A Strategy for Rental Condos
By Steve Gillman
There was a time when rental condos, houses and more were
bought not just for income, but because they could be easily
sold for a profit within a few years. Now (late 2011), five years
into the real estate slump, it looks like prices might still
be falling in most of the country. But there is hope for smart
investors...
As I have been looking at properties for sale in select cities
around the country (in order to keep my real estate website updated),
I have started to see some really cheap condominiums that can
be rented out for a decent return. In fact, in some decent cities
there are condos going for under $20,000. That makes cash flow
virtually assured, and the bottom can't be far away either, so
selling for a profit in the coming years is realistic.
So here is the strategy that you might want to consider; buy
cheap, collect a decent return from your rental condos, and start
looking for the opportunity to sell in a couple years. This is
generally a plan for those who have cash to invest, although
if you work the numbers carefully you might be able to borrow
and still get cash flow in some areas. The cash flow is what
makes this a safe strategy, because even if prices fall for a
while before rising you are making money while you wait.
Add the HOA fee of $300 monthly (common in Florida, for example),
to other costs of $150 (taxes, insurance, minor maintenance),
and you have expenses of $450 monthly. If the rent coming in
is $750 and you bought the condo for $40,000 cash, you're making
a 9% cash-on-cash return. If you put $10,000 down, and get a
loan of $30,000 with payments of $180 per month, your cash flow
goes down to about $120 monthly, but this is an even better return.
That $1,440 per year on a $10,000 is a return of over 14%.
Keep in mind though, that some condos cannot be rented out
and others have rules about doing so. It is typical for the homeowners
association to have to approve renters, which is fine (you want
good tenants in there too). It is also common that you have to
own a condo for a year before renting it out. Because of those
HOA fees this is too long to wait and eats up too much capital,
so you'll probably avoid condos with this requirement.
How Much Can You Make?
There is no guarantee that you'll make anything as a profit
in the coming years, since it is possible prices will keep falling.
If you make great cash flow and can afford to hold the investments,
this is not actually a problem. On the other hand, I was just
looking at $18,000 condos in Reno, Nevada, and similarly-priced
ones in several cities in Florida, and I have to wonder if they
really can go much lower than that. It seems likely that these
areas where the drops have been extreme are likely to see price
gains within a few years.
Ways to Make More | Related Opportunities
| Tips
If you do not need your money back quickly, there is a technique
for selling condos (or other homes) at a profit. It is to offer
easy financing. For example, suppose you buy at the low end and
get a condo for $28,000. When there are few others on the market
in that price range, you could put it up for sale for $42,000,
offering to sell it for a down payment of $2,000 and payments
of $300 monthly, with 8% annual interest. The point is that the
buyer sees an opportunity to buy something for less than the
cost of rent. Make the balance due in five years (enough time
for the buyer to find bank financing) so your money isn't tied
up for too long. You'll book a decent profit and collect good
interest.
Qualifications / Requirements
Cash to invest and a willingness to do your research.
First Steps
Look at properties online.
Resources
Realtor.com
- You can enter whatever criteria you are looking for and look
at rental condos city-by-city here.
Craiglist
- This site is helpful for checking out rental rates in the areas
in which you are considering investing.
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