HI, I am new to this forum and I read in a separate thread about estimating a property rent based on the .8-1% of purchase price guidelines
I admit, I don’t understand. Reading thru this I feel like I am missing something.
I am about to make an offer on the following. However the rent the market will support is around $1100. This is way out of the $1400 that the .8% rule described would call for based on the below.
2/1 condo. purchase price $175000 downtown Salt lake city. I am putting 20% down and taking an interest only mortgage.
HOA $212 including utilities except for electrecity. This will be up to the tenant.
$1020 property tax
Factoring in mortgage payment and insurance I estimate that I would break even at $1090.
I am planning to sell in 3/4 years speculating on appreciation. salt Lake is one of the top growing metro area.
Think long and hard about speculating on appreciation. Then think long and hard again. There is a post here about someone who did that for their first property and now they are in the hole big time and desperate to get out.
You want your first deal to be a sure thing, not an ‘I hope’ thing.
I agree 100% with LoriK, think long and hard about speculating on appreciation in a national market that has already started to decline.
Your numbers are WAY OFF - WAY OFF!!!
Throughout the United States, operating expenses run 45% to 50% of the gross rents. If the market rent is $1,100 per month, then the operating expenses would be about $550, leaving $550 to pay the mortgage and for any cash flow. This is a negative cash flow property and I would not buy it.
If things work out exactly as you hope with high appreciation, you’ll make money. However, there are a lot of indicators that the economy is in for a significant downturn. The sub-prime fiasco; the Democrats retaking power and raising taxes; the inverted yield curve; the historic frequency of recessions; etc, etc, etc, are all reasons to expect the market to decline. If you lose money every month on the property and the real estate market tanks, where will you be?
However, at least you realize this is speculation. Obviously, you should never bet more than you can afford to lose.
Apart from the current term issues of expenses that will probably cause you a loss, I don’t like the idea of investing in a condo for appreciation. They just don’t seem to enjoy the same kind of upside that single family homes do. Also, if the market is that hot, someone is probably building more condos right now…are they? If so, then you’ll have competition when it comes time to sell your place.
You seem to have cash and credit. Why not just buy a nice fixer and then rent it out for a year, then sell it?
I try not to invest in condos because of the high HOA fees and it is a very bad idea to have them responsible for the HOA fees. If they stop paying you will pay to get the lean off down the road.
I am considering lowering my risk by increasing the downpayment and secure the cash flow closer to the $100. From here, apprecitation will be icing on the cake
I will pay the HOA so there shouldn’t be any risk here. Since it is my first rental, I can get a 2nd home mortgage which should give me a more interesting rate.
Putting more money down does nothing to lower your overall risk in the deal. Sure, it might help with the negative cash flow situation, but you’re buying this for appreciation, not cash flow, and so your risk is that it won’t appreciate. More money down won’t change that.
I would look at your condo this way. The rent would be $1100. The HOA fee would be $200. The insurance is $100. That’s a cash flow of $800. Let’s call it $10,000 per year.
You’re paying $175,000. That’s a $10,000 return on a $175,000 investment, which is about 6%. That’s a pretty abysmal cap rate for an income property.
Granted, you’re speculating on appreciation, but it seems like everyone here is telling you that this is a dangerous game to play, particularly now.
You’re buying a dollar for a dollar and hoping that it becomes worth $1.25. Why not buy a dollar for seventy cents and then sell it for ninety-five? I think that is what most people here are trying to do–and doing.
this looks like a terrible deal from the start. for one, its a condo. As mentioned, condo are very weak performers plus that HOA fee could jump up at any time. I would guess that you will lose about 6-10k per year on this. Also, missing management fees, vacancy, repairs, new carpet when the current one get trashed.
I’d take a beat up SFR at this price to rent ratio before I purchase the condo. At any rate, the numbers are just off. On a 175k deal, I woudl want to at least $1800/mn to even consider it and more like $2000/mn to get serious consideration