Real Estate investors/Mortgage experts. Take a look and offer advice on this scenario.

FortFunFoSho

Golden Member
Mar 7, 2002
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I recently stumbled onto some condos in a good area that are about to be sold. I found a 1 bedroom that is selling for $88k. I would put about another $4k in upgrades into it.

I have a renter lined up that I think would pay $750/month at most.

Assoc dues = 204/mo. Include most everything but cable tv and electrical.

Good part of town close to downton and I think I could expect decent appreciation over the next 5 years.

ThoughtS?
 

J0hnny

Platinum Member
Jul 2, 2002
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What would your mortgage payments be? That's how you determine whether or not you should buy vs. rent.
 

BigToque

Lifer
Oct 10, 1999
11,700
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Originally posted by: J0hnny
What would your mortgage payments be? That's how you determine whether or not you should buy vs. rent.

Exactly...

If you're paying $500 a month on morgage then you're not really making anything and you have no guarantee you'll be able to find tennents to stay until the mortgage is paid off.
 

dullard

Elite Member
May 21, 2001
25,065
3,413
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You'll need to borrow $93,000 (I'm assuming you run 20% over your expected upgrade cost). At a ~6.25% interest rate, you'll pay ~$5800/year. Add in property tax, I'll assume that goes up to ~$7800/year. Add in normal maintenance, it'll be ~$8300/year. Heck, I didn't even include insurance and other costs.

Your tennant wants to pay $750/month or $9000 per year. I'm assuming he/she also pays the association dues.

The numbers just don't add up. Sure if you could get it occupied, you'll make a very tiny profit. But I'd assume at most a 70% occupancy rate (it'll vary in your particular market). At that rate, you'll average a revenue of ~$6300 and costs of ~$8300. You'd have a net loss of ~$2000/year.

It just doesn't sound like the best possible investment. Sure, rising propery prices could help you out. But a $88,000 building doesn't appreciate very quickly (a reasonable estimate would be $2000/year that it goes up in the long run). So, you would roughly break even for all this work and time. And you are counting on the property value to go up just to break even. What if it doesn't?

Note: over the long haul, this could be a good deal. Rent payments will increase in 5 years, 10 years, etc. And your costs will stay roughly the same. Thus, the longer you have it, the better the deal becomes. I'm just saying you need to plan for the long haul. You won't get much profit right away.
 

wedi42

Platinum Member
Jun 9, 2001
2,843
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when i looked into buying a condo conversion i needed 20% down
that was a deal killer for me
 

wyvrn

Lifer
Feb 15, 2000
10,074
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If you have nearly 100% occupancy, it's an ok deal because you add the property appreciation into the equity the renter is building for you, and you might earn around 10% a year on your money.

I have done this with a couple of rental homes. The good news is that I have fixed loans, and rent values have gone up enough in my area in the last 5 years that now in addition to unrealized gain, I get a small monthly cash flow.

But it's not a killer deal.
 

D1gger

Diamond Member
Oct 3, 2004
5,411
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Generally, I look at my real estate investment as a break even cash flow at best. You hopefully make money in the long run from the fact that someone else is effectively making your mortgage payments for you so at the end of the mortgage you will own a condo that you have not had to put any money into, and it likely has increased in value.

Commercial / Industrial rental properties can make a net profit, but generally not a residential property unless you have a significant down payment.