Author Topic: Paying Cash for Condo Investment Properties?  (Read 7548 times)

GoCubsGo

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Paying Cash for Condo Investment Properties?
« on: February 04, 2013, 11:44:16 AM »
I'm struggling with an internal debate on paying all cash on a condo investment property and am open to any thoughts on the matter.  I own a couple SFH rentals and I'm looking to buy two more properties this year.  In the past I've ONLY looked at SFH rental as they tend to appreciate better than condos and will rebound quicker than condos.  The problem now is that decent priced homes are very difficult to come by in my area.   Almost all foreclosed homes take multiple over list price bids (even the wrecks).  I've been sitting around with cash and can't spend it. 

I'm a Realtor and have recently been working with a client who has bought 3 foreclosed condos through me (in the last two weeks!).  The stream of condo foreclosures has remained strong although investors are out in full force now and starting to bid up the prices like we've seen with the SFH market.  Rental rates for the place I want to buy are solid ($1,100 K a month on a $50K condo- Assessemts & Taxes are about $450/mo).  Here is my two part dilema:

-  I love leveraging the banks money but on a $50K condo I will need to pay all cash (since I can't get a loan for such a small amount).  I feel like I'm "forcing" equity which I've never done in the past (because I've bought $200K SFH's with 20% down). 
-  I only have $80K I feel comfortable investing this year so taking $50K out of circulation to pay cash on this deal would leave me with only a $30K downpayment for a leveraged SFH (basically a $150K house which would be hard to find).

I'm having a hard time settling for a condo because of my fear they will lag in appreciation and not be as good a long term investment compared to the SFH.  The condo would pay for itself in 9 years which I guess would be nice, but I hate not being able to leverage my money and tying it up in a condo.    My gut says just keep waiting for a house but based on what all the investors are doing in my area, the money flowing to condos has me seriously considering it (I have one lined up to buy today).  Anyone have experience with Condo investments and any insight on your thought process when buying as a rental?


salmp01

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Re: Paying Cash for Condo Investment Properties?
« Reply #1 on: February 04, 2013, 11:55:36 AM »
In the last 4 years I have purchased nearly 20 condos and townhomes and I like them better than SFH because they are much less maintenance.   If youíre making $650/month on a 50k investment thatís around a 15% return.  If you need to pull out the cash get a HELOC on the condo with a variable rate.  You should be able to get at least 60% of the 50k so that will give you additional money if needed and the cost to acquire the HELOC should be minimal (it cost me $100).   

In the last couple months I have had a hard time finding deals so Iím thinking the housing market it set for some decent price increases so get the good deals while you can.

GoCubsGo

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Re: Paying Cash for Condo Investment Properties?
« Reply #2 on: February 04, 2013, 12:06:19 PM »
Thanks for the reply, I forgot to mention that similar condos in this subdivision are selling for about $65-70K (mine is a foreclosure) so I would have some equity.  The HELOC is a great idea that I've considered but haven't researched (I thought the fees would be too high).  I definitely need to research that to free up investment capital.  I agree about the maintenance/repairs and that would save me a lot of time (I do my own work on my SF homes which can eat up a lot of time).  Homes in my area already have started the march upwards (my town was up 9.5% last year) so I'm hoping the condo/townhouse market will follow in a couple years but I still don't think the appreciation will come close to the SFH market.

arebelspy

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Re: Paying Cash for Condo Investment Properties?
« Reply #3 on: February 04, 2013, 12:09:57 PM »
Having an urge to buy real estate is never good.  You have plenty of time, wait for a really good investment that you won't ever regret.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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GoCubsGo

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Re: Paying Cash for Condo Investment Properties?
« Reply #4 on: February 04, 2013, 12:43:06 PM »
I generally agree with that which is why I've held out over a year and a half since my last purchase (I've bid over-list on a few SFH that were great but got outbid).  That said, all of these condos are being snapped up by investors and being rented immediately for solid returns.   The client I sold the three condos to recently lives 3 hours away and picked my area after doing a lot of research. 

10-17% returns are awful enticing and I'm afraid my bias against condos is blinding me to opportunity.  I'll admit I love fixing places up and making them look new and not doing that for a year is making me antsy for another project.

As an interesting side note.  A family friend who just graduated from college got a job a couple weeks ago working for a company that is actively buying up properties in Chicago to rent and hold. They bought 20+ last month alone.  I'm sure there is a lot of that going on around the country.   

GoCubsGo

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Re: Paying Cash for Condo Investment Properties?
« Reply #5 on: February 06, 2013, 10:12:43 AM »
Quick update, I did put a bid on the condo ($45K) and it has multiple offers.  I'm submitting my highest and best offer today and am still crunching numbers to see how high I'm willing to go (the property needs rehab work which is about $10K). 

Updated numbers: The condo should be worth a minimum $75K once it is rehabbed (one closed yesterday for that price and it was of average condition). If I pay list price of $50K plus $10K in rehab costs, I'm in for $60K.  Rent would be $1,100 with HOA/Tax of $450 so it makes sense on paper.

I'd like to model the expected results using 2% appreciation going forward.  I'm struggling with whether I should factor in the "instant appreciation" and start the appreciation at the $75K market value or use the $60K cost value .  I guess I'm having a hard time deciding on whether or not it makes sense to tie up $60K for the return I'm getting.  What value should I give to the quick payback period?  I would have all my principal back in around 8 years with this deal (or does that even matter?).  I'm so used to the thought of a renter paying down my principal (and having a $200K property appreciating in value).  I'm having a hard time wrapping my mind around owning a much lower priced property outright without a loan upfront (if that makes sense).  Any thoughts would be appreciated




salmp01

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Re: Paying Cash for Condo Investment Properties?
« Reply #6 on: February 06, 2013, 10:44:40 AM »
When I decide if a property is worth purchasing I usually donít factor in any appreciation but I do make sure that Iím very comfortable with the area.  Also, make sure the association is in decent shape.  Check the reserves and find out if there are any large projects that could require an assessment. If I make over a 10% return assuming 100% cash itís usually a go for me. 

GoCubsGo

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Re: Paying Cash for Condo Investment Properties?
« Reply #7 on: February 06, 2013, 10:53:20 AM »
I appreciate the response salmp01, the reserves are solid and it is in a good area.  I don't want to be too greedy and this would generate over 10% even assuming one month vacancy so if I get it at list I'll be happy (but don't want to go above list).  I would still have some cash left for one more leveraged deal this year.

Bikerchic

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Re: Paying Cash for Condo Investment Properties?
« Reply #8 on: February 07, 2013, 03:50:10 PM »
Hi Fellow real estate investors, I have 2 SFH in Mpls area and am buying my first condo. It is bank owned and in good shape and cheep. To justify this all cash purchase I just had to compare the numbers to buying inflation protected bonds (TIPS) which currently have a very low return.  I decided that this condo is like a long term inflation protected bond.  For my cash investment I get a steady income stream that will increase with inflation. I also get to write off all of my expenses which is a nice bonus. So I don't really worry about my payback period. I am thinking more about what my total return (income - all expenses + tax savings) and comparing it to what else I could do with the money.  One point though is that the condo is much less "liquid". If I need the cash out of it quick, I can't sell it tomorrow like I could with a govmt bond. But I love the idea of taking out a HELOC. That is a great idea.

salmp01

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Re: Paying Cash for Condo Investment Properties?
« Reply #9 on: February 07, 2013, 03:55:44 PM »
Bikerchic - I too am in the Mpls area.  If you every have any question or want to exchange any tips on our real estate investments feel free to shoot me an e-mail at psalmela@gmail.com.