Buying a condo to rent out

[JBL]

I'm thinking of buying a condo just a few blocks from my home to rent out. It is located in a decent sized, well maintained building. I spoke to some unit owners I know at this building and they report that the building is very well maintained, has well funded reserves, and has never had a special assessment. The unit is listed for $35,000. The monthly fees, which include heat/hot water, are $276. The taxes are about $70/month. A landlord's insurance policy on this unit will cost $40/month. The unit should rent easily for about $750 per month.

I am already a landlord (I own a two family and have been renting out my first floor for over three years now) and while it's not my favorite thing to do, I feel comfortable with working with and screening tenants. I am also reasonably handy and have formed relationships with contractors, handymen, electricians, and plumbers in case of need.

I feel that this unit is an excellent investment opportunity for me, and I can afford (and intend) to pay cash for it. I am a bit apprehensive about sinking this much money into an investment which would be difficult to liquidate in a pinch. Even after buying this unit, I would still have a full 12 month emergency fund available. I also suppose I could, if necessary, use the condo to secure a loan or line of credit if necessary.

Am I missing anything here? It seems like the income should be so solid that it will yield far, far more than any other investments I currently hold. On the other hand, it is another property to manage and there are all the risks relating to renting property, bad tenants, tenants who lose jobs and can't pay rent, etc. Difficult decision!

[disneysteve]

That's a phenomenal deal. I'm wondering why anyone would even rent a place that they could buy with the same payment in less than 4 years. Why is the condo so cheap? Is it a foreclosure?

[JBL]

High rate of investor ownership means that mortgages are not an option in this building. Plus, the neighborhood has an "iffy" reputation. I've found that many renters are comfortable with the neighborhood, but it takes more work to attract the best tenants. Many people will not consider living in the city at all, and of those who will, many will not consider this neighborhood.

This is why I need to feel VERY comfortable with this being a l-o-n-g term investment. If I decide to sell down the road, it may take a good deal of time to find a buyer. The fact that the building is heavily investor owned also means that a few people own a lot of units and therefore hold a lot of power over how the building is run.

The upshot is that the building has a strict rental policy: all applicants must be submitted to the board, who run a full credit and background check. This keeps individual owners from renting to "just anyone." Just a few really bad tenants could quickly make the building a terrible place to live or own.

I think I'm going to go ahead with this. It should make me a solid income and I think that some of it's attributes (top floor with great views, very close to downtown, spacious for a one bedroom) will make it easier to rent to a good tenant.

[breathemusic]

Just a thought... you said the neighborhood is iffy... looking at the last several years, does it look like the neighborhood is slowly trending toward improvement? Or has it always been a steady iffy area? Or going downhill? That could make a huge difference for a long term investment. If the neighborhood has been slowly getting better over time then it could turn out to be quite a good investment. If it's getting worse, then it will only get harder to rent/sell in the future.

[97guns]

your numbers are very good, looks like a 12-13% ROI

[UnknownXV]

It sounds good to me. The rate of return is phenomenal, you can't get that from anywhere else. If you have the condo board doing the screens for you, or at least helping out, that cuts some work from your load. Honestly, pay for this in cash, and watch the money roll in for you.

Good luck.

[claudialeony]

I too think the same way. In future, you will in profit. You will get the more money than you spend overall. Landlords are always in the safer side when it comes to money.

[UnknownXV]

Just be certain to read up on the landlord // tenant relationship laws for your state. They very, some states are more friendly to landlords, others aren't.

[massive]

As you said, this is an investment. Long term. But counting the numbers you will get your costs back in 4 years. This is excellent opportunity. By the fact that all tenants must be accepted by the board you can feel more safe because you know the applicants are able to pay and are in good financial condition so risk is small.

The only thing you should pay more attention to is number of people renting flats in your neighborhood. You said this area is not the first choice for renting flat in the city. Try to figure out how many people rent anything in your area at all. This may give you a picture of how easy or hard is to attract anyone to rent anything there. The deal may not be so good if you can not find an applicant in 6 months, right?

[RickLeibo]

Nonsense

Condos are not now nor have they ever been a good investment!

[JBL]

Just an update; I did buy the condo for a bit over $30,000 in October. Spent far too long (3 months!) fixing and refinishing everything, all fresh paint, restored all the windows, refinished the hardwood floors, replaced some appliances, several small repairs. I just tallied this up for my taxes and the total upfront costs to purchase and get it into condition to rent (including the carrying costs since purchase) is about $40,000. I was able to find an ideal tenant (professional, perfect credit, excellent references) to rent it in February. I rented the place for $850 per month. So I get about $500 per month in income. I'm saving this now to capitalize a reserve fund to cover future expenses at the property, but hope to start paying myself at the end of 2013.

I don't think that condos are a good investment from an appreciation perspective; they are last to appreciate in an up market and first to lose value in a down market. I did not purchase this as a short term speculation, but as a long term supplement to my income. I plan to hold it and may, in retirement, move into it as I love the space, it's much easier to take care of than my house, and is very inexpensive to own.

Thanks to all of you for your advice. Our laws here protect tenants more than in most jurisdictions, but I already am a landlord and know that with careful tenant screening you can prevent most problems.

[snafu]

JBL: Thank you for the outcome update. Do you ascribe the 3 month fix-up due to your being busy with other objectives or due to the unit needing more cost & work than your initial plan? Several of our neighbours in this upscale complex have rented their units with bad outcomes. Wonder where you reside with laws protecting tenants.

[JBL]

JBL: Thank you for the outcome update. Do you ascribe the 3 month fix-up due to your being busy with other objectives or due to the unit needing more cost & work than your initial plan? Several of our neighbours in this upscale complex have rented their units with bad outcomes. Wonder where you reside with laws protecting tenants.

Snafu;
I didn't realize going in that all the windows needed to be reputtied, and did not realize that was the responsibility of the owner and not the association. I decided that while I was doing that I might as well fully restore the windows, so they are all completely redone, new putty, primer, paint, wood cracks filled, cracked glass replaced... So they should be good for 15 years or longer now. I opted to do a lot myself and took my time to get it done right. And I was too busy to get as many hours in each week as I was hoping to.

This building is not upscale. I charge a reasonable rent and I got the unit in better shape than most of the competition in the area. I also am (tooting my own horn, here) a more professional and organized person than most landlords/managers in this area, so people feel comfortable renting from me. I charge rent right at market, maybe slightly under. A lot of investment condos are mortgaged and between mortgage, common charges, assessments, taxes, insurance, maintenance on the unit, etc. it can get hard to keep the cashflow right. The last condo I owned I considered holding and renting but it was too tight; unless I got 100% occupancy I would lose money.

I live in Connecticut. Our landlord/tenant laws are really quite balanced; tenants have pretty strong rights and it is extremely slow to evict a tenant for cause. I think they are basically fair, but they make the screening process more important, as a non-paying tenant can cost lots of money and take lots of time (months) to evict.

[siggy_freud]

Glad to hear things worked out for you. You're right in that screening tenants is probably the most difficult and important thing a landlord has to do. There is a great rental and house flipping forum I am apart of. If you'd like the address shoot me a PM and I'll send it to you. It's not a secret forum or anything, just not posting it out of respect for THIS forum. You'll get great advice there from tons of professionals in the industry. And I'm sure you'll have great advice to contribute as well!

[~bs]

to me, a rental that at least breaks even is a decent deal. Most places, rentals lose money yearly even if you're putting in a 20% down. Around here, you'd need to put in around a 40% downpayment just to break even. We have a weird situation of extremely high home prices, maintenance costs, and rent not high enough to cover it.

A rental that can start making money instantly is a rare find. Usually investors snap those up and bid the prices up to levels where it's not that profitable (market efficiency)