How to Evaluate Condos for Investment
Eastside Condo Tour
We recently previewed a group of Eastside condos for an investor interested in holding a condo long term as a rental property. We started with this search:
Eastside Condos, < $500/SF, < $600K, vacant, 30+ days on market
Use of the price per square foot criterion helped us focus on the properties that were already priced reasonably. Sellers of condos that are vacant and sitting on the market over 30 days are going to be motivated and probably open to a price cut.
There are all kinds of surprises waiting for you when touring properties in person that you couldn’t guess from the online listings. One of these condos was highly undesirable with a dark, dank below ground level entry and uneven floors in the bedrooms that made us dizzy to walk through. On the other hand, one of these condos stood out as a gem: nice floor plan, great condition, remodeled kitchen, and the condo association had made numerous upgrades to the property: new roofs, vinyl siding, solid balconies, and the outdoor pool replaced with an attractive picnic area. This community should not surprise a buyer with an expensive special assessment.
When you buy a condo, the association provides a reseller certificate and a set of documents from which you can assess the health of the association: financial statements, board minutes, and a reserve study, if available. You want to look for red flags such as looming major repairs, lawsuits, too many units foreclosed on and owned by the association, or inadequate reserves.
Once you identify some properties you like, it is time to crunch the numbers. We like this tool from Calulator.net:
A few things to consider when doing this analysis:
What is your goal? Is it a long term or indefinite hold for the greatest price appreciation? Is it the best positive cash flow for immediate income?
Assuming you are getting a fixed rate loan, realize that your greatest cost – mortgage interest and principal – will be fixed, while your rental income grows over time. You might find it acceptable to take on negative cash flow in the early years, while the tenants pay off your mortgage.
A great way to make savings while you have a mortgage in place is to make extra payments toward the mortgage. Small, regular monthly payments have a big impact on moving the mortgage payoff date forward.
Will you self-manage the property? That can save you 10% of the rental income. It’s not very hard and property managers are not necessarily very good.
We’d be happy to walk through this calculator with you on a specific property and scenario.
Eastside condos – at least at this time of writing (April 2023) – are not going to get you immediate positive cash flow. They are a play on future price appreciation and/or protection against loss, if we have a recession coming up. Consider that wherever your money is – even in cash in the US dollar – it is sitting in an asset class that is rising or falling against every other asset class. Would an Eastside condo be a safe haven to park investment funds? Let’s talk it over.