Analyze my OC condo investment...

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usctrojanman29_IHB

usctrojanman29_IHB

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Ok, be honest and brutal if you have to be. I picked up a 3bed/2ba condo (1,120 SF) over in the South Coast Villas (Bristol/MacArthur by South Coast Plaza on the board of Santa Ana/Costa Mesa) for $215k and used a 90% 7-yr ARM I/O loan @ 5% on it back in March. At the peak the property was purchased for $400k in May 2006. I have it rented out for $1,650/month which results in a rental multiple of 130x. My hold period will be 7-10 years and hope to sell for $275k - $300k then. Here's how the numbers shake-out:



$1,650 rent

$275 HOA

$1,110 (Interest, Prop Tax escrow, PMI)

= + $265 cash flow (does not include the tax advantage from the active real estate tax loss)



What do you guys think???
 
It's fee simple. The one downside is that the units don't have a washer/dryer hook-up (there's a community laundry area) and it's got one carport but at least it's gated and very close to South Coast Plaza (I like how it's centrally located).
 
There are other REO properties in the complex like my unit that range in sale prices of $200k to $220k and I'm seriously considering picking another one up with a partner. After my closing, there was a sale that closed for $240k in late April. I'm hoping the prices won't go much below the $200k range which will be a 50% decline from the peak.
 
As long as rental demand holds up prices should stay firm at least. You haven't priced in any contingencies. Vacancies might be the biggest risk, or bad tenants. I know 3 people quite well who have or do own rentals, and all 3 have horror stories. 2 of them have no interest in being landlords anymore, and the 3rd is still involved in a tenant-related lawsuit, after which he may lose the property, voluntarily or otherwise. Do what you can to retain good tenants, because they're more profitable in the long run, and get enough insurance. What are the loan terms after 7 years? Do you then have a 23-year P+I schedule?
 
[quote author="Daedalus" date=1212583755]As long as rental demand holds up prices should stay firm at least. You haven't priced in any contingencies. Vacancies might be the biggest risk, or bad tenants. I know 3 people quite well who have or do own rentals, and all 3 have horror stories. 2 of them have no interest in being landlords anymore, and the 3rd is still involved in a tenant-related lawsuit, after which he may lose the property, voluntarily or otherwise. Do what you can to retain good tenants, because they're more profitable in the long run, and get enough insurance. What are the loan terms after 7 years? Do you then have a 23-year P+I schedule?</blockquote>
I showed the property via craigslist for a few weeks and did a thorough reference, credit, and employment check on all the potential renters including the current renters who are a nice hispanic family with 2 kids so I'm hoping that'll be there for 2+ years. After the ARM I/O period ends in 7 years, the loan adjusts to 1-year LIBOR + 2.25% annually and remains I/O through year 10 and then it amortizes over the final 20 years.
 
I've been looking at those units too. As another said, can't argue with cash flow. A little more for contingencies and vacancy would be good and max up your insurance.



The family you rented to is the target demographic for the area which is good. Can I ask of the prospective tenents that contacted you how was the English/Spanish mix for conversation? The thing that has held me back from that area is my lack of fluent spanish which I don't know if I need or not. Casual tours through open houses and the local area, seems to indicate Spanish is dominant and English is less viable. If needed, I'd be forced towards a PM firm which will quickly eat through the $250/month cash flow. Landlording is tough enuff without the tenant trying broken English and my trying mangled Spanish.



Have you eyed the foreclosure, NOD and for sale situation since? If I recall correctly, there was a lot of backlogged inventory potentially coming as distressed sales. It may leave you in a year or so as the landlord in the high-cost position in the complex.



Good luck!
 
The only think I would worry about is the competition.



There are a whole lot of units around SouthCoast. I lived in one in the late 90s that sounds very similar. In the mid 90s, they were going for ~$125k. And right now, it looks as if there are a ton of upcoming REOs in the area. If they drop back down to the mid-high $100s, you could be competing with other landlords, who do to their lower cost basis could rent as low as $1200 or so in order to attract "good tenants".



Even when I lived there 8 years ago, landlords had a very hard time getting and keeping good tenants. My landlord said that she screened over 100 apps, ran credits on 10-15, and I was the only one that had decent credit. I saw other renters (the complex was maybe 50% renters), who really trashed the place.



So it is all going to depend on whether you can get and keep the good tenants, and how low you will have to lower your price to do so.
 
[quote author="No_Such_Reality" date=1212621600]I've been looking at those units too. As another said, can't argue with cash flow. A little more for contingencies and vacancy would be good and max up your insurance.



The family you rented to is the target demographic for the area which is good. Can I ask of the prospective tenents that contacted you how was the English/Spanish mix for conversation? The thing that has held me back from that area is my lack of fluent spanish which I don't know if I need or not. Casual tours through open houses and the local area, seems to indicate Spanish is dominant and English is less viable. If needed, I'd be forced towards a PM firm which will quickly eat through the $250/month cash flow. Landlording is tough enuff without the tenant trying broken English and my trying mangled Spanish.



Have you eyed the foreclosure, NOD and for sale situation since? If I recall correctly, there was a lot of backlogged inventory potentially coming as distressed sales. It may leave you in a year or so as the landlord in the high-cost position in the complex.



Good luck!</blockquote>
Actually probably about 90% of the prospective tenants spoken fluent English, only a few could not speak English. Probably about half of them were hispanic families, a few asian families, a couple of white families, and then college kids. I actually got A LOT of perspective tenants coming by to check out the place (like 25 in a week and a half) and I think that was due to my properly pricing out the rent (I used my MLS access and craigslist to get an idea of what rents were going for and priced my unit in the middle). Sure I might have squeezed out an extra $50/month in rent, but I wanted to rent the sucker out quick. The thing that helped with my unit (what I heard from several of the people) is that was in really good shape because my dad and I touched it up a bit and that it was 3 bedrooms (I guess there weren't many nice 3 bedroom rentals in the area) plus the rental market seems to be strong in the area.



Some of that NOD/REO activity has began to roll through as there are 3-4 units in the $200k to $220k range on MLS. When I went into contract on my place in Feb, the lowest for sale 3-bedroom unit was $239k so prices have fallen about 15%+ since then. Later on this year or next year, I may be looking to pick up another unit up around $200k or less.
 
[quote author="freedomCM" date=1212626838]The only think I would worry about is the competition.



There are a whole lot of units around SouthCoast. I lived in one in the late 90s that sounds very similar. In the mid 90s, they were going for ~$125k. And right now, it looks as if there are a ton of upcoming REOs in the area. If they drop back down to the mid-high $100s, you could be competing with other landlords, who do to their lower cost basis could rent as low as $1200 or so in order to attract "good tenants".



Even when I lived there 8 years ago, landlords had a very hard time getting and keeping good tenants. My landlord said that she screened over 100 apps, ran credits on 10-15, and I was the only one that had decent credit. I saw other renters (the complex was maybe 50% renters), who really trashed the place.



So it is all going to depend on whether you can get and keep the good tenants, and how low you will have to lower your price to do so.</blockquote>
It's true that I may have bought a little too early and paid a little too much, but I really doubt that landlords will "give" their 3bed units away for $1,200 per month. No one will give away that much potential profit just to get a good renter in their unit. The rental market is strong in most parts of OC and 2bed units in the area have rented for $1,400 to $1,500 per month. With inflation increasing and being in a heavily in-fill location, rents only have one place to go and that is UP. It'd be a whole other story if this thing was out in BFE Inland Empire.
 
Is the $265 number net per month?

Cash on cash seems a bit low, but it sounds like your focus is on appreciation over the short-term.

At least you?re positive, it pencils which is extremely rare in this market.

Although, to be fair I don?t follow or know much about the condo or multi-family market.



Did you take Principles at SC?

Prof. Tarentello would approve.
 
[quote author="tenmagnet" date=1212633536]Is the $265 number net per month?

Cash on cash seems a bit low, but it sounds like your focus is on appreciation over the short-term.

At least you?re positive, it pencils which is extremely rare in this market.

Although, to be fair I don?t follow or know much about the condo or multi-family market.



Did you take Principles at SC?

Prof. Tarentello would approve.</blockquote>
Yeah, the $265 per month is net of the mortgage, prop taxes, and HOA costs. The insurance is included in the HOA and it does include any vacancy rate or maintenance costs. Total invested capital is approx. $25k so at $265 per month my annual return on invested cash is approx. 12.7% ($3,180/$25,000) which DOES NOT INCLUDE the tax benefit of the active real estate tax loss from the depreciation expense. I actually picked up an MBA from USC with a real estate concentration in 2005, but never took professor Tarentello
 
very, very good. But Not quite good enough. You need to also add in a few dollars up front so that in case anybody completely destroys something you'll have some money saved up. Usually I add something like 5-10k just in case. You also need to add renter's insurance and a libality insurance.... I can see 100$ a month as being reasonable. Which would give you a cap rate of around 6%... WAY better than alot of things. Plus once you start depreciating the rental you'll at least get some money IF heavy depreciation occours. good luc



-bix
 
[quote author="usctrojanman29" date=1212641066][quote author="tenmagnet" date=1212633536]Is the $265 number net per month?

Cash on cash seems a bit low, but it sounds like your focus is on appreciation over the short-term.

At least you?re positive, it pencils which is extremely rare in this market.

Although, to be fair I don?t follow or know much about the condo or multi-family market.



Did you take Principles at SC?

Prof. Tarentello would approve.</blockquote>
Yeah, the $265 per month is net of the mortgage, prop taxes, and HOA costs. The insurance is included in the HOA and it does include any vacancy rate or maintenance costs. Total invested capital is approx. $25k so at $265 per month my annual return on invested cash is approx. 12.7% ($3,180/$25,000) which DOES NOT INCLUDE the tax benefit of the active real estate tax loss from the depreciation expense. I actually picked up an MBA from USC with a real estate concentration in 2005, but never took professor Tarentello</blockquote>


Those numbers look very good.

Confused your dp and loan amount numbers initially.

Went back and came up with same #s you did.

Anything above a 7 or 8 CoC is very solid and extremely difficult to find in this market, imo.

Most of the stuff I see is proforma with those kind of numbers and I?m sure you know what that means?DOG!

Congratulations, very nice buy!

Tarentello was one of my favorite professors, took his principles class as an undergrad.
 
[quote author="usctrojanman29" date=1212580615]Ok, be honest and brutal if you have to be. I picked up a 3bed/2ba condo (1,120 SF) over in the South Coast Villas (Bristol/MacArthur by South Coast Plaza on the board of Santa Ana/Costa Mesa) for $215k and used a 90% 7-yr ARM I/O loan @ 5% on it back in March. At the peak the property was purchased for $400k in May 2006. I have it rented out for $1,650/month which results in a rental multiple of 130x. My hold period will be 7-10 years and hope to sell for $275k - $300k then. Here's how the numbers shake-out:



$1,650 rent

$275 HOA

$1,110 (Interest, Prop Tax escrow, PMI)

= + $265 cash flow (does not include the tax advantage from the active real estate tax loss)



What do you guys think???</blockquote>


I think your 911 turbo rocks.
 
[quote author="25w100k+" date=1212647287][quote author="usctrojanman29" date=1212580615]Ok, be honest and brutal if you have to be. I picked up a 3bed/2ba condo (1,120 SF) over in the South Coast Villas (Bristol/MacArthur by South Coast Plaza on the board of Santa Ana/Costa Mesa) for $215k and used a 90% 7-yr ARM I/O loan @ 5% on it back in March. At the peak the property was purchased for $400k in May 2006. I have it rented out for $1,650/month which results in a rental multiple of 130x. My hold period will be 7-10 years and hope to sell for $275k - $300k then. Here's how the numbers shake-out:



$1,650 rent

$275 HOA

$1,110 (Interest, Prop Tax escrow, PMI)

= + $265 cash flow (does not include the tax advantage from the active real estate tax loss)



What do you guys think???</blockquote>


I think your 911 turbo rocks.</blockquote>
hahaha Thanks...which car forum/s are you on?
 
[quote author="usctrojanman29" date=1212641066][quote author="tenmagnet" date=1212633536]Is the $265 number net per month?

Cash on cash seems a bit low, but it sounds like your focus is on appreciation over the short-term.

At least you?re positive, it pencils which is extremely rare in this market.

Although, to be fair I don?t follow or know much about the condo or multi-family market.



Did you take Principles at SC?

Prof. Tarentello would approve.</blockquote>
Yeah, the $265 per month is net of the mortgage, prop taxes, and HOA costs. The insurance is included in the HOA and it does include any vacancy rate or maintenance costs. Total invested capital is approx. $25k so at $265 per month my annual return on invested cash is approx. 12.7% ($3,180/$25,000) which DOES NOT INCLUDE the tax benefit of the active real estate tax loss from the depreciation expense. I actually picked up an MBA from USC with a real estate concentration in 2005, but never took professor Tarentello</blockquote>


Did you also consider the $50 per month or so of foregone interest on the invested capital? I think it was a bit early/bit too high of a price. If you bought it all cash, your ROI would probably be around 5% after property tax, HOA, maintenance, vacancy costs, etc. That kind of return wouldn't justify the capital risk for a cash investor. It does suggest that those units are very close to the bottom though as it almost pencils out... All-in-all, not a bad deal but a better one will likely be seem in fairly short order as REOs push the market down.
 
[quote author="ipoplaya" date=1212651551][quote author="usctrojanman29" date=1212641066][quote author="tenmagnet" date=1212633536]Is the $265 number net per month?

Cash on cash seems a bit low, but it sounds like your focus is on appreciation over the short-term.

At least you?re positive, it pencils which is extremely rare in this market.

Although, to be fair I don?t follow or know much about the condo or multi-family market.



Did you take Principles at SC?

Prof. Tarentello would approve.</blockquote>
Yeah, the $265 per month is net of the mortgage, prop taxes, and HOA costs. The insurance is included in the HOA and it does include any vacancy rate or maintenance costs. Total invested capital is approx. $25k so at $265 per month my annual return on invested cash is approx. 12.7% ($3,180/$25,000) which DOES NOT INCLUDE the tax benefit of the active real estate tax loss from the depreciation expense. I actually picked up an MBA from USC with a real estate concentration in 2005, but never took professor Tarentello</blockquote>


Did you also consider the $50 per month or so of foregone interest on the invested capital? I think it was a bit early/bit too high of a price. If you bought it all cash, your ROI would probably be around 5% after property tax, HOA, maintenance, vacancy costs, etc. That kind of return wouldn't justify the capital risk for a cash investor. It does suggest that those units are very close to the bottom though as it almost pencils out... All-in-all, not a bad deal but a better one will likely be seem in fairly short order as REOs push the market down.</blockquote>


Ipop brings up a very good point to which I agree.

All Cash, those numbers aren?t that impressive.

The use of an I/O loan with 10% down helps boost the CoC number but essentially the property isn?t paying itself off (at least the principal portion).

Recently, 24 units in Buena Park went for a 4.7 cap.

PP was $4M.

No way that would pencil for most of us, the buyer 1031 and stepped in with heavy $$$ down just to achieve B/E.
 
[quote author="tenmagnet" date=1212706474]Recently, 24 units in Buena Park went for a 4.7 cap.

PP was $4M.

No way that would pencil for most of us, the buyer 1031 and stepped in with heavy $$$ down just to achieve B/E.</blockquote>


There are plenty of triple net commercial properties available at a COC of 7-8%. Major brands like CVS, Office Depot, Staples, Bestbuy.



Heck, go on and finance a Walmart location for triple-N 6.5%.



All you have to do is cash the check.
 
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