First time questions - foreclosure or mls? House or condo?

General Real Estate Investing
1

Hello everybody this is my first time posting here and I have a few questions for everybody.

First of all, I’m 23 years old and I have been working for about a year now post college. I have been refusing to rent, eager to get a piece of the action in my Cincinnati market and I’m ready to make a move!

With record numbers of foreclosures and a ton of inventory, there are many options to choose from.

At this point, I’m looking into a couple options:

A. Two friend’s fathers have purchased several older condos in an area that leads Hamilton county in foreclosures. The only conceivable benefit to this area is that the condos have a panoramic river/city view. They are up on a hill about 3 miles to the west of the city in an area called Price Hill. The units that I’m looking at are in a building that consists of about 15 units total near the Cincinnati Christian Academy (several renters pay $650/month for these units). They are only 880 square feet, 2 bedroom units with a 6x20 balcony looking over the panoramic view. The highest comp within 90 days is $78,000 for a unit that had been updated with roughly 5000 in upgrades (stainless appliances, new tile in the bathroom and kitchen, new carpet, paint and crown molding).

Heres the deal - I have inquired and have been offered a non-refurbished unit for $45,000. Is this a good deal?

I don’t necessarily want to live here long. I want to live in an area called Oakley - where there are many houses available.

I imagine having a 3 br house and renting to 2 friends in this Oakley area - closer to young professional type activities, many bars, shopping, and dining.

I have been pre-approved to borrow only $140,000.

How plausible is it to do both and rent out the condo after I refurb it?

Any opinions welcome!

2

Cincy23Invstr,

This property is not a good rental at $45,000 + rehab because it will not cash flow. You can do a LOT better in Cincinnati.

Here is the way I see the numbers:

Gross Rents: $650
Operating Expenses: $325
NOI: $325
Mortgage: $50,000 (assuming $5k repairs), 30 yr, 7.5% NOO: $350

Monthly Cash Flow: $25

Keep Looking!

Good Luck,

Mike

3

Only $25/month in cashflow?

A 50000 30 yr fixed at 7% is only $299/month.

$299 + condo fees of $120 (include heat) = $420. Mortgage insurance =$50.

$650 - 420= $230.

If I pass on the electric and water to the renter, then would I not have $230 in positive cash flow/month?

4

Cincy23Invstr what I would do is find someone that has the lifestyle that I want and do exactly what they are doing. I would NOT reinvent the wheel. Everybody says it is wise to learn from a person’s mistakes. That is wrong. It is impossible to learn from a mistake. If you tell me 1000 ways that something didn’t work. I still have no idea how to do it right. What you want to do is learn how to do it so that you never make a mistake. I doubt that you will find anybody that ever made any money with condos. But if that person exists he will probably be found at your local real estate investor’s club. But don’t fall in love with doing condos fall in love with the lifestyle of the person you meet and imitate him to get the same for yourself.

propertymanager knows what he is doing there in Ohio. You can justify buying anything, but I would not buy any house that I had to win an argument with propertymanager over.

5

What about special assessments? Condos do have these every time they need more money to operate such as replacing the roof, etc. What if the tenant sues you? What if you need to evict that tenant and not only have lost rent but also court and lawyer fees? What if a pissed off tenant trashes the place and leaves you with $10k in damage?

6

This is not a good first deal. And condos are very tricky and only the most experienced of investors really make money on them.

7

Well said, Moon!!!

8

In your own calculation you did not subtract the mortage insurance.

Don’t forget property taxes, liability insurance, repairs, and vacancy. All of these items have a cost you have not considered. When you have a vacancy, the utilities normally paid by the tenant will come out of your pocket. And, won’t you have a marketing cost to fill a vacancy? Will you pay a leasing commission if a real estate agent brings you a tenant?

Legal costs are often overlooked, too. Will you have an attorney review and perhaps amend your your lease form each year to make sure you are compliant with your state landlord/tenant law? How much will that cost you? How much will an eviction cost you should you have to go through one?

Are there any rental unit licensing fees in your area? If so, how much?

Will you manage the property yourself, or hire a professional property manager? If you self-manage, what is your out of pocket cost to manage your own property?

How about bank charges? Will you have a business checking account with monthly statement charges? How about your security deposit escrow account – will there be a bank charge for that account and will you have to pay accrued interest on your tenant’s security deposits?

Maybe you will do your own accounting and tax return preparation. If not, then a professional comes with a cost. Even if you do it yourself, will you need to purchase a business tax preparation software package every year?

I am more pessimistic than propertymanager. Instead of the $25 NEGATIVE cash flow he projected, I think this property will average a $100 negative monthly cash flow in your first year of ownership. Maybe over time (about three years) this property will become a positive income generator for you. A lot depends upon your rental market. A soft rental market for the next two years means it will take even more time to get to a positive cash flow.

You also have to consider how the lender will look at this property when you want to purchase your next one. The lender will allow only 75% of your income but will use 100% of your expenses when calculating your debt/income ratios. Even if you manage to break even before taxes, the lender sees this as a liability not an asset. As long as this property is a liability, it reduces your purchasing power when you want to acquire the next property.

Remember, liabilities take money out of your pocket every month, assets put money in your pocket every month.

9

Bluemoon,

I have made a lot of money with condos – over time. I have a dozen of them in my rental portfolio right now. Condos are a niche that is not profitable in all markets.

You won’t find me at the local real estate investment club. I once joined my local club for a year and quit attending the meetings after four months. The club members that regularly attended were aspiring real estate investors who had never done a deal. The club offered me nothing and I quickly found better uses for my time.

10

I agree. Most every REIC I have visited has been a disappointment. Nothing more than wannabes who listen to the advice, “Go to your local REIC. . .”. The experienced, real investors don’t waste their time there.
Those clubs have become nothing more than money machines for the owners, who bring in a new speaker each month to sell their latest Get-Rich-Quick scheme for the dreamers in the audience.

11

The main bulk of the show is almost always newbie crap, you really have to pay attention to the sidelines, there can be some really great contacts to meet. I went to an annual conference for my local REIA and it was mostly a joke, the Flip this House New Haven guys spoke for 2 days and it was a huge room full of newbies soaking up every word and laughing at every corny joke. I sat in on it for about 5 minutes and couldn’t take any more. Out in the lobby where I spent the bulk of my time I talked to some great people (and again plenty of newbs). You can always tell the doers from the talkers. Like the woman that said she only buys high end apartments in X, Y, and Z town. I almost started laughing, in fact as soon as she walked away me and the girl I was there with were almost rolling on the floor. We’re talking towns that have $400k duplexes with maybe $2500 a month gross rents.

12

Thank you for the great response!

I understand there are a ton of factors that I am overlooking in regards to hidden fees and costs, but what if I were to get the condo for 45k, put 5k in upgrades and then sell at 75k such as the other units that have sold in the building?

What is a good formula to really figure out some concrete numbers on how much I would actually be able to profit?

Once again, this is in an area that is full of foreclosures and will not be one to appreciate any time soon. With a panoramic city-view and easy access to highways, will this typically depreciate as would other properties in the area? Also it is in a nicer part of this area - known as price hill, but ultimately, not an easy resale area.

13

Now you are talking about rehabbing and selling, completely different ballgame. You need to decide what you are going to do, are you a rehabber or are you a rental guy?

14

how about holding cost like mortgage payment, utilities and sale commssions, closing on both buy and sell. Plus in this market you will never get top dollar as everyone is looking for a bargin. Thus you might have a cost basis more like 53-55k , have to list it for $65k and net in the high 50’s after having it sit on the market for 6 months (or longer).

15

What has kept me away from our local REI club is that they charge $25 a meeting to attend and listen to these speakers. :shocked

16

The speakers aren’t the value in a good club. The networking is where you get some value. Spend $25, see if there is anyone there worth talking to. If not you’re only out $25, peanuts.

17

Your probably right. I should go and check them out. I just can’t stand to pay money to have some speaker schlep their wares throughout the whole presentation.

I guess I should arrive early and network, use ear plugs for the speaker, and stay late and network again.

Tg

18

Bring lots of business cards and hand them out by the fistful!

19

If you look down the list, there is a landlord’s forum and you might get different answers there.

As a rental, a condo is just about the worst choice you can make. You have to make your tenants comply with the association rules and the association is going to come after YOU if they don’t.

In a condo, your tennt is basically living in an apartment, where you have no control over what the neighbors do. There is a lot of personality conflict in an apartment building, and if you own the whole building, you can kick out the offenders. If you don’t own the surrounding units and there is a real jerk sharing a wall with your unit, your tennts will all move out, one after the other.

Condo buildings where tenants are permitted have a tendancy to get run down, and they are harder to re-sell because no home owner wants to live with a bunch of tenats as neighbors.

On the plus side for your unit, it sounds like the location is lovely and it is near a school which will provide tenants.

Since it is not the area you wish to live in, have you looked at duplexes in the area you deisre? Perhaps with a side rented and a roomate of your own, you could afford to get a place in the area you prefer.

OH is having some problems with loss of jobs and people moving out of state. That makes it harder to sell and harder to find good tenants to rent to. That doesn’t mean you can’t or shouldn’t. But what it does mean is that you should bargain hard when you buy. You should be able to get a really good price in a market like that.