Ws Homeowner, Real Estate Pro in Sunol, CA

What are the pros and cons of buying a condo for investment purposes?

Asked by Ws Homeowner, Sunol, CA Mon Nov 17, 2008

I am looking to purchase (I think, although being a landlord can be scary) a condo in Hayward down to Milpitas. Looking at the lower end $200-250. Are rentals getting near positive cash flow these days (assume 2-30% down and 7%) Has there been problems getting loans?

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Have you ever thought about just flipping the condo. Maybe buying one out through a short sale, renovating it and then putting it back out on the market. Since most homebuyers nowadays are looking for ready to move in homes with new kitchen counter tops and remodeled bathrooms. Just a thought.
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0 votes Thank Flag Link Sun Dec 4, 2011
If you want to buy a condo your mortgage payment + hoa dues + property tax/month = net rent (property manager charge 8% of gross rent).
You have to factor in vacancy and fixing up the unit cost up to $7,000 (painting + new carpet + redo restroom +kitchen +screen door etc) this will be each time a renter move out and new one move in. Property manager charge 40% a month rent each time new renter move in (cost for advertising and listing on different web site)
Rent for 2 bedroom condo is about $ 1,300. If you have a renter do not pay, trash the place and cost of eviction and court cost will be more)
So be cautious and do the calculation before you get in because I own rental for the last few decades and I am doing ok but some owner has very bad renters and the sold the rental and get out the business altogether.
0 votes Thank Flag Link Mon Apr 4, 2011
DP2 - great explanation of your numbers analysis.
I get into this discussion frequently with new investors, answering the question: "what is the right offering price for a property that produces $X in annual cash flow based upon planned financing and current market rents?" In California it seems that the right offering price is usually about 50% of the listing price. Since that dog won't hunt with the seller (50% offers seldom get even a rejection), the buyer has to look forward a little and decide if they want to include selling the property for a profit at a specific time in the future in their value analysis, otherwise they will never make an offer that will get accepted.
Of course, the most common question is still: "is it near a Starbucks?"
0 votes Thank Flag Link Thu Nov 20, 2008
Typically, when you're dealing with income producing properties--even if the property has 100% occupancy--one should factor in vacancy rate of 5% (of the annual gross income [GI]). Also, a well-run income producing property should have annual, net operating expenses (NOE) in the range of 25%-35% of the adjusted gross income (AGI--.95[GI]). If the landlord intends for the tenants to pay for water/sewer and the utilities, then the NOE should be closer to 25% of AGI; similarly, the NOE should be closer to 35% of the NOE if the landlord pays for the water/sewer and utilities.

Since I didn't know Ws Homeowner's intent, I chose to use 30% (the middle value) of the AGI for my NOE. Basically, I did all of this to calculate the net operating income (NOI--which 100-(5+30)=65% of the GI). So, now you see where that .65 comes from.

The .09 is the cap rate; the cap rate has to be at least 2+7% (the interest rate) or 9%.

Thus, the max purchase price that one could expect to pay--in order for this property to cash-flow positively and immediately--is NOI/(cap rate) or $130,000 in this case.
0 votes Thank Flag Link Thu Nov 20, 2008
I agree 100% with John, and I'll go a step further.

Barring a few recent exceptions, most single-family, residential properties--whether houses or condos--purchased in CA won't yield a positive cash-flow immediately (without a larger down-payment). Yet, it's now possible to purchase some pre-foreclosures/foreclosures/REOs in certain CA-markets at prices such that the property will cash-flow positively and immediately.

Nevertheless, multi-units are different beasts altogether. It's possible purchase multi-unit residential properties at a price that will cash-flow positively and immediately.

The key to purchasing a property with immediate, positive cash-flow is to acquire a property at the right price, with the right terms, such that the annual income minus the annual expenses is greater than the annual debt service (or 12 months of mortgage payments). The higher the value of the difference, the more you'll earn.
0 votes Thank Flag Link Wed Nov 19, 2008
Hi -
Condos can be good short term investments but I believe they are bad long term investments, here is why.
First the good. If the condo is in a luxury facility in a great location you should be able to demand good rents. Equally important, if you buy in a low market you may be able to upgrade the unit and sell for a reasonable profit within 1 or 2 years (ALL markets turn around at some point). I've always liked condos as entry-level investments in rising markets because they are cheap to buy and when you sell there are a large number of buyers in the condo price range. Condo facilities in good locations that have a lot of owner-occupied units tend to be well maintained.
Now the bad. Condos are the last type of rental property to gain in value in an up market and the first type of property to go down in value in a down market. Maintenance of the condo facility requires cooperation with neighbors and a Home Owners Association (HOA) that can be an absolute pain. Common area maintenance quality may fluctuate from year-to-year. HOA dues may also fluctuate and could add significantly to your operating costs (I'm managing condos in a facility where a 2 bed 1 bath rents for $1700 and the monthly HOA fee is $500 per month). Special assessments for new roofs, pool refurbishment, green area makeovers, parking lot resurfacing, etc. can also put your cash flow in flux and make your investment smell like rotten eggs. Lastly, a condo is not land. Over the long haul, the facility will become more costly to maintain and re-building is almost impossible. With a house, you are the single decision maker if you decide to tear down and build a better rental product or sell the property for the value of land that has appreciated over time.
Summary: the right condo can be a good investment, but I recommend you buy with a viable short term exit strategy.
0 votes Thank Flag Link Wed Nov 19, 2008
Let's assume that the average rent in Milpitas is $1500.

Assuming that you'll be able to rent whatever you decide to purchase at least at $1500/month, then the max you'll be able to offer (in order to cash-flow positively) is: 12(1500)(.65)/.09 = $130,000.
0 votes Thank Flag Link Tue Nov 18, 2008
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