I am in the process of buying a two bedroom condominium in a very desirable golf community. This is the first time I am venturing into the world of real estate investment and I would like to get some input from some of the more experienced investors on the viability of this deal.
So, here’s the overview. I am paying $188K for the unit that is expected to rent for around $1700/mo. My real estate taxes are $3300/yr and I will be paying %155/mo in association fees. The unit should be fairly easy to rent, as there seems to be a constant shortage of good rental properties in the area. Overall, I think I should be able to break even (from a CF perspective) with a 25% down payment with the assumption that I will be able to rent it out 11 months out of the year.
I ran the numbers under the most conservative appreciation scenarios and have come up with a conservative ROI of 20% (using 2% appreciation rate and 3% growth in rental rates and all of my operating costs).
The question I have for the gurus out there - is this something that looks in line with a typical return you look for in your investments? Am I being overly optimistic in my assumptions? Am I missing something, or is it really that profitable of an investment? Any advice from those who have done this for awhile would be greatly appreciated.
I know this may sound silly, but you did check the association paperwork to find out that renting of the units is ok per the by-laws?
You probably have since you have already started calculating what you may make down the road, but the last thing you need is to see some by-law in the association that says no rentals or investment property allowed and all units must be owner occupied.
Posted by Eric - FL on March 06, 2002 at 15:15:43:
Ed,
I have invested in condos in the past and I want you to clearly understand what you are getting into. Condo associations are famous for doing assessments for painting, new roofs, and just about anything else they can slip by. Typically, they are managed by condo boards who have no clue on cost savings and will elect to do work that doesn’t make any sense. I know this sounds stereotypical but remember you have 1 vote among all the residents where in a single family home you are the vote. I was renting a unit and the board decided no weekend rentals only weekly or monthly. That hurt!!! Be careful and realize you will have an investment that is not entirely controlled by you.
Make sure to figure in an appropriate amount for maintenance (repairs), vacancy, holding costs. Many investors figure up to 40% off the top, but for a nicer property it could be lower. To be safe, figure high.
30% of $1700 is $510, which leaves you $1190 for debt service, taxes, association fee, and any other monthly fixed costs. You didn’t say how much these monthly payments will be, but if they’re more than $1190, you’re not looking so good.
I am actually planning to use my existing (5%APR) home equity to finance the downpayment, so the numbers will probably work out closer to what you had in the zero down scenario.
As far as further negotiating is concerned, I was able to knock the price down by $8K from original asking price by accomodating the sellers’ request for a July closing. This is definitely a seller’s market and had they gone ahead with last Sunday’s open house, I am pretty confident they would have gotten their asking price or close to it.
This is definitely a condo townhouse since it has its own entrance and its own roof and walls on all sides. The 20% return is based on the most conservative estimates I could come up with. To give you an example, I used 2% appreciation rate assumptions, while this property has appreciated about 10% (net of inflation) over last 4 years. Based on these assumptions, do you think this makes sense as an investment?
Thanks for your help.
Ed
Joe,
Thanks for your advice. Basically, I assumed about $1000/yr in maintenance costs. These should cover all interior maintenance costs - exterior is take care of by the association. Plus the unit has all new appliances and carpeting, so I don’t think it will need any major improvements for at least 2-3 years.