Returns on Real Estate Investment

<p>Our friends just bought a short-sale condo in Avalon Lakes area of Orlando, Florida. After all fees and unpaid dues, it came out to $96,000 for a 5 bedroom condo and they have it rented already for $1200 a month. The monthly HOA dues are $200 and the management company takes 1 month rent per year.</p>

<p>Sounds like a really nice deal? This is tempting us to investigate for they are now looking for a second property.</p>

<p>Any thoughts from other landlords, realtors, etc....</p>

<p>Looks good to me....</p>

<p>Is it hard to get tenants?</p>

<p>How much does it cost each year for upkeep and what are the property taxes?</p>

<p>Is the HOA in good financial shape?</p>

<p>Would you ever consider living in the condo?</p>

<p>How many sq ft is the condo?</p>

<p>How old is it?</p>

<p>We have a rental property and knock on wood, have had a good experience for the most part but we live near where our rental property is so we can be pretty hands on. The negatives though, if something breaks, you have to get it fixed, obviously, but it isn't always convenient to do that either. There was a bad storm that went through the area last summer and we lost a lot of trees that we had to clean up so we spent a weekend doing that. We've had one stable renter the entire time, but off and on roommates with him. He has helped in the roommate search so that helps. We give him a break on his rent to "manage" the property, cut the grass, do minor upkeep things, etc.</p>

<p>There are some tax breaks for having the rental so that is nice too.</p>

<p>If you are going to do a long distance rental, I would ONLY do that if I had a responsible management company. I have heard horror stories about various management companies, many of them in Florida, so just do a LOT of research before you commit to one.</p>

<p>I would be very careful in buying something that is not close by. I own a house 120 miles from my primary residence and its a hassle. I've gotten idiotic complaints from tenants that I've had to address. I'd also be concerned about depreciating housing prices at this stage.</p>

<p>Dealing with tenants CAN be a huge PITA. You have to be careful and ruthless in that area. No sob stories, no excuses, look for older couples when possible. In many areas costs are now less than rent you can get. But that makes it likely better tenants will move out to buy when they can.</p>

<p>The fear is that Florida is not getting better, either housing wise or employment wise. But, how much worse can it get? </p>

<p>We are far away and would use the same reliable management company and repair person that our friends have engaged.</p>

<p>The upside is that prices are ridiculously low, and there are far stricter regulations in place to prevent the "easy loans" from happening again, so many tenants are less likely to qualify.</p>

<p>Amazingly, we have friends who actually live in other countries (Singapore, England and India) who are buying 2-3 condos and renting out.</p>

<p>The other question is single family versus condo.....</p>

<p>In most areas-SF>>>>condos
Condos need less maintenance time and $$$ as most is done for you. Appreciation lower in most areas not NYC and SF. Maybe Boston.</p>

<p>I have never heard of a condo with five bedrooms and certainly not one for the price of $96,000 unless there is some catch. A two bedroom for $96,000 is a different story.</p>

<p>I just looked on and saw a 4 bedroom 3 bathroom condo in Avalon park Orlando that sold for $88K. That sounds like quite a deal.</p>

<p>I read a study once that landlords typically average in the landlord business for 7 yrs.
If that study is accurate, ask oneself why? Is it that they get so rich in 7 yrs that they sell out and retire? I doubt that. I cannot comment specifically on property values in Vacation Town, Florida. My experience in general though, is that it takes a different kind of personality,combined with good luck, and business acumen; and doubly so for a long-distance rental. There are many rules and laws that seem to unfairly favor a tenant (imo) and this adds costs and aggravations to the job. </p>

<p>Many go into the biz dreaming- here's how little I can pay, then here's how much I can charge renters, so here's my roi, wow! It isn't that simple. Gosh, I wish it was that easy.</p>

<p>I think how Choc's friends are profiting after 5 yrs would be a better example for Choc, rather than friends who just bought. Of course, I understand Choc can't look 5 years into the future. My compliments to choc asking advice from realtors and landlords- only asking home owners or others sharp in general business would draw a very incomplete pic. This situation is buying a house, plus running a business with it.</p>

<p>One of the issues with buying a condo is the financial stability of the condo association. If there are a lot of units under water or in foreclosure, new owners can be hit up with additional assessments and fees, and if many condo owners are delinquent on their fees, the other owners can be on the hook for those, too.</p>

<p>renting a 5 br whatever for $1200 is looking for trouble. The quality of the renter will be below par and they tended to make a mess, unless FL is different. I went to see a section 8 apartment in a seedy area and the tenants just teared it apart.</p>

<p>income: $1200/mo * 12 = $14400</p>

<p>outgo: $200/mo HOA *12 = $2400
$200/mo taxes *12 = $2400 (might be more for a large condo)
$150/mo utilies *12 = $2400 (just a WAG but should be in the ball park)
$1200/year management fee
$100/mo insurance *12 = $1200/year
= $9600/year</p>

<p>So we are down to $4800/year net, which is a return of 5.0%.</p>

<p>And that's without factoring in reserves for repairs and maintenance, or having the unit be empty for any length of time, etc.</p>

<p>The point about the financial situation of the condo association is spot on, as well.</p>

<p>I wouldn't call this a great investment if you are looking for cash-flow. Whether it will appreciate or not, who knows.</p>

<p>Notrich, thank you for putting down the numbers, it makes it easier to "see",
Utilities are paid by tenant.
Insurance is under $500/year as only the inside needs to be insured
Taxes are very low, I will have to verify, but when home values plummeted, assessments did too.</p>

<p>Our friends claim that they are getting a 9% return, I will call them tomorrow and check.</p>

<p>From professional commercial real Estate point of view. Here is how we calculate the proforma NOI (net operating Income). We have plenty of Multi-family apartments that costs around $100K/door.</p>

<p>Scheduled Gross Rent: $14,400
Vacancy 5%: 720
Projected Goss Rent: 13,680</p>

$400/mo 4,800</p>

<p>NOI (proforma) 8,800</p>

<p>Return on Investment ~9%(before mortgage)</p>

<p>Chocoh, You are correct, in a general sense. The vacancy factor should be hihger, because you can only count 11 month/year rent. But in a Multi Fmaily rental calculation, you normally factor 5% vacancy.</p>

<p>If the vacancy rate were really 5%, gross profit were really over 50% (counting leasing commission), and the quality of available tenants were such that signing a lease meant getting paid for a year, this condo would never have been sold for $95,000.</p>

<p>Sure it could. Most people do not have the cash to buy a rental (need 25% down) or all cash nor the inclination. Market is relatively thin.</p>

<p>In a previous post, I have expressed the concerns about the quality of the tenants of a 5 bdr condo for $1200. In my profit analysis, the operative word is proforma, that is a case under the best scenario. And that is where the investor came about a 9% return.</p>

<p>JHS, I don't know where your 50% return came from.</p>

<p>One metric we use to evaluate a rental property is the Gross Rental Multiplier, or GRM. You divide the price by one month's rent. In this case, 96000/1200 = a GRM of 80.</p>

<p>For me this is border-line. Any higher, and it becomes difficult to have positive cash flow.</p>

<p>The last two properties I got had GRMs in the 40's. These spin out a nice amount of cash.</p>

Insurance is under $500/year as only the inside needs to be insured


I know of some condo associations that split the master insurance out of the HOA fees and bill the owner separately. For a HOA of only $200 on such a large unit to include the master insurance raises a red flag, and you should examine the condo docs very closely to make sure the insurance is adequate, and a decent reserve fund is being accumulated.</p>

<p>More numbers, if you are financing:</p>

<p>$96K x 30% down * 4% for 30 years = $320/month payment</p>

<p>Plus $100/month mgmt fee + $237/month HOA* + $160/month taxes* + $50/mo
insurance = $867/month</p>

<p>This leaves only $333/month in profit, which will have to cover vacancies, repairs, cleanup costs in-between tenants, etc.</p>

<p>*I pulled these numbers from this listing for a 5 BD 3 BA unit in Avalon Lakes:</p>

<p>Avalon</a> Lakes Real Estate & Avalon Lakes MLS</p>

<p>And I still think $50/month for insurance is cheap, you would need to make sure you have a solid level of liability coverage.</p>

<p>notrichenough--good analysis overall but it's difficult to compare insurance from one area to another. $50/month for insurance on a condo with a condo association in our area would be REALLY high. Most condo associations fees here run between $100-200/month. For that you get a master insurance plan that usually covers from the drywall out and anything attached-cabinets, carpet, etc. You also get garbage, lawn care, snow removal, etc. The renter would need to have condo/renter's insurance for their "stuff" and the owner, a liability policy for the most part.</p>

<p>Our rental is a single family home, we have to carry insurance for the whole thing and that is less than $75/month for a value of close to $300,000.</p>

<p>We take a net loss on our property but have positive cash flow. If we ran into MAJOR repairs that might be different but any major repairs would probably involve an insurance claim so even then, not a huge worry.</p>