Author Topic: Newbie wants to buy a cheap condo  (Read 6119 times)

Teddy25

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Newbie wants to buy a cheap condo
« on: December 18, 2014, 10:58:30 PM »
Hello,

I am new, and interesting putting an offer for a condo.  Could you let me know if is passes as a fair investment?  My primary residence is also a condo 65% paid off.

FMV of the condo is $55,000, it is in a middle class area surrounded by single family homes.  Association is fine, no history of special assessments and there are nothing in the next 5-8 that I can see that need any future assessments.

The unit it self has new everything, and the association covers everything from studs. Window aircon, no havc.

Purchase price: 48,000
Rental income 750-850/month
Association due: 260/month
Tax 75/month
Insurance: 25/month
Mortgage: 250/month(optional)

I have 3 options to pay for it
#1 cash
#2 cash then a home equity loan for 36,000 @ 4% (low closing cost)
#3 12,000 down rest at 3% for 15 years

I would prefer option #2 or #3, because I can use the 36,000 and invest in Index funds and oil.

Any advise would be great help, thanks!

Ted
« Last Edit: December 18, 2014, 11:07:18 PM by Teddy25 »

waltworks

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Re: Newbie wants to buy a cheap condo
« Reply #1 on: December 18, 2014, 11:08:38 PM »
If you finance it, you're only making a gross $150-200 a month. Your net will be a lot less due to marketing/management/maintenance/vacancy/etc. Probably negative cash flow by a decent amount once all is said and done.

If you pay cash, you can make a little bit of money, but it's not going to be much - assume maybe $60/mo for management, one month vacancy per year, and some minimal ($50/month? You'll have to do paint/carpet/appliance work) maintenance and you're already down to about $2k for your total net for the year. And that's being pretty conservative on expenses, and assuming you're right about no assessments/dues increases.

Not a great use of your cash, probably.

I always nag people about this, too - FMV is whatever you are paying, unless it's a partial gift from a relative or other non-arms-length deal. Nothing more accurate to assess value than the sale price, right?

-W

Teddy25

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Re: Newbie wants to buy a cheap condo
« Reply #2 on: December 18, 2014, 11:22:05 PM »
@2,000 cash flow/ year, at initial invest of 12,000, wouldn't the return be 16.7%?  nOt including appreciations and paydowns?

waltworks

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Re: Newbie wants to buy a cheap condo
« Reply #3 on: December 19, 2014, 12:27:52 AM »
No, the $2k/year is if you buy it with cash. If you finance it, you'll be negative $1k/year cash flow, I'd estimate.

Break it down like this:
-$750 gross rent. So $9k/year.
-Figure 10% vacancy. Down to $8100.
-Management @ 10% is $75/mo, down to $7200.
-$50/mo to fix stuff that breaks and replace wear items (this is probably *really* low). $6600.
-$260/mo association fees. $3480.
-Taxes/insurance $1200 for the year. I'm a little dubious that you can get insurance for $25/mo as a landlord, but we'll roll with it. $2280.
-Assume your city and HOA don't have any licensing/non-occupant owner fees or onerous landlording requirements.
-Assume the place requires no rehab/work to be rented (almost never true, but whatever).

Now you've got to pay your $3k worth of mortgage payments. So negative $720 is your cash flow - negative 6%. Yes, you get ~$2k/year knocked off the principal. I would not count on any appreciation beyond inflation, so that's not really a factor. And that's not even considering closing costs to buy, or commissions/fees/taxes to sell if you're treating equity as part of your return.

It's also nice and risky given that a tenant can sue you, or you can have the water heater blow up and wreck the carpet, or the association can decide they want a new roof and your costs can go through the roof. This would be a semi-ok deal without the HOA. With that, it's IMO not worth doing.

-W

@2,000 cash flow/ year, at initial invest of 12,000, wouldn't the return be 16.7%?  nOt including appreciations and paydowns?

Teddy25

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Re: Newbie wants to buy a cheap condo
« Reply #4 on: December 19, 2014, 12:44:13 AM »
It will not be professionally managed.  @what price and rent would you do this deal at?

I'm a newbie still learning, thanks.

waltworks

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Re: Newbie wants to buy a cheap condo
« Reply #5 on: December 19, 2014, 07:35:32 AM »
Still always include management, since there are lots of scenarios (you have to leave town temporarily or permanently, you're injured or have to care for a relative, etc) where you'd need it. Plus self-managing costs your time/effort, meaning that you should think of that portion as a part-time job, not a return on your investment.

I'd probably buy it for $30k.

-W

Teddy25

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Re: Newbie wants to buy a cheap condo
« Reply #6 on: December 19, 2014, 08:16:45 AM »
Thanks.

The mkt is not like couple years ago.  I will settle with mid 40s and 30yr to protect cash flow. 

waltworks

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Re: Newbie wants to buy a cheap condo
« Reply #7 on: December 19, 2014, 08:25:31 AM »
Why not invest elsewhere or in another asset class?

-W

Thanks.

The mkt is not like couple years ago.  I will settle with mid 40s and 30yr to protect cash flow.

sammybiker

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Re: Newbie wants to buy a cheap condo
« Reply #8 on: December 19, 2014, 08:30:24 AM »
This would be a great deal for a single family...but that condo HOA just kills your cash flow.

Teddy25

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Re: Newbie wants to buy a cheap condo
« Reply #9 on: December 19, 2014, 08:42:08 AM »
For someone looking at the BB terminal all day, I think am very diversified. Just need a few properties for the real estate exposure. REITs are a little expensive.  So rental is better than the current mkt.

waltworks

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Re: Newbie wants to buy a cheap condo
« Reply #10 on: December 19, 2014, 08:46:55 AM »
Ok, so basically, you came here for us to pat you on the back? Might want to change the title of your thread.

It's a crap property as a rental. Period. You might do ok on appreciation if you get lucky, you might not. If you want 2% ROI, just buy some bonds and forget the hassle and risk.

-W
« Last Edit: December 19, 2014, 08:49:24 AM by waltworks »

Fallenour

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Re: Newbie wants to buy a cheap condo
« Reply #11 on: December 19, 2014, 09:00:18 AM »
My immediate response:

Good
Good
Good
HOLY CRAP! WHAT AN HOA! WAAAAAH RUNNNNNNNNN!!!!!!!!!!!!!!

Honestly, I would file a formal dispute for excessive HOA fee with your local city council if you choose to buy into that area, as from what it looks like, the excessive HOA is paying a salary to someone, and unless there are "value added services" that justify such an "abnormal" HOA fee, it can be challenged on that basis. Addiontally, check what the CC&R says, and formally request a copy of the budget from a board member of the HOA or their appointed treasurer (if they have one).

Also, find out when the annual meetings are, and attend them. With the HOA being 1/4 of your total income monthly, when its usually just .125-.5% annually, it seems excessive (yours is at 5.6%)

Look into these:

http://www.reviewjournal.com/business/complaint-alleged-excessive-charges-racketeering-hoa-case

http://www.managementtrust.com/blog/?Tag=Homeowners%20Association%20Laws

http://www.nolo.com/legal-encyclopedia/how-high-hoa-association-can-raise-dues-assessments.html


arebelspy

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Re: Newbie wants to buy a cheap condo
« Reply #12 on: December 19, 2014, 09:10:38 AM »
Honestly, I would file a formal dispute for excessive HOA fee with your local city council if you choose to buy into that area, as from what it looks like, the excessive HOA is paying a salary to someone, and unless there are "value added services" that justify such an "abnormal" HOA fee, it can be challenged on that basis.

You'd buy a property like this to then challenge the HOA with the local city council (as if they can do anything?), rather than just ... not buy the property?

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Fallenour

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Re: Newbie wants to buy a cheap condo
« Reply #13 on: December 19, 2014, 09:24:01 AM »
No, the $2k/year is if you buy it with cash. If you finance it, you'll be negative $1k/year cash flow, I'd estimate.

Break it down like this:
-$750 gross rent. So $9k/year.
-Figure 10% vacancy. Down to $8100.
-Management @ 10% is $75/mo, down to $7200.
-$50/mo to fix stuff that breaks and replace wear items (this is probably *really* low). $6600.
-$260/mo association fees. $3480.
-Taxes/insurance $1200 for the year. I'm a little dubious that you can get insurance for $25/mo as a landlord, but we'll roll with it. $2280.
-Assume your city and HOA don't have any licensing/non-occupant owner fees or onerous landlording requirements.
-Assume the place requires no rehab/work to be rented (almost never true, but whatever).

Now you've got to pay your $3k worth of mortgage payments. So negative $720 is your cash flow - negative 6%. Yes, you get ~$2k/year knocked off the principal. I would not count on any appreciation beyond inflation, so that's not really a factor. And that's not even considering closing costs to buy, or commissions/fees/taxes to sell if you're treating equity as part of your return.

It's also nice and risky given that a tenant can sue you, or you can have the water heater blow up and wreck the carpet, or the association can decide they want a new roof and your costs can go through the roof. This would be a semi-ok deal without the HOA. With that, it's IMO not worth doing.

-W

@2,000 cash flow/ year, at initial invest of 12,000, wouldn't the return be 16.7%?  nOt including appreciations and paydowns?

I dont necessarily agree with walt on his math, but I do agree with his decision.

The amount on the HOA is excessive, and makes a non-viable buy for anything other than outright purchase in cash.

Your net cash returns will get you at best mediocre returns if you choose to finance, that money should go to the great index ocean of love.

Alternatively, if you choose to go head on with the HOA, ie you decide you want to buy in this area, start with an offer of a special meeting or a letter of intent to sue, that will bring most HOAs to the table.

Attorney fees can be charged off to the HOA fund in the event they dont choose to hold a special meeting. The looks on this seems like the buyer/developer of the area is trying to recoup investment costs via the HOA, which is not the place of the buyers to pay. If they want those costs recouped, they should charge the costs as part of the condo's purchase price. If you look at the prices they are asking for buy wise, and the prices of their "claimed FMV", it indicates the value has been decreased, which indicates that they are selling lower than the property is assessed to be valued at. The only logical reasoning to sell the properties for less than they are worth is they are destitute, in which case its a horrible buy, they cant sell them at their FMV, in which case its a horrible buy, or they plan ot recoupe the costs in other ways (the most likely of the three here) in which case its illegal, and can be challenged in court. See the links I referenced you to.

Development and upkeep are two separate categories, and an HOA cannot require a buyer to pay for initial development costs, only upkeep and maintenance costs. Additionally, they must itemize and release all of these assessed costs to all members of the HOA upon request. Failure, or refusal to do so, is an easy one way trip to the courtroom.

Dont be afraid to play hardball to protect your investments, and to open doors to investments. The better things in life are more often than not harder to achieve than easier, more mediocre things.

Fallenour

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Re: Newbie wants to buy a cheap condo
« Reply #14 on: December 19, 2014, 09:28:20 AM »
Honestly, I would file a formal dispute for excessive HOA fee with your local city council if you choose to buy into that area, as from what it looks like, the excessive HOA is paying a salary to someone, and unless there are "value added services" that justify such an "abnormal" HOA fee, it can be challenged on that basis.

You'd buy a property like this to then challenge the HOA with the local city council (as if they can do anything?), rather than just ... not buy the property?



So you live under the impression that local city councils can set fees, requirements, and restrictions on landlords, landlord/tenant regulation, and taxes, but they cant regulate what an HOA group can, and cannot charge an individual if its for non-business purposes?

You should look into california HOA regulations, there are quite a few, as well as Colorado House Bill 1237. You would be surprised how much local and state governments can influence, and dictate for that matter, what an HOA can, and cannot do.

shotgunwilly

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Re: Newbie wants to buy a cheap condo
« Reply #15 on: December 19, 2014, 09:31:39 AM »
Geez, are you sure the HOA isn't $260/yr?

Fallenour

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Re: Newbie wants to buy a cheap condo
« Reply #16 on: December 19, 2014, 09:36:22 AM »
Geez, are you sure the HOA isn't $260/yr?

I honestly feel that this is the missing piece of our puzzle.

It fits into the appropriate range of .125-.5%. (this would make it 0.47% annual)

Teddy25

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Re: Newbie wants to buy a cheap condo
« Reply #17 on: December 19, 2014, 10:28:22 AM »
Yes HOA is 260/month,  pool, parking, snow removal insurance etc.



I currently live in a condo with a 500+ assoc fee per month.  I know is high, but it cover everything  (laundry 24hr doorman).


It is not uncommon to have high association fees.

Fallenour

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Re: Newbie wants to buy a cheap condo
« Reply #18 on: December 19, 2014, 11:03:50 AM »
Yes HOA is 260/month,  pool, parking, snow removal insurance etc.



I currently live in a condo with a 500+ assoc fee per month.  I know is high, but it cover everything  (laundry 24hr doorman).


It is not uncommon to have high association fees.

A few questions.

1. Does the pool have a lifeguard? Year round access? Heated? Special auto-sanitation systems?

2. They charge you for something that is legally required to be provided?(Do you have a parking garage?)

3. Snow removal insurance? As in they are charging you through months like July and August for snow?(Do you live in Colorado or Minnesota?)

4. 24 hr doorman? (Do you live in NYC?)

waltworks

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Re: Newbie wants to buy a cheap condo
« Reply #19 on: December 19, 2014, 11:11:10 AM »
What is the point of asking about any of that? Could you conceivably spend years of your life and most of your sanity haranguing/suing the HOA to get the fees down? Sure. But I don't think you'd win, and even if you did, it's not *that* amazing of an investment such that it would justify that kind of effort.

Fees do seem crazy in comparison to the price of the unit, though. I ran an HOA that was $200-250k units and our dues were about $200/mo.

-W

Teddy25

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Re: Newbie wants to buy a cheap condo
« Reply #20 on: December 19, 2014, 11:35:24 AM »
Don't know why the Qs are relevant bit here are the answers.

 
Heated pool no guard
Heated underground parking
Downtown high rise of a mid tier city that gets a lot of snow, I usually walk to work , do catch a cab once a while.
No, we have a lot of old people.

I do have some experience how condo finance works, good associations build up the reserves for the large expenditures, like a new roof.  A reserve study needs to be done every 3 years, so the board knows what's coming up. My board is pretty good, our financials are good.( I read fs
 For living)

Personally I like these types of common uses things because I know I will get all the benefit and only pay a fraction of the cost.  Because majority of other people don't use them.

Just like the partnership I'm part of that owns two Cessna 172s and a Cirrus.

Poorman

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Re: Newbie wants to buy a cheap condo
« Reply #21 on: December 19, 2014, 01:04:13 PM »
For someone looking at the BB terminal all day, I think am very diversified. Just need a few properties for the real estate exposure. REITs are a little expensive.  So rental is better than the current mkt.

The difference is that a REIT will pay you a consistent return with little to no oversight or management.  It's a set it and forget it investment.

Purchasing this condo will cost you money on a consistent basis and for your efforts you'll be signing up to run a part time business.  Personally, I value my labor at more than $0 per hour, but you won't even be clearing that.  You will be paying out of pocket each month for the privilege of managing a property with no investment value.

Listen to the experts that are trying to save you from a mistake.  This is a bad deal man.

arebelspy

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Re: Newbie wants to buy a cheap condo
« Reply #22 on: December 19, 2014, 01:34:30 PM »
Honestly, I would file a formal dispute for excessive HOA fee with your local city council if you choose to buy into that area, as from what it looks like, the excessive HOA is paying a salary to someone, and unless there are "value added services" that justify such an "abnormal" HOA fee, it can be challenged on that basis.

You'd buy a property like this to then challenge the HOA with the local city council (as if they can do anything?), rather than just ... not buy the property?



So you live under the impression that local city councils can set fees, requirements, and restrictions on landlords, landlord/tenant regulation, and taxes, but they cant regulate what an HOA group can, and cannot charge an individual if its for non-business purposes?

You should look into california HOA regulations, there are quite a few, as well as Colorado House Bill 1237. You would be surprised how much local and state governments can influence, and dictate for that matter, what an HOA can, and cannot do.

You completely missed my point.

I'll restate:
Buying a property in a bad situation with the intent to petition the government to improve that situation for you is a bad idea*.

It is better to not buy that property.

(*99.99% of the time, unless you have certain connections.)

Is that clearer?
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Teddy25

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Re: Newbie wants to buy a cheap condo
« Reply #23 on: December 28, 2014, 06:10:32 PM »
Thank you for all the replies.  I have give up the idea of the cheap condo.  I have found the following single family home with no association fees.   could you all take a 2nd look?

Thanks!

Price: $110,000 (including closing cost)
down:20%, $22,000
Mortgage: $88,000

Monthly:
Rent: $1,200+
Principal & Interest:  $480
Tax:  $140
Insurance:  $75
Vacancy Loss Reserve: $120
Repairs: $120
Other 5%: $60
Total Exp: $995
Net Cash Flow: $205

Also, If i put in $20,000 in upgrades, i can rent it for $1400+.  that might be down the road.

iamlindoro

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Re: Newbie wants to buy a cheap condo
« Reply #24 on: December 28, 2014, 06:29:05 PM »
Assuming your numbers are all correct (something you want to be *very* sure about), this deal is on the lower end of acceptable, but is ok.  For what it's worth, I would just pay your closing costs rather than finance them in as you seem to imply.  Some things to consider:

* Is a landlord on the hook to pay any utilities in your city?
* Is this property in rent-ready condition?  No rehab needed whatsoever?
* Your proposed rent is just over 1%, which isn't ideal but many people make work.  How did you come by this number?  Don't trust what your realtor tells you, or your own random check of craigslist-- you want to compare identical neighborhoods, amenities, and conditions to come by this number.  If another SFH in the same neighborhood is getting $1200, what is their vacancy rate?  How does the condition of the property compare to yours?

Teddy25

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Re: Newbie wants to buy a cheap condo
« Reply #25 on: December 28, 2014, 06:42:09 PM »
I did under estimate the rent.  a smaller size property (similar condition) down the street is running at 1,250.
The utilities will be the responsibility of the renter.
The property needs $500 of work, a new garage door opener and new fixtures in bathroom.
 
my realtor believe it will get $1400, but i think thats a bit high.  if i finish 1/2 of the basement with a new bedroom, it should go for that.

the property is in a great school district. 


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Re: Newbie wants to buy a cheap condo
« Reply #26 on: December 28, 2014, 06:48:59 PM »
I did under estimate the rent.  a smaller size property (similar condition) down the street is running at 1,250.

See, this is what I was getting at.  You may find that you get $1200.  On the other hand, you may find that it sits on the market at that price.  You have a single property of comparison, and don't know what kind of vacancy they're seeing a that price.  I think you need to approach this more scientifically, or at least much find many more data points.

Who estimated the work needed at $500? 

Just things to think about.  If all the numbers are correct, it will probably cash flow.  But it won't be ideal and at this amount of cashflow I know that for me, I'd rather invest out of area where it's easy to hit the 2% rule (rather than the barely 1% on this property with the given numbers).

Teddy25

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Re: Newbie wants to buy a cheap condo
« Reply #27 on: December 28, 2014, 07:02:42 PM »
I can do the work, just cost of the items from Home Depot. 

There are other similar size town homes for about 1150 but they are have not updated the bath/kitchen for 20 years.

as for the 1% or 2% rule.  anything over 1% in my area is a deal.  which part of country do you living and able to find the 2%?

iamlindoro

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Re: Newbie wants to buy a cheap condo
« Reply #28 on: December 28, 2014, 07:08:12 PM »
as for the 1% or 2% rule.  anything over 1% in my area is a deal.  which part of country do you living and able to find the 2%?

I live in California.  2% can be found lots and lots of places such as Tennessee, Ohio, Arkansas, Missouri, to name a few of the most commonly targeted by investors.  When I suggested looking out of area, it was because I have to do so myself.  I also am just beginning when it comes to Real Estate investment but it was always a given that I would have to go out of area.  However, it has been helpful to an extent because I have to evaluate everything objectively, as all properties are quite literally at arm's length (and then some).

Teddy25

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Re: Newbie wants to buy a cheap condo
« Reply #29 on: December 28, 2014, 07:17:37 PM »
usually anything above 1% in my area requires a lot of additional investment(updates), after the cost of updates, it will be 1% or below.

Thats too far from me.  I will just focus on 1%+ in my local area. if i can net 200 per door is not too bad at 10% on cash investment.

Rent relative cheap comparing to buying.
« Last Edit: December 28, 2014, 07:21:09 PM by Teddy25 »

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Re: Newbie wants to buy a cheap condo
« Reply #30 on: December 30, 2014, 02:21:29 PM »
Assuming you are dead on with all your numbers and have done all your due diligence, it's a decent deal to some, not worth it to others here.   

FWIW 1%-1.5% deals are hard to come by in my area the past couple years and I'd be happy with anything above 1% (and purchased one last year).  I'm betting somewhat on appreciation (so far so good) and always have the 1.25 % floor to fall back on as worst case for the property I bought.  Definitely better deals in other parts of the country. For now I'm happy with my current approach but as it's getting near impossible to find even decent deals, and I will eventually have to reach out to other markets.  Make sure you are conservative with your numbers and you should be ok.