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I’ve got the opportunity to purchase a newly renovated 3 bedroom, 3 bath townhouse in a great area with great schools. Purchase price is $95,000, slightly above market price, but zero down and zero interest. Payments would be $365, which after all expenses gives me a $125/mo profit.
If this was a single family house I’d be closing on this in a heartbeat. However, this is a townhouse. I’ve always stayed away from townhouses and condos since I’ve heard from more experienced investors that they try to stay away from them. I’m wondering…why? Under these kinds of purchase terms, is this still one to pass on?
Chris
Great terms but that cash flow is super skinny. If you had to replace a water heater, or HVAC system, your “profit” would be totally wiped out for a year or two.
The reason most people stay away from townhouses are:
(1) the HOA fee – it can jump up a lot in 1 year and kill your cash flow. I have 5 properties with an HOA fee. three go up 10% a year, ever year. At that rate – like inflation – it sill make the property very UNprofitable. the other two just jumped from $140 a year to $265 a year PLUS code enforcement went from $55 a year to register rentals to $75 a year to register rentals.
Avoid properties that have FEES which you have no control over.
(2) it’s harder to get insurance for a townhouse
(3) it’s harder to sell a town house – very hard for a buyer to get financing for a townhouse so you would need to plan to keep it forever
(4) the neighbors are tooo close. Get a bad neighbor and it can ruin the whole deal – regardless of the terms.
What you might do is get an option on the deal with those terms, then advertise it for sale with seller financing at 7-8% financing. Sell it with a wrap so the buyer has to pay the HOA fee. With seller financing, your cash flow may be better.
Or just master lease it with an option. Set it up so your payment is applied towards the purchase price. Less risk for you but the same benefits.
Let us know what happens
Jackie
Jackie,
I might be calculating profit slightly differently than you, let me know if you would still consider this skinny…
$850 market rent
-$125 taxes
-$40 insurance
-$25 HOA fee (TOTALLY guessing on this number, I’m unfamiliar with townhouse fees. If this number changes, so would my offer on monthly payments)
-$85 (10% budgeted for vacancy)
-$85 (10% budgeted for repairs)
-$85 (management fee — I’m the manager, but I build this in for my time)
-$40 (profit. When I pitch this to sellers, I tell them “If I’m going to pay the taxes, and the insurance, and maintain the property, and guarantee the payments, don’t I deserve something for my efforts?”)
= $365 left in the deal to make payments to the seller.So my $125 profit that I’m calculating from above is from the management plus profit.
In reading your reply, I’m definitely starting to see why many folks don’t like townhomes. I do like your idea of tying up the property with an option and offering it with seller financing, though – I will probably go this route instead. This way, if I can’t find a buyer, I’m not on the hook. Thanks for the insight!
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