Author Topic: what do you think of this opportunity?  (Read 3192 times)

Mr Mark

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what do you think of this opportunity?
« on: June 27, 2012, 06:54:36 AM »
Ok, so here's the deal. I can get a 2500 sq ft condo in Detroit, that 6 years ago was selling for $200k for $25,000 cash foreclosure. It should rent out for about $1500 per month, but association fees - including utilities - are $1040/ mth. Taxes around 600 a year.

Good deal?

grantmeaname

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Re: what do you think of this opportunity?
« Reply #1 on: June 27, 2012, 07:23:17 AM »
So in months that you collect rent, your net after association fees and taxes is $410? That $410 has to cover insurance, repairs, your time managing the property, and vacancies (and you should evaluate it as if you'd be getting a mortgage, whether or not you would, because if it doesn't work from a cashflow perspective you shouldn't force it to work by paying more down).

Seems like an awful deal to me, but maybe I'm missing something big.

arebelspy

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Re: what do you think of this opportunity?
« Reply #2 on: June 27, 2012, 08:01:33 AM »
So in months that you collect rent, your net after association fees and taxes is $410? That $410 has to cover insurance, repairs, your time managing the property, and vacancies (and you should evaluate it as if you'd be getting a mortgage, whether or not you would, because if it doesn't work from a cashflow perspective you shouldn't force it to work by paying more down).

Seems like an awful deal to me, but maybe I'm missing something big.

Completely agree with all of the above.  Bolded the brilliant part that many don't get.

Is that HOA of $1040 a typo? Should it be 140?
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Mr Mark

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Re: what do you think of this opportunity?
« Reply #3 on: June 27, 2012, 10:10:16 AM »
No, its not a typo. But it includes maintenance, 24/7 security, gardens, trash, water, heat, insurance, (though not for interior), electricity, a gym and laundry. And its on the river in a good part of town.

I know what you mean, its the cashflow. But I can get a long term lease tenant, and that means even after interest on 100% of purchase price I'm getting a strong net cashflow. Although I agree some of the upside is in capital appreciation long term. 

arebelspy

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Re: what do you think of this opportunity?
« Reply #4 on: June 27, 2012, 03:12:05 PM »
it includes maintenance, 24/7 security, gardens, trash, water, heat, insurance, (though not for interior), electricity, a gym and laundry. And its on the river in a good part of town.

Okay, it's real nice that it has all that, but that doesn't save you any money.  Tenants normally pay for all those utilities, so having the HOA pay for them (and you, since you pay for the HOA), doesn't help you much.

Let's run the numbers and see.  These are fairly standard assumptions other than the last one, which is a guess on my part.

25k purchase price.

1.5k rent/mo.
-1040 HOA
-50/mo taxes (600/yr)
-17/mo insurance (200/yr)
-75/mo vacancy (5% vacancy - this is less than 1 month a year vacancy, and may be too low)
-30 collection losses (i.e. tenants who don't pay, and you are unable to collect from them - this is based on 2%, i.e. assuming that it happens only one month every 4 years)
-150 management (10% standard. you could manage yourself and keep this 150, but then it's not a return on your investment, and shouldn't be counted as such - it's a side income managing a property, and you could gain that same 150 by hiring yourself out to manage someone else's property.  this should be counted separate from your return)
-50 repairs (guesstimate)

You won't have capital expenditures such as roof replacement due to the HOA (though you inadvertently will be paying them through your association dues, but that's already counted).   You will have other maintenance and repairs which is on that last line (from major stuff like plumbing and hot water heater to minor stuff like paint and carpet between tenants).  I put a guess of about 600/yr on that (2.4% of your purchase price).  Standard is 1-2% of the purchase price, but this price is deceptively low (due to the high hoa), so I based it more on FMV of the property w/o that.. I may have guessed a little low. Likely no repairs for a long time, then something big hits (or a tenant moves out after a year or two and you pay 2k in paint and carpet, or whatever).

That's not counting advertising or rental fees (or anything else that may come up as an ancillary cost, like legal fees).

That leaves you with $88 net cashflow/mo x 12 mo/yr = $1056/yr.

Feel free to tweak those numbers if you have due diligence that suggests otherwise, but I'd bet they average out to be fairly accurate over a long period (5+ years).

On 25k purchase price, that's a cash on cash return of just over 4.2%.  You'll have some potential appreciation, but the high HOA will also stifle that.  No equity paydown w/o a mortgage.  You'll have some depreciation.  And, of course, you'd also get that landlord sidejob that could net you 150 more/mo.

I, personally, look for a much higher return on my money in real estate (in the neighborhood of at least 8-10% cash on cash return on a cash purchase, 15+% return on a financed purchase).

That being said, this isn't a terrible investment.  Just not ideal, IMO.
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Mr Mark

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Re: what do you think of this opportunity?
« Reply #5 on: June 27, 2012, 09:46:31 PM »
Thanks so much Arebelspy.

I'll crunch those numbers, but appreciate the framework and rules of thumb tremendously.

Looks like (and assuming 20% equity at cost of capital of 9%  plus finance 80% ' internally ' at 4%) I should def look to sell the extras if poss to up the rent say 100 a mnth, plus and add utilities to the 1600 @150/mth. I also think we can reduce HOA soon to 900.

That adds a lot. Plus capital appreciation could be huge. In Chicago....

arebelspy

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Re: what do you think of this opportunity?
« Reply #6 on: June 27, 2012, 10:02:48 PM »
Certainly any of those variables will help.

Like I said, it's not a terrible investment, so if it actually is a little better, it might turn into worth doing.
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.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.