Buy Condo Next Door to Rent Out?

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It's very hard to get a mortgage when the loan amount is less than $100k. What are taxes and condo fees like? All real estate is local so what looks like a good deal to one person looks like a bad deal to another because they're used to different cap rates. Certain areas have high cap rates and other areas have low cap rates. Obviously you don't want to buy a property that has a low cap rate if the cap rate for the area is high, but in certain areas, the cap rate is low so the numbers are still ok. The cap or capitalization rate is the net income divided by the purchase price. You would subtract fixed costs such as taxes and condo fees, but not the mortgage. For 50k, you could almost float this on a couple of credit cards at 0%. Also with over 50% rentals, you probably won't be able to get a mortgage. And if you do, with such low numbers, consider a 10 year mortgage. Rents tend to go up over time, how much do you think rent was 5-10 years ago?
 
Originally Posted By: daves87rs
I think houses are better than condos for renting....easier to sell if they like it!


I agree, especially since the monthly condo fee would go toward a better house.

Originally Posted By: Wolf359
It's very hard to get a mortgage when the loan amount is less than $100k. What are taxes and condo fees like? All real estate is local so what looks like a good deal to one person looks like a bad deal to another because they're used to different cap rates. Certain areas have high cap rates and other areas have low cap rates. Obviously you don't want to buy a property that has a low cap rate if the cap rate for the area is high, but in certain areas, the cap rate is low so the numbers are still ok. The cap or capitalization rate is the net income divided by the purchase price. You would subtract fixed costs such as taxes and condo fees, but not the mortgage. For 50k, you could almost float this on a couple of credit cards at 0%. Also with over 50% rentals, you probably won't be able to get a mortgage. And if you do, with such low numbers, consider a 10 year mortgage. Rents tend to go up over time, how much do you think rent was 5-10 years ago?


I own a place that has a little more value than the subject condo. My 15-year mortgage, including tax, is $450/month. My $1M insurance policy (may be over-kill,) which also includes enough to cover pretty much anything outside of what my association-provided insurance includes, is just over $100. Condo fees are around $250, so around $800/month, all in.

If what wolf359 says about a 25% down-payment is true, then a 30-year mortage would be $150+ cheaper (very rough #, based on unofficial APR's and assuming the same taxes.) Why do you recommend a 10-year mortgage, btw? I know the market is pretty unstable still, but I'd hope to get more than 4% ROI from my investments (4% that is tax-deductable, right?)

That means ~ $650/month.

My wife found another place in the complex for rent, asking $975/month. Depending on the condition of the place, we'd hypothetically rent for close to what the others are asking. Since we just recently bought here, I wonder whether my bank would have an issue with opening a second mortgage.
 
That's 25% down on a 100k+ mortgage. Don't know what things are like when you're under that. Only reason for a 10 year loan is that if you have the cash flow, you will pay it off quicker. If you look at an amortization table, if you have a 30 year mortgage, after 10 years into it, you've still got a pretty balance left whereas after 10 years, it's just pure cash flow.

The bank doesn't care when you got a mortgage. All it cares about is the DTI ratio and your credit score. Assuming they're good for just 50k loans, they shouldn't have an issue. Also keep in mind that what people are asking and what they're getting can be two different things. Sometimes I test out the market by putting out a for rent sign in front of the house (which can be done with multifamilies, some condo associations don't allow it) and then when people call and ask how much the rent is, I tell them and if they balk, I ask them how much they want to pay and then if they're close, we negotiate the rent. I usually give myself a little room so that if the tenants sound like they'd be good, I'd drop the price a little bit on the spot just to lock them in.
 
Originally Posted By: Wolf359
That's 25% down on a 100k+ mortgage. Don't know what things are like when you're under that. Only reason for a 10 year loan is that if you have the cash flow, you will pay it off quicker. If you look at an amortization table, if you have a 30 year mortgage, after 10 years into it, you've still got a pretty balance left whereas after 10 years, it's just pure cash flow.

The bank doesn't care when you got a mortgage. All it cares about is the DTI ratio and your credit score. Assuming they're good for just 50k loans, they shouldn't have an issue. Also keep in mind that what people are asking and what they're getting can be two different things. Sometimes I test out the market by putting out a for rent sign in front of the house (which can be done with multifamilies, some condo associations don't allow it) and then when people call and ask how much the rent is, I tell them and if they balk, I ask them how much they want to pay and then if they're close, we negotiate the rent. I usually give myself a little room so that if the tenants sound like they'd be good, I'd drop the price a little bit on the spot just to lock them in.


I would pay a 10-year mortgage off faster, but the difference in interest rates between a 30-year and 10-year, including paying for the additional years, won't account for any stock gains over the same period for the capital difference, right?

I don't know what you mean by cash flow. With less money going toward paying for a 10-year mortgage, I'll have more cash flowing into my 401(k), Roth IRA, and mutual funds, right? I know these past two recovery years have been pretty good, but I saw 20%+ gains last year and 10%+ so far this year(though 2009-2011 were pretty [censored].) If I bought a place with a 10-year mortgage, I'd have less invest.

Good advice in the second paragraph, thank! I think, to get the place rented quickly we'd choose a price point lower than the other two, like $875.

Are mortgage decisions by banks based on the number of debts at all? I was originally approved for a much more expensive place when we weren't sure whether we wanted a "forever" home or a cheap starter home. I feel like we got really lucky finding the place we're currently in, since it's cheap in pretty much every regard and has everything we need, plus some. I still find myself envying those who have really nice houses, but not when I hear how much they're paying each month for them - some, up to 4X more, not including bills! I feel like we can have a couple of kids in this place before running out of space, and we can save money in the mean time.

That saved money, I'm wondering if it makes sense to invest in another, cheap condo. Thanks for the comments so far!
 
Did you check with the bank to see what their rates are and terms when the loan amount is this low? At 50k, with 25% down, that's just $37.5k. That will really answer you question with regards to putting the money in the stock market or just paying off the loan which is basically a fixed rate of return.

With regards to debts, the only real rule out there now is that it's hard to finance more than 4 properties. If you want to do more than 4, it's a lot harder and not as many banks do them and terms are tougher. DTI is basically your monthly debts as a percentage of income. They just use the minimum monthly payment when pulling your credit report.
 
Condos and townhouses are a pretty small part of the market. We owned a townhouse years ago and then left for single family and rented the townhouse-2 miles away. It worked ok, but not something we particularly cared to do long term. My mominlaw has been in a nice fireproof condo for 25 years and it's value is the same now as when she bought it=too many renters now and fewer owners. Taxes are low, but assocition costs are high. Good luck with your decision!
 
USAA had a minimum loan amount, which I inquired about before moving forward. They said that we'd work something out, but when the final mortgaged amount came out to well less than their minimum they balked and eventually said they could not provide us a loan. The USAA rep. I was working with was super nice, but I made sure to give him a piece of my mind adding MONTH onto our closing time.

NFCU was awesome and had no issues at all lending us money for a cheap place. I called a bunch of times just to make sure, but never had an issues. It was extremely easy! I guess it was so easy, that I figured it wouldn't hurt to inquire about a second condo, so when one became available for less than what we paid for ours (condition unknown as of now) I because curious.

Again, thanks for the advice. For those of you who are renting, please also add pros and cons, as you see them, for your situation. We all have different thresholds for pain, financial situations and geographic concerns, but I'd love to read anything you're willing to share!
 
What is / why do you have a burning desire to become a landlord ?????

Use that money to buy a house of your own and not deal with the stress.
 
Originally Posted By: LT4 Vette
What is / why do you have a burning desire to become a landlord ?????

Use that money to buy a house of your own and not deal with the stress.



It's called OPM or other people's money. Basically this a 4/1 leverage. In the stock market they only allow you a 50% margin. If the value of the property goes up 10%, because you only have 25% down, your ROI is 40%. At least that's the theory anyway, transaction costs lower the actual return. Just depends what you're willing to do to earn that return and how much risk you want to take, some people just don't have the stomach for it. The greater the risk, the greater the reward and similarly the potential for disaster.

I've been doing this for 10+ years and have 15 units. I don't really consider myself stressed out.
 
IMHO its still an OK deal, I don't like condo's unless you can buy enough units to control the association. To much can go wrong. Your only cash flow positive by $1,200 a year. A condo association fee increase, or one month vacancy and your negative.

Typically I like to see my costs at around 50%-60% of income, with equity from day one, in RE you make your money when you buy. Don't make the mistake of overpaying just to do a deal, you will regret it for a long time.

The loan term really doesn't matter, if you pay a 30 year off in 10 your going to save on interest so whatever really. Its a poor investment if it can't pay for itself in 10 years anyway.

If the FMV of the condo is $90k-$100k, you need to buy it around $50k-$60k, to make money on this one. It would be a great place to park a little cash for a nice return.
 
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As I've stated previously, this thread is hypothetical in nature. I have no burning desire to buy the condo next-door, but I would like to see if it even makes sense. Not only that, but the information helpful posters are adding will help me formulate options to give me a path forward for researching and trying to figure out my RE options, and whether I even want to choose that over putting my money elsewhere.

Originally Posted By: hattaresguy
IMHO its still an OK deal, I don't like condo's unless you can buy enough units to control the association. To much can go wrong. Your only cash flow positive by $1,200 a year. A condo association fee increase, or one month vacancy and your negative.

Typically I like to see my costs at around 50%-60% of income, with equity from day one, in RE you make your money when you buy. Don't make the mistake of overpaying just to do a deal, you will regret it for a long time.

The loan term really doesn't matter, if you pay a 30 year off in 10 your going to save on interest so whatever really. Its a poor investment if it can't pay for itself in 10 years anyway.

If the FMV of the condo is $90k-$100k, you need to buy it around $50k-$60k, to make money on this one. It would be a great place to park a little cash for a nice return.


Doesn't the loan term matter? The interest is tax-deductible, right? If the market does better than the effective interest rate over the period of the mortgage, doesn't it make sense to have a lower mortgage payment and put different into other kinds of investments, or even other RE options, such as another rental property?

I know I won't be very positive in my buy-the-condo-next-door scenario, especially if I take into account a conservative level of maintenance that may need to be done. From what you and others are saying, it does not make sense to go into a property unless you'll be comfortably profitable, right? How is this done? I mean, if I was to buy a more expensive single-family home I'd be able to rent it out for more, but all of my costs would also rise: the mortgage, taxes, etc. would all rise. It seems that, unless I was to put a massive amount down, I'd always be very close to unprofitable.

However, the simple fact that I own land and the edifice on that land while some one else essentially pays for its cost seems like the whole point in investing in RE, with the exception of those who flip houses.

Thanks again for the thoughts. Please keep them coming.
 
You need to pound the ground and look for deals, that's how you get the best ones.

If your not making money your just moving money around, and in RE you can move a lot of money and not make a thing. The number one mistake people make in RE is they overpay, and its almost impossible to recover from this.

With rentals you can depreciate them, and deduct all sorts of expenses as well as interest. But that's like spending a dollar to save 60 cents. What your looking for is cash flow and to actually make money.
 
Well, what can you rent it for? Assume ten months of occupancy per year, not 12 for purposes of conservatism. What is your return assuming reasonable set aside for repairs and maintenance? I'm thinking if its 8% or so, go for it. So, assume 40K downpayment on 200K condo. I would want: Mortgage payment including tax and insurance, plus condo fees, plus maybe a reasonable set aside for repairs and maintenance, 150 bucks per month or so, minus depreciation (you get to take a little depreciation on a rental property) plus eight percent of your 40K nut, or 3200, or $320 per month on top of all those listed expenses around 1,000 per month or so.

Bear in mind that a mortgage on a rental is a different animal than a mortgage on a principal residence. In order to make it work, you might have to switch residences and make the next door condo your principal residence.

I figure its an advantage to live next door. If its a marginal deal, the next door angle would be enough to get me to jump.

I'd go ahead and finance long term. The name of the game is leverage. It makes it easier to rent the property for a lower price, it leaves you with a bigger cash cushion for emergencies. Rates are at historic lows. The plan is to sell in a few years when you buy your definitive house, right? So you want your 200K condo to appreciate to 250K, and your 40K nut to grow to 95K, well over 100 percent cash on cash return. Not a fortune, but it puts you in a considerably nicer house when the time comes.

Edit: A subtle advantage of switching condos would be that your present condo would presumably not need a lot of repairs for awhile. You can defer this and that on your own place in a way you can't as a landlord. So that would be helpful for the old cash flow for a few years.
 
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