Question for the Real Estate investors out there

[harley]

HpRyder, is there a reason you are addressing condos and then mention HOA's? Two different things.

harley, you mentioned you would not have a problem renting your unit. I'd be interested in knowing how you can be so sure of that. Have you checked the current documents regarding the condo associations rules about renting? Would you rent it out on an annual basis? Weekly?
Monthly? Lot of associations have monthly minimums to keep the building from looking like a hotel. All of a sudden your vacation rental business is limited. Hope you have looked into this.

You ask an important question, and truthfully the only way I "know" about the renting is that the rental agents I've talked to say they usually take less then a month to rent a unit in the general area. Also, since they are easy to rent they only charge 1/2 of a month's rent as a fee. My mentor said that's a pretty good indication as many of the one's he works with charge an entire month. This would be an annual rental, with reasonable (TBD) capabilites for ending the lease.

As to your point on HOAs vs condo fees, your right. There are both in this community. The HOA is very secure financially, with a 1.8% delinquency rate and a fully funded reserve fund. The condo assoc. is the issue, and I'm waiting for a response to some questions about why it's that way.

 

[harley]

Here are some considerations.

1. Feds are probably going to cut spending... maybe dramatically. Will that affect population trends in the DC area and home formations. IOW will it affect the growth in home values over the next 10 to 15 years? Who knows. But I've lived in the area for 40 years and the federal gov't has never gotten smaller.
2. The accrued debt for the condo fee deficit. Those fees generally increase over time as the property ages. What is the debt overhang right now for the condo association... including outstanding (put off) maint. None as of now. As I've said, the units are new. The reserve fund appears to be fully funded, it's just arecent issue causing the delinquencies. I need more info before I make any decisions..
3. Localities are suffering from lack of money. Will property tax rates be higher in the near future? Probably. Just like sales, income and all other taxes.
4. Rent may be high right now (i.e., peaked). What happens if you cannot raise rent over the next 10 years but your expenses go up? Then it will turn into another one of my less than brilliant investments. But I have plenty of elbow room to cover it.
5. Are you an experienced with rental property? If not, expect oversights on your part... be conservative. No, and I'm trying to.
6. Likewise... it is a business investment not a passive investment... all of that territory comes with it. If you are going to manage it be prepared for the job (nothing is free) OK
7. Pull out your personal effort to manage it and support it and assign a wage to it. It would be unrealistic to compare that part as an investment (assuming you will track the investment and compare it to your alternative). The equivalent alternative may be (invest passively in something like a REIT and get a part-time job). I'll track that over the years. It will be interesting to assign a value to the time.
8. Does the investment represent more than 10% or 15% of your assets? Be careful of too much investment concentration. Around 7%.

Make sure you do best case (realistic), expected case, and worst case (realistic) scenarios in your projections. If you cannot tolerate the worst case (realistic) scenario... consider passing on it. That's what I'm doing, and why I asked for comments. To help me consider worst cases.

If you do it and experience an bad outcome, how will you know it? And what is your exit strategy? Worst case scenario, we can use it to stay in when we visti DD who lives nearby.

For that matter how long do you intend to own it in the expected scenario?LTBH. Possibly until my death, when DW might live there. She loves the area.[/QUOTE]

 

[Fishingmn]

Deleware Dave has good advice.

I'm a Realtor in Minnesota and have also seen a huge investment opportunity with rental real estate. In the past 9 months I've purchased 3 townhouses & 1 condo as rentals and have an offer in on another townhouse. All of them have HOA's. Bought them all for cash as well and even with conservative estimates for costs have 9%+ cash flows right out the gate.

I'm finding properties that are selling for approximately 50% of what they sold for 5 years ago - the first 3 were bank owned but I'm seeing more opportunities in buying short sales lately as those are my last purchase and the one with an offer.

As for the HOA issue, in Minnesota sellers are required to provide HOA documents and financials and you have 10 days to cancel after receiving them so I always look them over carefully or even call the management company for details on reserves or future possible increases. As others have said, the banks are required to make the HOA whole at closing so it may hurt the HOA for short term cash flow but they will eventually get their money once the backlog of lender mediated homes gets cleared out.

Before making an offer I research Craigslist for expected rents or ask other tenants in the development what they are paying. I then plug that into my real estate investment spreadsheet to figure out returns. The biggest variables are what you enter for vacancy allowance, legal/insurance and ongoing repairs. You'll want to factor in all of your up front costs to get the property in rentable condition as a part of your initial investment cost (paint, carpet, appliances, locks, cleaning, misc).

The other thing you need to do is really figure out your processes for renting, especially the application/background screening and setting a high bar for who you are willing to rent to. The biggest way to have success (imho) is to get good tenants and setting requirements up front that they have certain credit scores & income levels is how you get them without being discriminatory.

 

[calmloki]

I have no experience with condos or HOAs. I do, however, have an opinion on Chinaco's view of real estate investment as noted in his #7: "Pull out your personal effort to manage it and support it and assign a wage to it. It would be unrealistic to compare that part as an investment (assuming you will track the investment and compare it to your alternative). The equivalent alternative may be (invest passively in something like a REIT and get a part-time job)".

Seems to me that his idea is that real estate is work. I accept that, but I spend plenty of time watching the stocks and gold prices bounce up and down and plenty of time stewing over the direction of the market and how to be positioned to do well - in terms of amount invested and return on investment I spend far more time on the piddling stock positions than on real estate or loans for far less return. Is that time spent not somewhat like work? Maybe not, as I'm not doing spreadsheets and comparative analyses but just dithering. But some of the posters on this board - LOL and Nords as handy examples - do seem to treat their stock positions seriously and, based on the graphs and facts and such that they post, appear to be working their investments.

I'm just gonna suggest that real estate investing can be just as much or as little a passive investment as stock ownership. Now CDs...

 

[REWahoo]

Seems to me that his idea is that real estate is work. I accept that, but I spend plenty of time watching the stocks and gold prices bounce up and down and plenty of time stewing over the direction of the market and how to be positioned to do well - in terms of amount invested and return on investment I spend far more time on the piddling stock positions than on real estate or loans for far less return.

Investing in individual stocks and shiny metals can be work - a lot of work. But a portfolio of a few boring mutual funds (psst...Wellesley) isn't much work - virtually zero.

If you spend a lot of time stewing over the direction of the market and fiddling with how to position your investments to maximize your return, you are obviously a hands-on type who needs to grab hold and actively manage things. Some folks have a need to [-]work[/-] be actively involved in their investments - nothing wrong with that at all. It seems real estate investing fits your needs perfectly in this respect and it also appears you are successful with this approach.

Me, I'm done working - and I try to save my stewing for tomatoes, not my investments.

 

[MichaelB]

Deleware Dave has good advice.

Hi Fishingmn, welcome to the forum. Please stop by here and tell us a little bit about yourself.

 

[wolf]

Actually, you do mean to be harsh. And how do you expect him to take it?

If you want to help people on a public forum, you need a mentor to help you learn to express yourself in a more positive and friendly manner.

Just wanted to help the "OP" avoid a big mistake. Any experienced landlords out there? Hate to see a "novice" lose their hard earned dollars.

 

[Nords]

The sale wasn't going to go through because the condo association is 23% delinquent in collecting the fees, and the gov't won't guarantee loans if the number is over 16%.
So, let me know what y'all think about this situation. Thanks.

But I'm not sure that the situation reflects weakness or mismanagement on the part of the condo association. I think that with this being a relatively new community people bought in at fairly high prices and even in the best housing market in the country a lot of them are underwater. I'm thinking there might be a rash of foreclosures and short sales coming down the road, which would give us an opportunity to buy low assuming we decide the problem is salvageable. If we bought I wouldn't be concerned about the resale value because our intention would be to hold it for a very long time.
Since so much of Loudoun County is new communities, in Ashburn, Lansdowne and Leesburg, I wonder if this problem is more widespread than I am aware. Just before the housing bust Loudoun was the fastest growing county in the nation.
And HFWR, you're right. The CDs that recently matured were 1.5%. Now the best I could do is 1.19%. That's part of what is making this investment seem like a good idea. Sort of like an annuity with headaches. And a possibility of getting your money back someday.

Y'all are missing the point. I'm not trying to do the leverage investing thing, or flipping for a quick profit. This is very different from what people who want to build their wealth with real estate are trying to do. I'm basically trying to create the equivalent of an annuity that I put a certain amount into, and then I receive a certain amount of income every month. Then, in 10 or 15 or 20 years, if I want to, I can sell the unit and hopefully get all of my money back, adjusted for inflation. Or move into it ourselves, when we get tired of taking care of the big house we're currently in. This part is a little iffy, since I can't guarantee prices.
Having said all that, I agree the delinquency rate is a huge red flag that will probably scuttle the whole deal. I'm waiting for more information from the condo association.

Harley, at least three posters (you included) have mentioned the dreaded word "assessment". It seems to me that would blow away any cash-flow projections you may be hoping for. With this high a percentage of delinquencies you're certainly not going to be able to plan for cash flow.

Even if the association (whichever one it is) goes after the delinquencies, the owners aren't going to pay until the short sale or foreclosure is finished. The only way for the association to get their money would be through liens, and those legal fees aren't cheap either. I'd say it's not "if" there'll be an assessment-- just "when".

I remember Loudon county popping up a lot in the media in 2004-2006 as a hotbed of mortgage fraud and runaway prices. I bet the whole county is as bad as Vegas or Florida.

Instead of chasing yield for the risky 1.5%+ cash flow you're torturing this property to cough up, why not buy TIPS? Or, gosh, if you want annuity-like cash flow, then why not buy a term annuity or a CD ladder? And before you start thinking "Yeah, but...", even a large-cap blue-chip ETF like the Dow Dividend fund will leave those yields in the dust while growing at least at the rate of inflation. No 6% "trading" fees, either.

 

[Purron]

I remember Loudon county popping up a lot in the media in 2004-2006 as a hotbed of mortgage fraud and runaway prices. I bet the whole county is as bad as Vegas or Florida.

Nords, I don't think Loudoun County is at all like Vegas or Florida. Prices went up in the bubble and have come down like most parts of the country. However, values didn’t tank as much as other more distressed areas and have since stabilized. l don't recall stories about how Loudoun County was a notable "hotbed" of fraud and runaway prices - recent revevant links?

I don't live in Loudoun but am in a "next door neighbor" county so have kept an eye on things there.

 

[clifp]

Las Vegas and Washington DC area are polar opposites Case Schiller (Vegas 95, DC 183) in the real estate market. I will say that given the trouble I'm have finding a tenant (2+ months, lowered the rent to the low end of "comparable rents" that everybody quoted me, and offered a free months rent.) my enthusiasm is dimming for this landlord business.

So while the DC job market/economy is certainly much better than Vegas seeing that houses are still almost twice what they were in 2000 would give me pause.

 

[harley]

Harley, at least three posters (you included) have mentioned the dreaded word "assessment". It seems to me that would blow away any cash-flow projections you may be hoping for. With this high a percentage of delinquencies you're certainly not going to be able to plan for cash flow.

Even if the association (whichever one it is) goes after the delinquencies, the owners aren't going to pay until the short sale or foreclosure is finished. The only way for the association to get their money would be through liens, and those legal fees aren't cheap either. I'd say it's not "if" there'll be an assessment-- just "when".

I remember Loudon county popping up a lot in the media in 2004-2006 as a hotbed of mortgage fraud and runaway prices. I bet the whole county is as bad as Vegas or Florida.

Instead of chasing yield for the risky 1.5%+ cash flow you're torturing this property to cough up, why not buy TIPS? Or, gosh, if you want annuity-like cash flow, then why not buy a term annuity or a CD ladder? And before you start thinking "Yeah, but...", even a large-cap blue-chip ETF like the Dow Dividend fund will leave those yields in the dust while growing at least at the rate of inflation. No 6% "trading" fees, either.

Yeah, the possibility of the assessment is what has put this investment on hold, for sure. I'm trying to find out currently what the history has been on condo fee increases. If they increase faster than rents my return would be whittled down over time, although IF prices rise on the units that could offset them. But definitely an issue to research, and that doesn't even take into consideration "special" assessments, which as you point out are nearly guaranteed.

Purron's right. Loudoun was high flying, but not in the same class as Vegas or Florida. Prices are only down a few percent from before the crash. The property should return about 4.5% if things go according to the books, with possibility of somewhat better or worse.

I finally got hold of the management company for the condo association. It was like squeezing a rock, but I got a little information. Turns out that 23 of the 100 units are at least 30 days late. 1 is over 120 days, 5 are between 60 and 120, and the other 17 are between 30 and 60 days. There's only one unit in foreclosure (the one over 120 days). The reserve fund is fully funded. They have a line item in the budget for delinquencies, but I would need to see the documentation in order to know what that is. I would need to make an offer that was accepted before I would get the documents. I'm asking my agent if she can get them ahead of that. But overall, I'm thinking it's time to back off. Spend some more time educating myself, see what happens in the market, collect my 1.19%. I don't want an annuity, got the CD ladder, just thinking there's got to be something better. Based on the "greedy when others are fearful" theory, real estate seems to be the best bet.

 

[Nords]

Nords, I don't think Loudoun County is at all like Vegas or Florida. Prices went up in the bubble and have come down like most parts of the country. However, values didn’t tank as much as other more distressed areas and have since stabilized. l don't recall stories about how Loudoun County was a notable "hotbed" of fraud and runaway prices - recent revevant links?
I don't live in Loudoun but am in a "next door neighbor" county so have kept an eye on things there.

"Recent"? You know me-- if I have a link handy I use it.

I dug around for a while and finally remembered reading it in Business Week:
Washington DC bubble?
Washington DC in trouble

I also dimly remember reading something about some remote parts of the county still having cesspools, and the EPA's requirement to upgrade to septic or city sewer was causing major heartburn. Would that have been the WSJ? Washington Post?

Anyway you & Harley are on the ground there. Spouse grew up in Bowie and experienced perpetually-rising values during the 1970s and 1980s, so maybe it's recovered despite the misconduct.

The reserve fund is fully funded.

Speaking from bitter experience, there's a big difference between "Meets all state & local requirements for reserve funding levels!" and "Can actually re-roof and repaint all units during the same decade".

As ClifP once told me, "I wouldn't even invest in this with your money"...

 

[chinaco]

...
If you do it and experience an bad outcome, how will you know it? And what is your exit strategy? Worst case scenario, we can use it to stay in when we visti DD who lives nearby.

For that matter how long do you intend to own it in the expected scenario?LTBH. Possibly until my death, when DW might live there. She loves the area.

It sounds like you are being careful and not putting too much into it.

Just some brainstorm stuff.... based on your answer to that last question.

One other thing you might try to work into your overall plan... Is the condo unit situated on a (bottom) floor that has easy access? If you had any sort of mobility problem would it enable easy entry and exit from the condo? When you get a little older and can no longer maintain your current home... would it be a good (low maint) solution for you and/or DW if you sold your current home?

Condos can be a good old age living accommodations.... provided you are ok with that type of arrangement (some people do not like it because of shared walls, someone living above them, noise, less privacy, etc.)

The could save you a round trip in another set of real estate sale/purchase transactions down the road later in life.


If later you sell your home and move into the condo.... The assets from the sale of your current home.... whoooppeeee you have already paid taxes on it. No taxes due. That can be really handy in managing your tax situation (spending some of that and lowering marginal tax rate).... but that part depends on your other assets.


Of course, that would be a secondary consideration. But if you want that as a future option.... make sure you buy the right unit.... easy access and layout that would be good for you and your DW later.


When that time comes down the road.... depending on your financial situation.. you might even sell the condo to your daughter (owner sale... no RE agency commission).... she could get a mortgage and be your landlord and you could pay her rent.... You might be able to hold the price down by selling before you spend the money to refurb it for yourself (basically transferring the asset to her... be sure you talk to a tax pro or attorney to make sure it is all done the right way and everything is legal.) During the process, you could get the RE attorney to setup a lease for life with the ability of you and/or DW to exit at your convenience/need.


A lot of future things to perhaps consider... but if you want it as an option later... now is the time work it into the plan (before you buy). If those type of longer term situations do not work out the way you planned, you can always change your mind later and sell it.

 

[sheehs1]

The HOA is very secure financially, with a 1.8% delinquency rate and a fully funded reserve fund. The condo assoc. is the issue, and I'm waiting for a response to some questions about why it's that way.

That is the million dollar question ..harley and you are definitely asking the right questions. In addition to the other suggestions here ....you might want to see if there are lawsuits against the builder or somehow determine if the residents are not happy with something. People have stopped paying for a reason. Let us know what you find out.

 

[wolf]

Harley:

Glad you decided to wait and get more education. I really do understand your comments about, not wanting to buy real estate for appreciation.

You want cash flow. Income. Treat Rental real estate like an annuity. Put more money down to increase cash flow.

In the past, I've heard other real estate investors talk the same way. Very
difficult to explain the flaw in their reasoning.

Thanks, Nords, you have more patience. Your comments were good.

Harley, even though you are "only interested" in income, cash flow. If you
are buying rental property, You have to take into considerations all of the other factors mentioned my "landlords" who have posted here.

The other "factors" "things to consider" have or will have an effect on cash
flow.

Good luck.

 

[lovinglife1]

From my limited experience with three rental properties in Michigan, all purchased in 2005/6, the key to success for me was finding the most experience management person/company I could find. In this case, it is a family owned business with apartments. They are experts at screening, interviewing and managing tenants. And, they are experts at repairing anything that goes wrong. I can honestly say that I have not had one 'headache' from owning these properties. I pay the management company about 10% of gross rent and I sleep very well...

 

[wolf]

From my limited experience with three rental properties in Michigan, all purchased in 2005/6, the key to success for me was finding the most experience management person/company I could find. In this case, it is a family owned business with apartments. They are experts at screening, interviewing and managing tenants. And, they are experts at repairing anything that goes wrong. I can honestly say that I have not had one 'headache' from owning these properties. I pay the management company about 10% of gross rent and I sleep very well...

Good for you. Most new Real estate Investors, cannot purchase a Rental Property. Plan for vacancies, repairs. Pay Property taxes/insurance.
Pay 10% of of the gross rent and still have a Net Return for the year.

 

[arebelspy]

Good for you. Most new Real estate Investors, cannot purchase a Rental Property. Plan for vacancies, repairs. Pay Property taxes/insurance.
Pay 10% of of the gross rent and still have a Net Return for the year.

ESPECIALLY not properties purchased in 05/06 aaa the quoted poster said.

Significantly easier now, with rents the same or higher as then, but prices 40% lower.

Pretty impressive.