considering first rental condo in a building I own a unit.

General Real Estate Investing
1

Last year I moved into a condo building in downtown Chicago I purchased a 3 bedroom condo in an older building (built in 1932) that only provides common property maintenance, water, cable, and building management for assessments (no workout room etc. the newer buildings have).

The total units in the building is 90, 16 floors.

This year we had a special assessment that will cost us 4k for our 3 bedroom 2 bath over the course of 2 years. (The possible condos are 1 bed 1 bath 2 bed 1 bath and 3 bed 2 bath).

The building is located close to two colleges and across the street from millennium park (big tourist attraction), also walking distance from the financial district, the prices are low compared to average apt in the area.

Recently I have noticed that 6 2 bedroom 1 baths are on the market for sale, I was considering purchasing one as my first rental property (this seems like the perfect apt for college students and many currently live in my building). The 6 properties are listed from 200k-290k, but all are structurally the same, some are likely in better condition then others.

The current rates for rent are from 1650-1850 from what I could find on the internet.

I ran the following numbers and it appears there is room to create a cash flowing property here, what do you think the most I should pay for one of these properties is? how much do you think I should put down? Is it okay to put down more to make up for the fact that there are large assessments?

Any additional feedback or comments would be appreciated.

fixed costs month year
taxes 2683
assesment 500 6000
insurance 600
total 773.5833 9283 month year
rent 1600 19200

variable	30 year				variable	30 year

cost of home 160k 180k 200k cost of home 160k 180k 200k
% down % down
20 692 778 865 20 1613 581 -463
30 584 657 730 30 2909 2033 1157
40 486 547 608 40 4085 3353 2621
50 405 456 506 50 5057 4445 3845

mortgage cost/month			profit/wiggelroom per year
variable	15 year				variable	15 year

cost of home 160k 180k 200k cost of home 160k 180k 200k
% down % down
20 938 1056 1173 20 -1339 -2755 -4159
30 821 924 1026 30 65 -1171 -2395
40 704 792 880 40 1469 413 -643
50 591 660 739 50 2825 1997 1049

2

If the market rent for a unit is $1600 per month with fixed costs at $800 per month, your variable costs (advertising, management cost, leasing fees, vacancy, rental loss, repairs, preventive maintenance, special assessments, replacement reserve, etc.) might eat up another $200 per month.

Now your net operating income is $600 per month. If the unit cost is $160K and you put 20% down with a 30 year loan, your NEGATIVE cash flow is $92 per month.

I notice that you are only considering variable rate financing. This will be fine for the rest of this year and maybe next year too, but interest rates are expected to rise soon. And, the increase may be dramatic. What will your cash flow look like when your interest rate jumps 5% at the first rate adjustment?

It would appear that the least expensive property with the least down payment will not cash flow for you. It is a rookie mistake to believe that you can improve your deal by making a larger downpayment.

For future reference, “profit” is what you make when you sell the property. Profit often depends upon appreciation which may not happen for quite a few more years. Cash flow, or income, is what you make while you are holding the property as a rental until you sell it.

How much did you pay for your unit? Work the cash flow numbers for your current unit if you convert it to a rental. You might be able to get a positive cash flow for your current unit if you moved to a less expensive property.

3

  1. I would compare this opportunity with everything else you can find on the market and see if there is anything better. Remember that great deals have probably already sold (so take a look at past sales as well to see what you might be able to get if you wait/look hard!)

  2. Just because they are asking X $ doesn’t mean you have to pay X $.
    You just need to figure out what the maximum amount you can offer which will guarantee you cashflow on the unit with 5% vacancy and a fixed interest rate. Once you have SOLID numbers and you know exactly what you can offer - make one.

Remember that your cashflow estimate is very important the more research you put into each expense the more realistic your cashflow estimate will be.

The only thing I like about your proposal is that it will be easy to manage the property since you live in the same building.

I don’t like the age of the building, or the cashflow #'s.

Taylor

4

sorry I did not mean variable interest rates, i meant that was a variable whereas assessments/taxes are not changing.

I feel like this property has potential for profit as I will likely to get a great price since there are 6 on the market. I am more concerned /w the cash flow aspect.

I currently trade stock options for a living, my assets are currently liquid and I felt this was an opportunity to build a cash flowing asset. ( if i put 50% down for this to cash flow and at the same time build equity this seems better than truly passive incomes, no?) This could also get my feet wet in terms of getting my 1st property /w little risk.

I plan to manage this property myself as I live in the building so that cuts cost, however there is a lot of competition in this area so likely I would pay
to get renters in.

its obvious that assessments really hurt the ease of cash flow for REI investors, so who is making money on rents from condos? is the key just in the purchase price of the unit?

5

Let’s assume that you can get 30 year, fixed rate financing at 5.25% for a non-owner occupied loan with 20% down. Let’s also assume that the contract purchase price for the unit is at the bottom of your range, $160K.

If we use your numbers for the property taxes, insurance and monthly assessment, your monthly outlay for these items will run about $775 each month. If we also assume the other costs of ownership and rental operation will run another $200 per month, your monthly outlay increases to $995 per month.

With a rental income of just $1600 per month, you will have just $605 each month to cover your debt service. Whatever is left over is cash flow.

You don’t tell us what interest rate and loan term you are using for your analysis, so let’s use 5.5% just because the owner occupied rates are being quoted at 4.25% today and the non-owner occupied loan rates tend to be about one point higher.

With a purchase price of $160K, you will be financing $128K after a $32K downpayment, making your debt service about $707 per month. So, with the lowest purchase price and the least downpayment, your probable cash flow will be a negative $102 each month.

Increasing your downpayment to 50%, will lower your debt service to $442 each month, and consequently increase your monthly cash flow to $163.

If you have $80000 investment capital, would you rather use it to buy a rental property that produces an annual cash flow of $1956 per year or buy a 30 year Treasury with a 3.5% yield? If the personal finance gurus all believe that 30 year Treasuries are not good long term investments right now, why would you even consider an investment vehicle with a 2.5% ROI?