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Investment Property ROI?
Old 03-07-2016, 10:05 PM   #1
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Investment Property ROI?

I know very little about real estate investment but am considering buying a second condo in my building. A neighbor has been trying to sell his condo for a couple years without luck and has now dropped the price to 20% below appraised value and would likely go down another 5%+ so i'm thinking about it. The asking price is $32,000 and other nearly identical units have rented for $525 or $550. I expect that he'd accept an offer of $30,000. I would have to pay $175/mo condo fee, and $80/mo in property taxes and insurance so at $525/mo rent i'd clear $270/mo or $3240/yr. $3240/$30,000=10.8% ROI. Am I figuring that right? Is that a good enough deal? Is it better to finance? Any other tips/advice would be very welcome. Thanks.
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Old 03-07-2016, 10:32 PM   #2
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No. You have not included vacancy and collection loss, maintenance and repairs, or capital improvements. You should also consider the expense of property management, even if you intend to do it yourself.

You may not be able to get financing in your building if a high percentage of the units are rented. Costs associated with financing a small amount will be high, if you can find a lender that does small loans.
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Old 03-07-2016, 11:41 PM   #3
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Sounds great to me ! Couple of questions.

1. How many units are in the condo complex ?. And how many units
are rental. If majority are rentals, not to good.

2. How come the condo's are so hard to sell ? Where I live, real estate
is moving quickly. If depressed area, location in decline. I would not
buy.

3. If location is good. Competition from other rentals not high.
Employment, schools, good. Again, sounds good.

4. Can you afford to pay mortgage/ asso fee, when empty.

5. Can you paint and do minor fix up, and rent the unit.

6. If yes, sounds good.

7. Where I live, 30K, will not buy anything. San Francisco Bay Area.
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Old 03-08-2016, 03:34 AM   #4
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I would want to know why it is not selling? Are others in the complex moving? Real estate as a rule is not liquid but a couple of years is crazy. A lot of red flags, but the numbers do look good.
2 problems I see: repairs, you need to be handy and appreciation, does not sound like they are going to go up any time soon. I would throw the 30K at ATT and take the 5.5 return with no headaches.
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Old 03-08-2016, 06:13 AM   #5
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Make sure you can actually rent it. Some HOAs have rental limits. You MUST pay cash for it, as with a mortgage you will likely lose money.

I assume 10% of rents for maintenance, 5% for vacancy, and 10% for property management. How much rehab needs to be done to get a renter? A nice place will attract a better renter. A bad renter will not make your life easy, and may make you wish you were never born.

Your main issue is knowing how to attract and recognize a good tenant.

In this case, I would say go for it. It's only $30K. Worse case you lose $5K during the rental and sell it for another $5K less than you bought it for.

Best case, you make $2,500 a year and spend some time with it.
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Old 03-08-2016, 07:59 AM   #6
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Make sure you can actually rent it. Some HOAs have rental limits. You MUST pay cash for it, as with a mortgage you will likely lose money.

I assume 10% of rents for maintenance, 5% for vacancy, and 10% for property management. How much rehab needs to be done to get a renter? A nice place will attract a better renter. A bad renter will not make your life easy, and may make you wish you were never born.

Your main issue is knowing how to attract and recognize a good tenant.

In this case, I would say go for it. It's only $30K. Worse case you lose $5K during the rental and sell it for another $5K less than you bought it for.

Best case, you make $2,500 a year and spend some time with it.
Thanks for the feedback. There are 24 units and I think around 7 are rented, the rest owner occupied. 10% of rent for maintenance seems high since the condo fee covers all exterior maintenance. I wouldn't have property management for just one unit that is local. The unit doesn't need any rehab which is good because i'm NOT handy with that stuff. I'm confident it would be profitable but i'm concerned that a low end condo would attract a low end renter so i'm leaning towards not buying but still thinking about it.
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Old 03-08-2016, 08:08 AM   #7
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I agree with Senator. Another consideration is putting too many eggs in one basket. You already own a condo in a small building. If you buy another, you will own 1/12 of the building. That doubles the financial impact of a special assessment. Of course, if the building as a whole is well run, you will doubly benefit. Making this investment would give you more of an incentive to become more involved as a board member, which may be more headache than you want.
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Old 03-08-2016, 09:44 AM   #8
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Don't ignore the cost of marketing (even if you think you can do it). Another 10-15%.
To recap:
(have to pay $175/mo condo fee, and $80/mo in property taxes and insurance so at $525/mo rent i'd clear $270/mo or $3240/yr.)
Condo fee 33%
Ins/Tax 15%
Maint. 10%
Occup 5%
PM 10%
Marketing 10%
HOA Board 5%
Total 88%
Net 12%
and if you get lucky or do these things yourself, you have just taken on another job! One that you are not good at! Take a pass...
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Old 03-08-2016, 10:36 AM   #9
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Quote:
Originally Posted by aaronc879 View Post
I know very little about real estate investment but am considering buying a second condo in my building. A neighbor has been trying to sell his condo for a couple years without luck and has now dropped the price to 20% below appraised value and would likely go down another 5%+ so i'm thinking about it. The asking price is $32,000 and other nearly identical units have rented for $525 or $550. I expect that he'd accept an offer of $30,000. I would have to pay $175/mo condo fee, and $80/mo in property taxes and insurance so at $525/mo rent i'd clear $270/mo or $3240/yr. $3240/$30,000=10.8% ROI. Am I figuring that right? Is that a good enough deal? Is it better to finance? Any other tips/advice would be very welcome. Thanks.
The things that you need to consider that others have mentioned like maintenance, etc you should have a good idea about since you also own in the building. Also as mentions, you need to consider vacancy. But in the long run you will also get any appreciation (or depreciation) on the unit, a depreciation deduction for tax purposes and income taxes on your profits.
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Old 03-08-2016, 11:30 AM   #10
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You MUST pay cash for it, as with a mortgage you will likely lose money.
I'm curious about this statement, Senator. Do you mean that mortgage payments would lead to a negative monthly cash flow? (in which case I agree with you!). Or do you mean that this is not a good investment and that the OP should "only" take a chance with $30,000 of his savings? Because IIRC that might be a significant investment for aaronc879.

If a property is a good investment and produces positive cash flow from day 1, then it is worth leveraging for a higher ROI provided that interest rates are reasonable. OTOH, leveraging makes a bad investment worse.
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Old 03-08-2016, 11:44 AM   #11
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Be mindful of any special assessments that might come up and cost you money. Even thou condo boards are supposed to have ample reserves some of them just continue to lowball monthly fees and then go the assessment route. In your case you would need to pay for 2 condos if they levy something per unit.

At a 30K purchase price I would be concerned about quality tenants and high turnover. If you get problem tenants, your neighbors will be knocking on your door wanting you to fix it....
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Old 03-08-2016, 11:52 AM   #12
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Just reread OP original post. Neighbor can not sell unit after a couple of years.

Although, the cash flow/return on investment is good.

I would pass on this as an investment. Income + Appreciation make for
good rental investment.

2 years, and no buyers, REAL big Red Flag.
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Old 03-09-2016, 12:11 PM   #13
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....If a property is a good investment and produces positive cash flow from day 1, then it is worth leveraging for a higher ROI provided that interest rates are reasonable. OTOH, leveraging makes a bad investment worse.
And actually, leveraging can sometimes make a "bad" (or marginal) investment better. Let's say you have an investment opportunity that you invest $100k, receive $5k a year for 5 years and then expect to be able to sell for $100k. The investment return is 5% without leverage... not too exciting.

Then lets say you can finance 80% at 3% simple interest so the leveraged cash flows at -20,000, 2,600, 2,600, 2,600, 2,600 and 22,600. The leveraged ROI is 13%... quite a bit more interesting.

While I think it is best to focus on the 5% unleveraged return, there are some people who prefer to look at leveraged returns.
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Old 03-09-2016, 04:04 PM   #14
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I'm curious about this statement, Senator. Do you mean that mortgage payments would lead to a negative monthly cash flow? (in which case I agree with you!). Or do you mean that this is not a good investment and that the OP should "only" take a chance with $30,000 of his savings? Because IIRC that might be a significant investment for aaronc879.

If a property is a good investment and produces positive cash flow from day 1, then it is worth leveraging for a higher ROI provided that interest rates are reasonable. OTOH, leveraging makes a bad investment worse.
Yes. I did not run the numbers, but I assumed that a mortgage payment would make it either negative cash flowing, or close to it.

If you barely cash flow on paper, you will not cash flow in actuality.
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Old 03-09-2016, 04:07 PM   #15
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And actually, leveraging can sometimes make a "bad" (or marginal) investment better. Let's say you have an investment opportunity that you invest $100k, receive $5k a year for 5 years and then expect to be able to sell for $100k. The investment return is 5% without leverage... not too exciting.

Then lets say you can finance 80% at 3% simple interest so the leveraged cash flows at -20,000, 2,600, 2,600, 2,600, 2,600 and 22,600. The leveraged ROI is 13%... quite a bit more interesting.

While I think it is best to focus on the 5% unleveraged return, there are some people who prefer to look at leveraged returns.
The problem with higher leverage, on marginally cash flowing properties, is the AMOUNT of cash flow is minimal. A simple repair can make you go negative quick. A bad tenant that costs $5K, kills your 5-year plan.
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Old 03-09-2016, 06:49 PM   #16
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The problem with higher leverage, on marginally cash flowing properties, is the AMOUNT of cash flow is minimal. A simple repair can make you go negative quick. A bad tenant that costs $5K, kills your 5-year plan.


But with the mortgage (all else being equal), you'd have all that extra cash available.

A bad tenant costing you $5K is $5K with or without a mortgage.

I'm not following you.

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Old 03-09-2016, 08:16 PM   #17
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But with the mortgage (all else being equal), you'd have all that extra cash available.

A bad tenant costing you $5K is $5K with or without a mortgage.

I'm not following you.

-ERD50
If you cash flow a decent amount, you could take the previous months money and future months money to at least break even. Paying these amounts with your earnings.

Otherwise, you are just borrowing the money when you have a bad tenant and depleting your capital.

In the end, it may not be much difference; Sort of like taking a mortgage on your home and putting it in the stock market.
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Old 03-09-2016, 08:18 PM   #18
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Aaron - depreciation is good while you're a landlord; it really keeps down the taxes you'll pay on rent income. But read up on "depreciation recapture" so you know what will happen when you sell the property. It could increase your tax bill.

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The things that you need to consider that others have mentioned like maintenance, etc you should have a good idea about since you also own in the building. Also as mentions, you need to consider vacancy. But in the long run you will also get any appreciation (or depreciation) on the unit, a depreciation deduction for tax purposes and income taxes on your profits.
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Old 03-09-2016, 08:47 PM   #19
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The best way I know to win on depreciation recapture is "move in" for a few years before selling. When the unit is in the same building should be easy.
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Old 03-10-2016, 02:52 AM   #20
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The IRS does not allow you to avoid depreciation recapture. The previous poster is referencing the capital gains tax that is avoidable ( under current tax laws) on the profits from the sale of your primary residence upon meeting residency requirements.

The depreciation tax may be avoided by
A. Doing a 1031 exchange
B. transferring the property as part of your estate upon death.

I don't know of any other way to avoid the depreciation recapture tax.

Even if the taxpayer does not write off the depreciation the IRS expects the tax to be paid at the time of sale. I've heard some landlords say it's too confusing. They should invest the time to learn about it because the issue won't disappear just because they can't figure out how to complete a Schedule E.

Depreciation is the cost basis of the house not land and any improvements. If you hold the property until the end of the deprecation period it will have been depreciated fully . 27.5 years.




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