Due diligence performed on a low income condo community in Orlando

Let me describe a lower income community that came across my desk recently. I did some basic due diligence and number crunching on it. On first glance it looked ok - an Orlando gated community with swimming pool, fitness center, children´s playground etc. Units ranged in price from $38,000 - $45,000 and net returns were 7-10%. Many of Orlando´s main hotspots were within a 15 minute drive.

What´s not to like?

Plenty as it turned out. The HOA reserves were hopelessly inadequate to maintain the facilities and the building structures. Almost 50 of these units were in foreclosure or short sale with asking prices way below what was being offered to me. Average household income was one of the lowest in the city and the crime rate was very high.

Most of the leases of the tenanted units had expired or were about to expire. Driving around and through this neighborhood was like something out of The Wire, a gritty TV show based in Baltimore.

Does the condition matter as long as the property earns an income? 

Perhaps you´re not too bothered about the condition of the property as long as it´s generating a 10% net return? I mean, it´s not like you´ll be asking your mother to spend the summer there minding the kids right?

However, you might want to consider the following: the rents will decrease because there are too many vacancies, your HOA will increase because too many people aren´t paying their monthly dues. Your repair bill is going to be high because the properties are nearly 30 years old and these tenants are much more likely to break stuff than those renting in a wealthy neighborhood like Dr. Phillips /Bay Hill. You will also have regular vacancy periods due to tenants regularly leaving and/or refusing to pay their bills on time.

In other words, that +10% net yield can turn into -10% quicker than you can believe. After all, we´re only talking about +/- $4,000 per year on a $40,000 property.

Anyone else out there have horror stories from buying a property on the wrong side of the tracks?

Regards

Colin Murphy