Buying investment property

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    Jul 04, 2012 7:41 PM GMT
    A couple of days ago I became aware of a small condominium unit not far from my house that is on the market. It is in the same development where my partner recently purchased a unit to rent out. The unit is listed at about 1/3 of the price units in the development were selling for back in the high of around 2005/2006. It is in a highly desirable area that near downtown Tampa that I think would be appealing to a student attending the University of Tampa which is less than two miles away or a single adult working downtown - about two miles away. I have access to funds I could use for a down payment and to give the place a cosmetic update. Best case scenario, I figure I could have positive cash flow of around two hundred dollars a month while building equity in the unit. But then there is the possibility of special assessments, unforeseen repairs, tenants that don't pay and having to go through a drawn out eviction process, or having a unit that stays unrented while I'll continue to have to pay the mortgage, association fees, and taxes.

    What I'm looking for from any of y'all that have had a rental property is the worst situation you were faced with so if I do decide to make an offer, I can do so knowing I have thought through most of, if not, all of the negatives that could occur.

    Thanks for helping a fellow RJ guy out with this!
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    Jul 04, 2012 8:54 PM GMT
    sashaman saidBut then there is the possibility of special assessments, unforeseen repairs, tenants that don't pay and having to go through a drawn out eviction process, or having a unit that stays unrented while I'll continue to have to pay the mortgage, association fees, and taxes.


    That's basically what it is to own property and rent it. Non-paying tenants and eviction really aren't that bad, especially in the US where you have effective legal recourse for that (dealing with it in Mexico is a whole different potato let me tell you). Your unit not renting for months and months is basically the worst plausible scenario that can happen, and that just comes with the investment risk.
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    Jul 04, 2012 9:00 PM GMT
    Make sure you can handle the payments and upkeep out of your pocket, because students are notorious for not paying and/or leaving the place trashed.
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    Jul 04, 2012 9:02 PM GMT
    My only reluctance to purchase a condo as a rental property is the HOA. The article below is probably a rare/extreme situation. But the fact is, condo owners are always at the mercy of the HOA.

    http://www.businessinsider.com/these-condo-owners-had-their-properties-stolen-by-local-developers-2012-6

    Personally, I'm going to save a little more money and get a du/tri/four-plex.
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    Jul 04, 2012 11:05 PM GMT
    I own both vacation and long-term property. My experience with the long-term properties has been excellent with tenants staying in the properties for several years (the longest is an elderly couple that has been renting for 12 years). I have only had to do basic maintenance and upkeep on those.

    The vacation properties are awful. Condos that rent by the week, and they get trashed pretty regularly. I put more into repairs on those than I make from them, and they have just become a write off at tax time. I would sell them, but their value dropped more than 50% after I bought them. So, I need to hold them.

    While I haven't tried student rentals, I imagine that the worst scenario could be similar to the hard use I see in my vacation properties. The tenant isn't concerned about living in a nice place as much a having a roof, and in many cases with students, they aren't paying the bills. So, there is no connection between damage and who pays for it.
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    Jul 04, 2012 11:10 PM GMT
    While I think investment property is awesome - putting yourself through a high amount of risk for only 2 hundred incremental dollars a month is not enough. That will barely cover the annual repairs on the place, or the property taxes. I would wait for a better investment with more cash per month.
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    Jul 04, 2012 11:14 PM GMT
    If you are referring to N Hyde Pk area, then this

    North Hyde Park Zillow Home Value Index
    app?service=chart&chartType=geo&mt=34&dt


    ...shows prices down about 60% from peak, typical for metro Tampa Bay which seems to run anywhere from 50-70% down.

    If you are talking somewhere in the various Heights sections, you should be shopping something 60-70plus% down generally.

    Any of the Davis Island stuff looks still way overpriced to me. Same with Bayshore. I wouldn't touch anything there just 30% down. Buyers might not lose too much if they hold long enough (10-20 years) but I think more likely they are kidding themselves, particularly if we crash some more. Even if we don't crash more, and I think most of Tampa has bottomed, those higher priced areas look to me like that could further correct. I think they just held out longer because there was more money to begin with but I would not be surprised to see foreclosures kick in some more.

    Just checked realtytrac. In the 33606 area (am I close?) you've currently got 753 lis pendens, 109 on the auction block and 346 bank owned properties or about 1208 financially distressed units out of about 6560 total owner occupied and rental units. So about 18% of the units are or could be in trouble.

    Where I bought two houses in the Bay area I got for about 60-70% down, conservatively, and with about 4% distressed at the time, we are at about 8% now (zip code wise, though my immediate area is very solid) but prices seem to be finally leveling or slightly climbing nontheless so i suppose anything is possible.
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    Jul 04, 2012 11:18 PM GMT
    What is your projected cash on cash return? If you don't know how to calculate that I would do it before you buy. Take the rent you expect to make on an annual basis, subtract taxes, insurance, hoa fees and any other fee you can think of EXCEPT the mortgage. If this rate is above 6% or so then you may have a decent property. If it is 3 to 4% it is not a good investment. A high cash on cash return will allow you to set aside money for repairs and special assessments. You need about one or two grand a year after paying all your expenses.

    Here's another calculation. Take your down payment and imagine you bought a stock with it instead. If your rent can cover all the above expenses plus the mortgage than what is left can be viewed as a dividend. What percent is that dividend of the original down payment. This will be your levered return or your yield after financing. If you have a negative carry than its not a very good deal. You can't count on real estate appreciating these days. Real estate only appreciates when the land appreciates. The building is in fact depreciating which is why you have to count on repairs. With condos you are sharing a small amount of land among a lot of people. Keep that in mind as well.
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    Jul 04, 2012 11:22 PM GMT
    Comrade_Cranky saidYou do not want to rent to students. They will destroy the place.


    This is kind of an unfair generalization. Maybe I just hung out with the responsible crowd in college who were excellent tenants in their rented places.
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    Jul 04, 2012 11:32 PM GMT
    Comrade_Cranky said
    Ariodante said
    Comrade_Cranky saidYou do not want to rent to students. They will destroy the place.


    This is kind of an unfair generalization. Maybe I just hung out with the responsible crowd in college who were excellent tenants in their rented places.

    Maybe I should have said "Do not rent to heterosexual students."


    Again, my friends weren't gay =p Well one was, he lived in a house with 2 other girls and another guy...Or 3 other girls and 2 guys..I forget...anyway their place was always immaculate. They meticulously tended the grounds, too.
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    Jul 04, 2012 11:33 PM GMT
    Basically what others have said.. purchase it only if you're able to sustain the cost of the property (mortgage, insurance, utilities, etc.) as if you weren't even renting it out. As for worrying about people not paying or causing damage.. well that's what the "security deposit" is for that your tenants would pay - just be sure to leave that deposit aside in a separate account for when you need to refund it/use it for damages. Good luck!
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    Jul 04, 2012 11:40 PM GMT
    Comrade_Cranky said
    I surrrender.


    that's no fun >=o I'm sure there are a whole bunch of irresponsible college kids trashing places everywhere. I probably didn't have the most average college experience. My small private liberal arts University was exorbitantly expensive, so if you were a student there either your parents were loaded or you were loaded up on student loans. San Diego is hellishly expensive as well, so those kids were paying a mighty hefty price to rent that house and probably took extra care to make sure they got their deposit back at the end considering the various financial burdens on them.
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    Jul 04, 2012 11:59 PM GMT
    Unfortunately, there's always going to be risk in this type of investment. You could have horrible tenants, students or not. Or you could have the most wonderful tenants. Your approval process and the scrutiny of your screening is what's going to be critical, in addition to the required deposits.

    You also mentioned building equity. Equity does not build in today's properties at the same right as in the past, so calibrate your expectations accordingly.

    Lastly, make sure to fully read and understand the condo's CC&Rs. And, of course the reserves/special assessment situation.
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    Jul 05, 2012 12:00 AM GMT
    Ariodante said
    sashaman saidBut then there is the possibility of special assessments, unforeseen repairs, tenants that don't pay and having to go through a drawn out eviction process, or having a unit that stays unrented while I'll continue to have to pay the mortgage, association fees, and taxes.


    That's basically what it is to own property and rent it. Non-paying tenants and eviction really aren't that bad, especially in the US where you have effective legal recourse for that (dealing with it in Mexico is a whole different potato let me tell you). Your unit not renting for months and months is basically the worst plausible scenario that can happen, and that just comes with the investment risk.


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  • turtleneckjoc...

    Posts: 4685

    Jul 05, 2012 12:17 AM GMT
    These days with the number of foreclosures out there, the renal market should be very strong. Therefore, I don't think you'll have a problem renting out the condo at all.

    I'm sure you have thought of these items, but this is what came to my mind:

    1. Any special assessments would go through the HOA more than likely (renovations, etc) and each unit would be assessed a certain amount. That can be incorporated into the rent (raising it) if such a decision from the HOA were to occur.

    2. You mentioned property taxes, and you might be able to get an idea of that amount through the Hillsborough County Property Appraisers Office. A history of assessments would be helpful as well. Just incorporate the taxes and the homeowner's insurance into the rent too. If you are seeking financing for the unit, have them escrowed.

    3. Do ask if the complex (if it is in one) will permit rentals of the units. Some may not as they feel it lowers resale value. Might be good to find out if it's a bank-owned (called REO for "real estate owned") property. If it's a "short sale," look for months to pass before getting an approval. Is the unit occupied now?

    I am sure you have thought of all of these, but like I said, this is what came to my mind.
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    Jul 05, 2012 12:18 AM GMT
    Ariodante said
    Comrade_Cranky saidYou do not want to rent to students. They will destroy the place.


    This is kind of an unfair generalization. Maybe I just hung out with the responsible crowd in college who were excellent tenants in their rented places.


    I agree. I'm a great tenant.
  • rjva99

    Posts: 5

    Jul 05, 2012 12:40 AM GMT
    1. Make sure there is a real pool of renters looking for your type of property
    2. Make sure you can charge competetive rent and still pay all your expenses.
    3. Put away 5% of rent per month for vacancy, 5% for maintenance
    4. Pressure test your cashflow at higher interest rates - I don't know what you're paying for interest in the USA but if it goes up by half a percent are you going to be in trouble?
    5. Screen your tenants like hella strictly. If you get bad vibes at all, don't rent to them. Do a credit check. Get a reference from previous landlord. Confirm their employment by seeing a paystub and calling their work.
    6. Make sure your rental agreement is tight as a virgin boys bottom. Don't leave anything up to assumptions. Even things like how often they need to clean and if they are allowed to leave windows open and if they can have friends over, or boyfriends/girlfriends sleep over for a month at a time and not pay rent...etc.
    7. If they don't pay rent, begin the eviction process the very next day. Tell them it's a formality and you will stop the process as soon as they pay. Don't be a pushover and wait, because then you will have a non-paying tenant for that much longer.
    8. If you have a good tenant, treat them like gold, buy them gift baskets, send birthday cards.
    9. Don't be afraid to raise the rent once a year or whenever is allowed.

    I forgot to say, before you buy it do your due diligence: get an inspection, read the condo board documents, check the reserve fund...etc

    Also, be wary of professional property managers unless they have good reliable references. I've heard horror stories.

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  • studflyboy87

    Posts: 194

    Jul 05, 2012 12:42 AM GMT
    I own some rental property and I believe they are some of the best investments out there right now. Here are the reasons I think you should buy:

    1. Interest rates will never be this low. You can get a 30 year loan for 3.75% today. Over the life of the loan, you typically pay more in interest than you do in principle, so having a significantly low interest rate saves vast amounts of money. It will also put you at a huge competitive advantage in the future when other investors looking to buy rental properties are paying much higher interest rates to buy the same condo.

    2. Housing prices may never be this low again. If any of my houses were to burn to the ground, it would cost more money to rebuild them than I paid for them. When this is the case, building of new houses slows or stops until that trend is reversed. The market can't really go much lower, and has already started to turn around.

    3. Tax benefits. I'm not sure how you calculated your +$200 a month cash flow, but often times the biggest money maker is the tax savings at the end of the year. Tax laws are written in favor of renting a house. For a house, you can depreciate it over 27 years, which means even if you make a decent amount of profit on it every year from your house, you will most likely show a loss and therefore have a tax writeoff. Anything you buy for the house is a tax writeoff. Any time you travel to your house to conduct business, you can writeoff the mileage. etc, etc, etc... Add tax savings to the "total value" of your investment.

    4. You are building equity. Every month you gain hundreds of dollars just by your tenants paying their rent. Add this to the total value of your investment.

    5. Your asset will more than likely go up in value over the term you own it. Remember that over the course of history, housing prices have almost exclusively gone up. Yes there are corrections like in any market, but you are likely to make money if you keep it long term. Make an estimate at what you think it may be worth in 10 years and add this to the total value of your investment.

    If you are scared of the hassle of dealing with tenants, get a property management company. I pay a property management company $50/month plus $300 anytime they sign a 1+ year lease with a tenant (Works out to ~$75 a month). They collect and deposit the rent. They handle minor repairs. They have contractors with discount rates (do the volume) that can do repairs for cheaper than normal. If someone isn't paying rent or needs to be evicted, I still get paid (the company pays me) while they go after the tenant for the money owed. Worst case scenario is I could loose out on $500-$700 for an eviction, but it is somewhat rare. Also they collect a 1 month of rent security deposit if

    If you want to hedge your bets against major repairs, buy a home warranty. For a large house, they are $300-$400 a year and cover most any repair. If something breaks, you pay a $50-60 call out fee, and any repairs, parts, and labor are covered. Honestly I think you will save money if you don't have a home warranty, but it is like an insurance policy, so it will prevent you from having a large unexpected bill.

    Add up your monthly cash flow, plus monthly tax savings, plus monthly equity gain, plus monthly projected value increase, and you will come up with way more than $200/month. It is probably 3-5x that amount in just a few years.
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    Jul 05, 2012 1:49 AM GMT
    xrichx saidMy only reluctance to purchase a condo as a rental property is the HOA. The article below is probably a rare/extreme situation. But the fact is, condo owners are always at the mercy of the HOA.

    http://www.businessinsider.com/these-condo-owners-had-their-properties-stolen-by-local-developers-2012-6

    Personally, I'm going to save a little more money and get a du/tri/four-plex.


    Wow! Thanks. This is a possibility I had not thought of. I imagine it must not happen very often or I would have heard of a similar situation. I'm going to check what Florida's laws are with respect to this sort of situation. And I will definitely check on whether the development I am considering limits the number of units any single individual entity or person can own.
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    Jul 05, 2012 1:55 AM GMT
    theantijock saidIf you are referring to N Hyde Pk area, then this

    North Hyde Park Zillow Home Value Index
    app?service=chart&chartType=geo&mt=34&dt


    ...shows prices down about 60% from peak, typical for metro Tampa Bay which seems to run anywhere from 50-70% down.

    If you are talking somewhere in the various Heights sections, you should be shopping something 60-70plus% down generally.

    Any of the Davis Island stuff looks still way overpriced to me. Same with Bayshore. I wouldn't touch anything there just 30% down. Buyers might not lose too much if they hold long enough (10-20 years) but I think more likely they are kidding themselves, particularly if we crash some more. Even if we don't crash more, and I think most of Tampa has bottomed, those higher priced areas look to me like that could further correct. I think they just held out longer because there was more money to begin with but I would not be surprised to see foreclosures kick in some more.

    Just checked realtytrac. In the 33606 area (am I close?) you've currently got 753 lis pendens, 109 on the auction block and 346 bank owned properties or about 1208 financially distressed units out of about 6560 total owner occupied and rental units. So about 18% of the units are or could be in trouble.

    Where I bought two houses in the Bay area I got for about 60-70% down, conservatively, and with about 4% distressed at the time, we are at about 8% now (zip code wise, though my immediate area is very solid) but prices seem to be finally leveling or slightly climbing nontheless so i suppose anything is possible.


    Thank you for this info! The unit I'm thinking about is in the 33606 zip code. It's south of Azeele though and just a couple blocks north of Swann. Walking distance to Bayshore Blvd.

    The stats you provided make me less anxious about this particular property. I'm going to think long and hard about it. If it gets away, I'm sure there will be others to buy. But I personally have a feeling that values have reached there low point and are going to start creeping up again.
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    Jul 05, 2012 1:56 AM GMT
    friendormate saidWhat is your projected cash on cash return? If you don't know how to calculate that I would do it before you buy. Take the rent you expect to make on an annual basis, subtract taxes, insurance, hoa fees and any other fee you can think of EXCEPT the mortgage. If this rate is above 6% or so then you may have a decent property. If it is 3 to 4% it is not a good investment. A high cash on cash return will allow you to set aside money for repairs and special assessments. You need about one or two grand a year after paying all your expenses.

    Here's another calculation. Take your down payment and imagine you bought a stock with it instead. If your rent can cover all the above expenses plus the mortgage than what is left can be viewed as a dividend. What percent is that dividend of the original down payment. This will be your levered return or your yield after financing. If you have a negative carry than its not a very good deal. You can't count on real estate appreciating these days. Real estate only appreciates when the land appreciates. The building is in fact depreciating which is why you have to count on repairs. With condos you are sharing a small amount of land among a lot of people. Keep that in mind as well.
    .

    Thanks! I'm going to print out your formula and run the numbers using it.
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    Jul 05, 2012 1:59 AM GMT
    Thank you all for sharing your insights. There are at least a couple of points raised I had not thought of before. I'll take a look at the remaining posts later. Thanks again!
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    Jul 05, 2012 2:26 AM GMT
    Smart money has been dumping real estate like that
    for years now. So you have to ask yourself if you have better intel then they do.
  • Webster666

    Posts: 9217

    Jul 05, 2012 2:28 AM GMT
    Absolutely, snap up that piece of property.

    Hiring an agency that manages rental properties means no headaches for you, and you get a check from the agency, at the end of each month. The renters pay the rent to the agency.
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    Jul 05, 2012 2:57 AM GMT
    sashaman saidThank you for this info! The unit I'm thinking about is in the 33606 zip code. It's south of Azeele though and just a couple blocks north of Swann. Walking distance to Bayshore Blvd.

    The stats you provided make me less anxious about this particular property. I'm going to think long and hard about it. If it gets away, I'm sure there will be others to buy. But I personally have a feeling that values have reached there low point and are going to start creeping up again.


    You're welcome. It's a tough call. Rents might bubble so then any price might look good. But since we don't know where this is headed, it can be scary.

    For those who don't know, investors here are protected somewhat from prop tax hikes based on assessments by 10% per year (3%/year max for homesteaded properties). Mil rates can increase, however.

    That's a great neighborhood. I'd think it would rent more to someone working downtown rather than a student. Looking at realtor.com I see a 1/1 asking about 125/sq ft, down 56% from it's last bullshit sale. I'd have to study price to rent ratios typical for the area but it looks still a little high. A 2/3 asking 187/sq ft, what a fucking joke and i haven't even looked at the history yet. Oh yikes. Much scamming. I'll bet if I checked public records I'd find a crap load of ATMing going on there. Sold for $118.sq ft in 2000, probably about what its worth today. It got $176/sq ft in 2009, likely as a foreclosure but I suspect the owner got ripped off anyway, now just trying to unload it at cost. No thank you.

    Oh, and here's another 1/1 in the same complex as the one I just said looks a little high. only this one is asking 74/sq ft, about what I paid on two houses (though that needed a ton of work) Go for it. Jesus. zillow shows it got 270/sq ft on 05, no scam there, huh?

    Oh, and here's another one, what a fucking joke. Assholes are asking 238/sq ft for something they bought at foreclosure last month for 89/sq ft. I think I looked at a unit in that building a few years ago. The scamming continues.

    What a fucking mess this is.

    Anyway, didn't realize how close that area is to the expressway. it could be that once they open the I-4/Selmon exchange, that area's gonna get very noisy with a constant highway hum and there's gonna be lots of soot for everyone.

    It does look like there could be a few things there worth buying in there. Just be careful and good luck.