A Strategy for Rental Condos


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.

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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.


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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