It’s been a few years since I updated my assumptions of our three rental properties – all condos. I’ve been going off the estimates that I created back then. In some ways these estimates are accurate. The insurance and property taxes don’t change much. In other ways, they aren’t accurate – condo fees continual climb up is the biggest example of that.
Three years is too long, so one of my goals was to create a fresh update early in 2020. I especially wanted to get early start on it so that my alternative income reports will as accurate as they can be. (Look for January’s report next week.)
All three condos have 15-year mortgages on them. We are about halfway through paying them off. To figure out how much money we are making or spending, I needed to come up with the cashflow of each property. That’s simply what we are making in rent minus what our expenses are.
The rent side is simple. It’s the check the tenant pays us.
The expense side is more complicated. A good place to start with that is a common real estate investing acronym, PITI. PITI stands for:
These are the core costs for owning a property, with the big missing factor being maintenance. I’m not sure why there’s no PITIM acronym, but maybe it’s because maintenance can vary widely depending on the size and state of the property. For now, let’s fill in the PITI.
Principal and Interest were easy to find our mortgage statements.
Taxes were much more difficult since we rolled them into an escrow. I had to go digging through my city’s assessor website. I wasted a lot of time trying to use Zillow or Redfin, but going to the source turned out to be much faster… and much more accurate. Unfortunately the city didn’t include an easy tax number. Instead I had to take the city tax rate and multiply it by the assessed value of the property. That’s not too hard, but it required looking for two numbers in slightly different places.
Finally, there’s insurance. That was easy to find. I simply dug up last month’s bank statements that had the payments we sent to the insurance company.
Adding in Condo Fees
Since these are condos, they all have a condo fee. I prefer to invest in condos because some of the maintenance is covered by the association for me. I don’t have to worry about hiring landscapers or snow plows. There can be amenities like pools and gyms that are attractive to potential renters – and those costs are shared by everyone. Like some of the previous costs, this is an easy one to figure out. The condo association tells you what the fees are going to be. You pay them every month, so you should have an easy record around.
Just because I like to invest in condos, it doesn’t mean it’s right for you. For example, Rocky Balboa is not really a fan:
Special Assessments: The Hidden Beast
Before I get into the main topic that I wanted to discuss today, I wanted to take some time to cover something very specific to owning a condominium.
One thing to beware of with owning a condo is that there are occasional special assessments. These are repairs to major infrastructure. One of my properties had to put new roofs everywhere due to a structural defect. Two of the other properties needed completely new siding. Neither had planned those costs into the fees. It was tens of thousands of dollars. Fortunately, when it’s this much money, the condo associations usually work together with a loan provider to make it easier to pay.
How Much is Condo Maintenance?
No one seems to talk about condo maintenance aside from the standard condo fees. Appliances need replacing. Plumbing goes bad. Since these are rental properties, we have to paint more often than other people might. (When one tenant leaves and the furniture is gone, dirty walls become the focus of all potential new tenants.) Every so often you have to replace the kitchen and bathrooms. There’s also heating and cooling units to replace. We’re slowly switching to durable vinyl flooring because replacing carpet is a pain.
So how much do you budget for all this condo maintenance?
I could take each item, one by one, create a spreadsheet with expected life and amortize it. That would be a very thorough way to get a very accurate number. However, after calculating all the above numbers, I simply wanted a “rule of thumb” that was “close enough.” I didn’t want to spend another couple hours on each property to get a final cashflow number.
I had an idea for a rule of thumb, but I reached out to Twitter to ask for some advice. Here are some of the best responses:
Vacation or long term rentals? If long term, probably 1% of value, half that of a 20+yr old house since your association covers the outside
— Stop(ped) Ironing Shirts (@StIroningShirts) January 16, 2020
Stop Ironing Shirts pointed out that the rule of thumb is to budget 2% of the value for 20-year old houses, so 1% would make sense with the condo fee covering the rest. I hadn’t read it was 2% for 20-year old houses, just that it was typically 1%. I was going to go with 0.5% for half of that 1%, but instead found that Mr. Shirts’ number was better.
Next Aron from Nine to Thrive came up with this:
5% of the rent should be allocated for maintenance. 10% towards capital expenditures.
— Nine To Thrive (@Nine_to_Thrive) January 16, 2020
I love the simplicity here. It’s a very easy calculation. This was very close to my 0.5% of the total value rule above, but well shy of the 1% estimate.
I decided that both approaches have their merits and averaged each of the numbers. Again, the goal is to come up with something quick and hopefully close to accurate over the long haul. After all, maintenance costs are always going to be an inexact science where an estimate is the best we can do. This math satisfies my requirements.
Results of the cashflow of our three condos
I put together a spreadsheet of our condos’ cashflow and this is the result:
There’s some extra data here, simply because I’m a nerd. I have “active rent”, which is the rent that we get. I also record Zillow’s estimated rent. This helps me calculate a potential rent (the simply average) of where some kind of fair value should be. In this case Zillow had a weird data point in estimating the other two condos at nearly $1800. Previous months topped out at $1500 and Zillow’s fixed their estimate to be back towards that number.
The first and third condos were ones that my wife and I owned before we met. They lose money every month. One reason is that they had a big assessment. Another is that we have 15-year mortgages on them, so our payments are high. Ordinarily, it wouldn’t be a good idea to buy a rental property that loses money every month. However, it’s a better situation to make the equity than it would be to sell.
The last four rows are my favorite. These show how much we’d make if the mortgages were paid off. This gives me an estimate to what kind of monthly and annual income we make from each property in 2027. Since these all depend on the rent that we are charging, I put three scenarios together. It’s a fairly wide range, but it looks like these properties will roughly supplement our retirement with somewhere around $28K-$30K a year (picking a low-end between the actual rents and the Zillow estimate.)
The downside to this income is that we have to be landlords. Maybe for $25K a year we can have a rental property manager do all that work for us.
For now, let’s stick with the $28-30K number. If we were to try to make this kind of passive income through the stock market we’d need $1,120,000 invested in a stocks that produce a 2.5% dividend. If we wanted to draw down on a large nest egg using the 4% rule we’d need around $700,000. In this later example, the 4% rule may only last for 30 years.
So while the cashflow of the properties doesn’t look particularly good now, the end result should give us the financial flexibility to cover most of our typical living expenses.
Do you have a good (easy) way to estimate condo maintenance expenses? Let me know if the comments.
I would add that Special Assessments are not just for condos. I live in a suburban neighborhood with an HOA. It’s a very small neighborhood, about 100 houses, for its own HOA. The main amenity of the HOA is a community pool(apparently given by the builder to offset construction problems, but that was before my time). Our dues are fairly low, $169 a quarter, so when the pool needed heavy duty maintenance it has required a couple of “special assessments”.
Lazy Man says
That’s a good point. We have a small HOA for our street as there’s an area that needs drainage and upkeep. It’s very, very little, like $25 every year, so I often forget about it. I guess any time you have an HOA there can be special assessments, but HOA’s are more common with condos in my experience.
I refinanced our duplex and paid off the condo. The cash flow is nice, but we probably won’t keep it. The HOA is too high and the property tax increases every year. The rent isn’t that high either.
The best thing about the rental condo is minimal maintenance. The HOA takes care of a lot of stuff.
Your cash flow looks really nice. The rent in that area seems high, but that’s good for you.