Thanks motivatedceo and pete_houston.
After more consideration, I realized that sooner or later there is bound to be some sort of problem that causes a significant vacancy throughout my rentals. If that happens in the scenario I described, I wouldn’t be able to pay the mortgage and I would lose them. I would be on the hook for a $3,240/month mortgage plus maintenance charges. My $3k/month income wouldn’t be able to take it. In the apartment complex scenario, I would be on the hook for a $8,100/month mortgage.
Can you imagine turning that $400k into $900k per year in gross rent (probably $150k-200k per year in NET profit
After paying a $100k/year mortgage I would net $50k-$100k/year if those numbers are right, but covering the mortgage and other expenses during a vacant period would be a serious problem.
Personally I wouldn't think about spending that kind of money on a condo...especially as a real estate newbie. You can cash out & make a lot more money elsewhere.
Is buying as many cheap properties as possible the key to generating income above the mortgage expense? It sounds like it is. I didn’t realize that.
Back on the expensive condo thing for a second, I figure I could finance a $325k condo, put 20% down ($65k), and have a mortgage payment of $1,320/month plus $500 maintenance fees. I could probably do a $2,100/month long term rental on the condo to cover the mortgage, maintenance fees, and property taxes, or I could set it up as a vacation rental and probably make $2,300-$4,500/month before expenses depending on 50%-100% occupancy. The nice thing is I wouldn’t be over-leveraged and since I’ll own my home I could conceivably cover the expenses if there’s a vacancy problem.
What would you do with $65k in my situation? There are a lot of foreclosure condos a little ways from here going for $25k-$30k each. If high volume and low price is the way to go, would you buy 12 of them instead of the $325k condo?
The 1031 exchange is not necessary in what you describe.
Your basis on the inherited property should be close or possibly even more than what you sell it for. So you should have almost no capital gain on the sale.
I wish. The property I inherited was originally put into a trust and the basis was determined a while back. I’ve talked to two different CPAs about getting a stepped up basis to the sale price and they both say it can’t be done. One of those CPAs actually handles the trust. I’m completely open to ideas on reducing, eliminating, or deferring the tax though. At this point it looks like I’m going to have to pay up ($75k) because I don’t want to be on the hook for a $640k mortgage.
Financing on Condos is difficult in this market. Check with your lenders before you puchase these.
I spoke to a lender for quite a while yesterday. She said they do finance condos as long as they aren’t “mixed usage” meaning some vacation rentals and some timeshare in the same complex. She also said they only loan 70% on investment properties, the interest rate would be 5.75%, and closing costs would be 3.25%. Should I be able to do better than this?
I would also recommend looking at Multifamily properties vs these condos.
Is a duplex a multi-family property? Any other examples? When looking to generate income, is the goal to house as many people as possible?
If you make 3k a month, how will you pay property tax and insurance on your 640k home?
I don’t understand. I’m not sure of the exact property tax rate but I think it’s less than 1%. 1% would be $533/month and insurance can’t be too bad.