Property Evaluation

[Chiron]

Hi everyone,

I'm new to real estate investing, but am looking to buy one or two properties in the next year.  There's a condo less than a mile from where I currently live and I've run some numbers on it as an investment.  It seems to be a good deal, but would love your feedback on it. I've pasted my analysis below.  Sorry for all the funky table formatting - I couldn't get it to format correctly.  The property is currently listed for $79k.  How much would you pay for it? 

Note that the analysis below assumes an $80k all in purchase price (including closing costs and improvements to get it rent-ready, which are going to be minimal because the place is in great shape) and a 25% down payment.  I think I could even lower my maintenance allowance because the HOA covers exterior maintenance.



                       Month                 Year
Gross Rents   $1,400.00   $16,800.00
Vacancy                $70.00   $840.00
Gross Income   $1,330.00   $15,960.00
Management   $140.00           $1,680.00
Taxes           $185.18           $2,222.20
Insurance     $40.00           $480.00
HOA                   $328.00           $3,936.00
Maintenance   $100.00           $1,200.00
Other           $0.00           $0.00
Total Operating
Expenses           $793.18           $9,518.20
NOI                   $536.82           $6,441.80
Debt Service   $304.01           $3,648.13
Cash Flow   $232.81           $2,793.67
COC Return at
25% Down        1.16%        13.97%

[Johnny Aloha]

I don't see mortgage interest payment in your table.

[Chiron]

P+I is included in "Debt Service" for a $60k loan.  The principal part of that doesn't factor into cash flow, but equity build up is obviously a benefit from renting it out.  Another benefit not accounted for is appreciation, but I don't expect that to be greater than 1-2%.

[arebelspy]

5% vacancy may be a little light, and there's no turnover costs in this (beyond the vacancy itself, you'll have expenses such as utilities for the few weeks it's being turned over, plus paint, carpet, etc.), but in general you pretty much nailed everything, assuming the numbers are accurate (have run rental comps for the rents, have exact insurance - which actually seems high to me - and taxes).

The management is probably a little light as well (you did 10%, which is about standard monthly, but then they also typically charge a 1/2 months' to 1 months rent to get it rented, which adds another 4-8%), but that may vary in your area.   Otherwise you may have advertising costs, or otherwise.  You set the expenses (without the HOA) at only 38% of the gross rent, which is quite low.  Even with saying no exterior maintenance, you will be paying for that through HOA fees, special assessments, etc.

The other thing I hate about an HOA that high is HOAs only tend to rise over time.  And with ones that big, they rise proportionally.

1400 rent, 328 HOA, for 80k is potentially viable.

Honestly I wouldn't be jumping on it, but nor would I pass right away.  Based on the figures given I'd start more due diligence into the HOA itself, the neighborhood, the city's demographics and trends (jobs, etc.)

At least you didn't do the typical gross - HOA and PITI and come up with 542.81 cash flow, what so many people do when they start.

You've got a very good head on you, or good head for numbers, for a beginning real estate investor, which will serve you well.

Best of luck!

[Chiron]

Thanks for the response arebelspy.  Insurance is just an estimate, but I think similar ones I've seen are actually less than $40/mo.  Taxes are the exact assessment, though the assessed value is actually higher than the listed price.  So if I buy it for much less, I may attempt to fight the assessment.

I actually plan to manage it myself, so I'll be capturing all the "management fees" but it makes sense to include it in evaluations anyway to give a true picture of the investment potential of the asset.  I'll add another $700. 

I'm comfortable with the neighborhood and city since I live in the same neighborhood and know it's stable.  When you're doing diligence on the HOA, what do you look for?  I plan to look for past special assessments (was told there haven't been any), the balance sheet and amount of reserves, and the rate at which the HOA fees have increased over the past 5-10 years.  HOA fee increases is my biggest fear with this property.  I'm hesitant to invest in a condo after everyone has mentioned it as a bad investment because such a large variable is out of my control, but the numbers seem to make sense on this one.  It has been on the market for 400+ days so on the one hand I think I can get a lower price, but on the other I think why has this been on the market so long?

Really appreciate the feedback as this is new territory for me.

[marty998]

So when you want to sell will it be on the market for 400 days? hmmm

Regarding special levies....if the building is structurally sound then the only other major potential expense would be a paint job.

I cringe whenever I see these sort of numbers....for 1400/month rent you would have to pay in the order of $350000-$400000 for a property here :(

I'm going hunting for an IP tomorrow...there's a decent 1 bedder somewhere in the Wild Western Sydney region I've got my eye on. You guys wouldn't consider it ($300k purchase, $370/week potential rent), but it makes sense down here.

[arebelspy]

It has been on the market for 400+ days so on the one hand I think I can get a lower price, but on the other I think why has this been on the market so long?

That tells you a lot.  Now find out why the other investors aren't snatching it up, and it isn't because it somehow slipped under their radar.

[arebelspy]

I'm going hunting for an IP tomorrow...there's a decent 1 bedder somewhere in the Wild Western Sydney region I've got my eye on. You guys wouldn't consider it ($300k purchase, $370/week potential rent), but it makes sense down here.

No.  It doesn't.

A 6% maximum return with no repairs, vacancy, taxes, or insurance?  (I.e. 2-3% actual returns.)

Especially with the high interest rates you guys see on CDs and similar vehicles?

All the Aussies I know invest overseas for a reason.  That is the reason.

That return, risk adjusted, is basically negative.  And takes much more work to get.  Run, don't walk, away from that.

[babysteps]

5% vacancy may be a little light, and there's no turnover costs in this...

The other thing I hate about an HOA that high is HOAs only tend to rise over time...

1400 rent, 328 HOA, for 80k is potentially viable.

Honestly I wouldn't be jumping on it, but nor would I pass right away.  Based on the figures given I'd start more due diligence into the HOA itself, the neighborhood, the city's demographics and trends (jobs, etc.)

You've got a very good head on you, or good head for numbers, for a beginning real estate investor, which will serve you well.

Best of luck!

+1

Set yourself a time limit (to avoid analysis paralysis) and possibly:
-look at the HOA's annual reports for the last few years, that should give you an idea of what shape they are in and how fast the fees have been rising.
-if you haven't already, check out rentals in the complex - ask renters or other owners, check ads, etc. - can help give you a better idea of your competition & comparables (also ask owners what they think about the HOA)
-check out sales in the complex for trends (not just comps) - is it healthy relative to other projects or are there any warning signs
+If $1,400 is the right market rent number, consider offering/advertising at a slightly lower amount for first year's rent to get more potential renters so you can pick a great renter.  imo it's worth giving up a little first year rent for a stable, dependable, long-term tenant that moves in soon after you close (check references!!).  You can even write into the lease that starting in month 13, rent rises to $1,400.  ymmv

[DoubleDown]

Just curious, have you seen this particular unit? Who owns it, an individual? A bank or investor?

The thing that immediately jumps to my mind about why it is still sitting on the market after all this time is there is some significant problem with the unit itself (needs lots of work), or perhaps a legal or ownership hangup. As an example, it could be co-owned by uncooperative partners, where one wants to sell and the other doesn't.

If you have a chance to check it out and everything seems to be okay, then given your numbers it would seem you have little risk by making a lowball offer (with an inspection contingency of course). Not so lowball as to be deemed completely "offensive" and potentially turn off the owner, but quite low.

Not knowing anything else about this place or the local market, if no major work needs to be done, then with an asking price of $79k, I might offer somewhere around $60k and see what they say. Give them no more than 24 hours to consider your offer, and you can always make a new offer if they turn down your first offer outright or make a counter-offer.

EDIT: Should have also said that I would find out what comparable properties sold for recently. Making any offer would be silly without knowing what others have sold for. For all I know, that $60k "lowball" offer could be overpriced!

[marty998]

I'm going hunting for an IP tomorrow...there's a decent 1 bedder somewhere in the Wild Western Sydney region I've got my eye on. You guys wouldn't consider it ($300k purchase, $370/week potential rent), but it makes sense down here.

No.  It doesn't.

A 6% maximum return with no repairs, vacancy, taxes, or insurance?  (I.e. 2-3% actual returns.)

Especially with the high interest rates you guys see on CDs and similar vehicles?

All the Aussies I know invest overseas for a reason.  That is the reason.

That return, risk adjusted, is basically negative.  And takes much more work to get.  Run, don't walk, away from that.

Ha...you're forgetting that we actually get long term capital growth down here....

[arebelspy]

No, I'm not.

But the long term appreciation isn't relevant, as it's an inflation-adjusted 0% return.  The real return is the cap rate, which I specified.

[Chiron]

Thanks everyone.  I'm in the beginning stages of looking at this property, so more due diligence is definitely ahead of me, including looking at HOA information, checking out other rentals, and getting clarity on the history of the unit and why it has sat on the market so long.

For comparable rentals, what is the process to verify those?  I will have a realtor helping me, so could I ask her to use MLS to look at comps?  Or will it be more like checking craigslist, asking other owners, etc.?

[arebelspy]

For comparable rentals, what is the process to verify those?  I will have a realtor helping me, so could I ask her to use MLS to look at comps?  Or will it be more like checking craigslist, asking other owners, etc.?

All of the above.

Get MLS rental comps, check sites like rentometer.com and zillow.com and Craigslist, and see what other ones in the same building are going for.

[meadow lark]

When I think about condos I always think about how much of the HOA fee is really helpful.  So if you think it would cost say $128 a month for everything the HOA provides that you would otherwise have to pay for (exterior maintenance) you need to think about what the other $200 could buy if it was put toward a mortgage instead of the HOA.  What I mean is - do you have SFHs for $120,000?  (A very rough guess of what $500 a month debt service would cover, after you put in your down payment.).     
  So far where I live the SFH's are just as good of a deal as the condos, plus the SFH's usually appreciate better.

[GoCubsGo]

400+ days in a "stable" neighborhood is a big red flag to me.  My guess is that it is a short sale (you or your realtor can look to see what loans are outstanding) or that it may have spent much of that time grossly overpriced (check the days on market at each price is has been listed at).  In my market, investors would have snapped it up at the numbers you are giving especially in a stable area.

Check the average market time before sold for other comparable units to get a comparison baseline (I just ran a report for my market for the last 12 months and the average time on market is 129 days and each market differs greatly).

[Chiron]

Thank you everyone for your replies.

It turns out that I grossly misrepresented this property in my initial post.  I had only seen pictures of the place, and though they were detailed and high quality, they were not representative of the condo's current condition.  It needs new paint, floors, popcorn removed from the ceiling and some minor hardware replacements to get it rent ready.  I estimated these repairs to cost $8k.

Further, the rent estimate was mistakenly based (by me) on current places for rent in the area, and not the price of places that had actually rented.  My realtor pulled those and the only other condos in the complex that have rented in the past six months went for $.67/sqft.  At that rate, I projected I could get ~$1000/month out of this place.  At that rent and with a $328/mo HOA fee, the most I would want my all-in price to be is about $44k.  Subtract repairs and closing costs of $2k (cash purchase) and the most I would pay to seller is $34k.  Seller is asking $79k, and the size of that delta indicated to me that this lead was not worth pursuing.

One bright spot about the place is that the HOA seems to be very healthy (almost embarrassingly so).  It has cash reserves of $550k.  Like an Apple shareholder, I wondered why they didn't distribute some of that cash back to owners in the form of HOA fee credits?  The complex is large (115 units) but this seemed like overkill to me.   

Thanks again for all your input.  This was a great learning exercise for me and it's nice to have a place to learn it the easy way rather than the hard way.  I mentioned to my realtor that I might be interested in multifamily properties and these seem to be much more promising.  After I check some out and do some initial diligence, I'll make some more posts here to see what you all think.

[arebelspy]

Way to go doing the due diligence.  So many people just head first in, and only later realize their mistakes (under estimating repairs, overestimating rents, etc.)

Smart.

Regarding the HOA cash, they likely have a reserves study you can look through to see why they're keeping that much - upcoming roof repairs, perhaps, or something like that.

Usually they build up cash for quite awhile, then deploy it, because big ticket items require years of savings.  The reserve studies will show when and where that cash will be going.

[DoubleDown]

Yes, good job on checking everything out.

I didn't go through all your numbers again with the new information, but if you got it for your suggested maximum offer of $34k, would it be sufficiently cash flow-positive for you? If so, why not make an offer of $34k and see what they say? The worst they can say is no (okay, they can be offended and say worse than that, but who cares :-) )

[Self-employed-swami]

My sister just bought an owner-oc condo.  The realtor had a condo expert go over the condo board's docs.  He said that you want to see regular maintenance being done.  The expensive things are roofs, windows, exterior stuff (the siding was redone on hers, and it cost $400,000), elevators, windows, plumbing/HVAC.  You want to see all those thing addressed in the 5 year studies that the condo board should be having done.

[HawkeyeNFO]

Was depreciation figured into the numbers in the first post?  I didn't see it, but perhaps it was included with something else.

[arebelspy]

Was depreciation figured into the numbers in the first post?  I didn't see it, but perhaps it was included with something else.

I don't think it was, bhut probably wasn't important at this stage.  Aside from the fact that the depreciation on a 34-80k condo isn't very significant, an investment property better pencil out cash flow wise before depreciation, so calculate that on top afterwards to get final ROI.  Shouldn't affect your targeted cash on cash return.