I got an email from a realtor who occasionally sends out these investment properties that she has. They are usually new construction or condo conversion negative cashflow properties. I felt that I should post this one because of two things. 1) the builder has guaranteed rents and HOA payments for 1 year, 2) the calculations show positive cashflow! This is a new condo complex in Austin, TX.
However if you examine their calcuations you realize that their numbers are totally unrealistic and designed to make the mathematically inclined to think they have a good deal.
If you look at their numbers you’ll see that they are using a 1-2% interest rate. We all know that this is a temporary interest rate for a few months and cannot be used in a long term calculation. They also list the HOA as $0, but elsewhere in the email the HOA for a 1 bedroom is listed at around $200/mo. Everyone knows that property taxes in Texas are expensive. They have used $361/mo in their calculations but at the bottom of the table it says “Taxes to increase to 2.96%” which comes out to $460/mo. Wow, $5,000/yr taxes on a $175k condo! The building also offers a property management service at $120/mo for a 1 bedroom.
Using a realistic interest rate of 6.5% IO payment which equals $750/mo, $200 HOA, $460 taxes and $120 PM fee and their guaranteed rent of $1,100/mo, I get a cashflow of -$430/mo.
Hmmm, doesn’t sound like a great deal anymore does it? As a final comment I also question whether these units could actually fetch $1,100/mo for rent. My experience is that these rents are usually inflated and that $900/mo is probably more inline with market. If that’s accurate, then you are looking at -$630/mo cashflow on a 1br condo!