of the capex expenses, but there are many things inside that can will need to be replaced over time.

Condo Associations are also not created equal.  Some will make the necessary repairs when they are needed and will get reasonable quotes for jobs.  Others may mismanage the funds and need more frequent special assessments.  It is a good idea to check into the condo association management.

Condo Associations may have a variety of rules that may make it tough as a landlord.

All in all I would say that any profit in this deal is pretty thin or non-existent.  The 50% rule can be a good rule of thumb, but there are cases like this that it may overstate your income potential.

Account Closed · Answer

I do not like condos for the very reasons everyone here has pointed. I feel like I or you would have no control of my expenses in a given year. i.e.HOA fees, special assessment fee. And you pointed out that you do not feel comfortable investing in condos. So, bottom line is my vote is move on to something that you won't lose sleep over.

Andy Chu · Answer

This may be an off topic response, but how much are single family residences in the area (with 0 or low HOAs ) cost? The reason I ask is giving the following scenario.

If the property sits vacant after your sister rents the property, then you are stuck with an HOA bill of $220 without getting any rent. Who knows how long that would sit there not including your mortgage. A second scenario may be as follows .

Take the $220 a month and figure the yearly HOA cost 220*12 = $2,640.

Take 2,640 and figure out how much more that affords you in terms of a bigger investment property that won't have such high HOAs. You mentioned earlier that a rate of 5.75 was quoted. For the sake of argument, this will be a interest only scenario and not amortized at 15 or 30 years.  2,640 / .0575 = $45,913.04.

So a $90,000 condo's mortgage payment is simlar to a 135,900 (ish) SFR home without HOAs. Just food for thought.

Sharad M. · Answer

I think you shouldn't have any hesitations. If you didn't want to invest out of area in a condo, then don't invest in it now. There will always be other opportunities that meet your criteria and just stay focused. You have got to have a criteria for the kind of properties you want to purchase and then stick with your criteria.

Also, how I would calculate my numbers a little different:

Gross Rent = 900
- 50% = (450)
NOI = 450
- HOA = (220)
- P&I = (262.61)
Net Income/(Loss) = (32.61)

Keep in mind 50% is just a rule of thumb to screen the properties that aren't worth wasting your time on. The best case scenario is that your operating expenses will be 50%, but there are other factors that can push your expenses north of 50%. For instance, in your case, property expenses are $180/mo, which comes to $2,160, which means you need about 2.5 months of rental income just to cover property taxes alone. That's a high number, IMO.

Good luck!

Good Idea/Solid Rental Property?

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