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How much can you make on a rental condo: a one year profit/loss

How much can you make on a rental condo: a one year profit/loss

My guide: How to make money renting condos

Exactly a year ago, I moved from Seattle to San Francisco to start a new job in the Bay Area. It was a bit unexpected, in the sense that I knew it was a possibility I would get the job, but it wasn’t a certainty.  Unfortunately, I never had the opportunity to move into the condo I spent so much time finding and remodeling.

 I’m glad I did spend so much time and money on the condo, however, because the move gave me the opportunity to rent it out and develop some passive income. Coupled with appreciation, it has been a wealth generating machine over the past 2 years. It’s a bull market and it won’t last, but at least I am starting on a good note! I’ve also been lucky to have fantastic tenants, and no major maintenance issues. Renting out a condo has been easy... so far. But first, the numbers.

Buying my condo and remodeling

When I bought the condo in May of 2016, the Seattle real estate market had been appreciating for about 6 years on the back of a strong national economic recovery and even stronger local (ahem, Amazon) demand. I honestly thought I’d be lucky to see 1-2% appreciation over the next several years. I bought the condo to keep forever, though, so I didn’t care.

My game plan was relatively simple. At first I was looking for a house, but it was WAY too expensive to find what I wanted anywhere near the neighborhood I wanted to live. What about townhomes? No go there, too. Way too expensive in comparison to condos for the negligible addition of a tiny yard. 

Instead, I decided to find a crappy old 2-bedroom condo in a great neighborhood, remodel it, and hopefully end up with a smaller monthly payment and the flexibility to rent it out if I ever needed to. After a while, I found the 980 sq. ft.  diamond in the rough that you see below for $325,000 in Ballard. It had been on the market for over 2 months (an eternity in Seattle). I offered $319,000 with 10% down and it was accepted immediately. Including closing costs, I was into the condo for $36,000 with a $289,000 mortgage at 3.99% that I found on LendingTree after comparing 3-4 loans.

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Fugly kitchen

Pre-remodel (all numbers as of 5/2016): Seattle condo cost

  • "Balance sheet"

    • Down payment: $36,000

    • Mortgage balance: $289,000

    • Total investment: $36,000

    • Zillow Z-estimate: $330,000

    • Equity: $41,000

    • Change in equity: $5,000 ($41,000 equity - $36,000 investment)

  • Income

    • Payment (includes taxes and insurance): $1700~

    • Mortgage Insurance: $120~ (annoying)

    • HOA: $499 (ouch)

    • Total monthly out-of-pocket: -$2319/mo

Of course, that wasn’t all. I needed to fix it up (as you can see above). Since I’ve already gone into morbid detail on that, I will just let you know the final number. My down to the studs remodel cost $110,000, or around $110 per square foot. It’s pretty insane, I know… but I am very happy with the result and as I’ll show you, I think this was still a fantastic investment overall. As you can see, from the same vantage point as the previous picture, things are looking much much better now. 

condo-flip-investment.jpeg

After the remodel, I had it appraised to get the mortgage insurance taken off (full post about that here). Basically, I had to prove I had at least 25% equity based on the value of the property. With a $290,000 mortgage, that means the property had to be worth around $400,000 for Wells Fargo to take the mortgage insurance off. 

The appraiser cost me $500 and valued the condo at $407,000 (!), barely meeting the number to remove the mortgage insurance. With the mortgage insurance off, I was happy, but I also feel the appraisal was incredibly conservative simply based on the comparable properties that were for sale at the time. The Zillow z-estimate in Personal Capital said $420,000.  That was probably conservative too, since it doesn’t take into account the like-new condition of the condo. I will still use the z-estimate as a baseline valuation, however: I probably like my condo more than anyone else would so it pays to be conservative. 

Worst case scenario, I could have always refinanced into a new loan without PMI by adding a small amount to the down payment. 

After remodel (1/2017): Seattle condo remodel cost

  • "Balance sheet"

    • Down payment: $36,000

    • Remodel cost: $110,000

    • Mortgage balance: $285,000

    • Total investment: $146,000

    • Z-estimate: $420,000

    • Equity: $135,000

    • Change in equity: $-11,000 (wish that remodel had cost less!)

  • Income

    • Payment (includes taxes and insurance): $1700~

    • Mortgage Insurance: $0 (woohoo)

    • HOA: $499 (ouch)

    • Total monthly: $2199/mo

How much can I rent my condo for?

Since I moved to San Francisco, I had to rent out the condo or sell it. And yes, some people wonder "can you rent out a condo?" Absolutely! Given the title of this article, you can guess that this is the approach I took. Rents in Ballard had been going up for years, and I figured I could net at least $100-$200 a month over our total costs by renting. The rental income alone wouldn't be very significant, I was much more interested in the overall P/L (including mortgage pay down and appreciation) than the small income I might generate from the property.

I was incredibly lucky with tenants. The first people that looked at the house I immediately liked and trusted. They were down to earth, held steady jobs, and seemed genuinely excited about the condo (which I felt would lead to them taking care of it fairly well).  It seems dumb, but I went with my gut instinct and (after a background and credit check) had them renting the condo for $2350/mo. With expenses at $2199/mo, I would net $151 a month or $1812 a year. Again... not very exciting, but the total numbers are much more enticing.

Reflections on a year as a landlord

My first year as a condo landlord has been a breeze, mostly. I have a detailed spreadsheet that tracks every single minute I spend on condo related activities, and in total I have spent less than 24 hours working on the property or interacting with the renters. $1800/24=$75 an hour. That's definitely worth my time. 

Those 24 hours weren't even "work", per se. The vast majority was travel time due to an emergency day trip I needed to take up to Seattle when a pipe burst near my storage unit. Tl;dr, I needed to remove my stuff from the storage unit so the carpets could dry. That emergency trip cost me $300, but I made the best of the trip by visiting with some friends before I headed home. I also left my keys with one of them, so if something like that happens again I can stay in San Francisco. It's good to have friends!

That was the most difficult part of the year. My tenants have been awesome. They pay on time or early every month. They take care of the property themselves. There have been no complaints from neighbors of any kind. They did call me once – when the breaker for the fridge flipped and it turned off. But, five seconds on the phone and that was fixed. One tip for absentee landlords: keep a photo of your circuit board on your phone. Luckily, I was smart enough to do that before I left.

My biggest revelation as a condo landlord may be obvious: condos are easy! With a responsible association, as mine is, there’s no roof to worry about, no siding to fix, and almost no pipes to wrench on (because even if they break… someone else fixes them!). There’s also no yard, which as an owner is frustrating, but as a landlord is a huge plus. I’m sure there will be little problems and fixes as the brand new renovation wears off, but the first year has been relatively painless.

Condo income after 2 years of ownership and 1 year of landlording

Over the past year, Seattle real estate has taken off. As you might expect, I have been keeping a very close eye on 2 bedroom condos in Ballard. The absolute cheapest sale for a 2 bedroom over the past year was at $473 a sq. ft. – and that was in a building of similar or worse quality than mine, and the unit itself hadn’t been remodeled.

Even more close to home, there was a 725 sq. ft. one bedroom unit that sold in my building for $485 a sq. ft. As you can see, it’s also fairly dated.

 My Zillow Z-estimate. I use Personal Capital to keep track of all my investments for free.

My Zillow Z-estimate. I use Personal Capital to keep track of all my investments for free.

Based on these comps, and my Zillow z-estimate in Personal Capital, I think my condo is worth $510 a sq. ft., absolute worst case, $480. At 980 sq. ft., that gives me a range of $470,000 to $500,000 in value. Redfin and Zillow have relatively similar numbers, with the lowest number I have seen recently coming in around $460,000. To be ultra conservative, I will use that number in my calculations (but keep in mind there’s a potential $40k in upside here).

After 1 year of renting and 1.5 years of ownership (1/2018): condo numbers

  • Balance

    • Down payment: $36,000

    • Remodel cost: $110,000

    • Mortgage balance: $277,000

    • Total investment: $146,000

    • Z-estimate: $460,000

    • Equity: $183,000

    • Change in equity: $37,000 (This is a little fuzzy since some of it is mortgage pay-off, but since I don’t pay my mortgage out of pocket, I consider that a profit!)

  • Income

    • PITI: $1700~

    • Mortgage Insurance: $0 (woohoo)

    • HOA: $499 (ouch)

    • Total monthly cost: $2199/mo

    • Income (rent): $2350/mo

    • Monthly P/L: $151

    • One time maintenance cost (flight): $300

    • Yearly P/L: $1512

Total P/L (income and appreciation): $38,512

Annualized profit/loss

My investment was $146,000 total, so my $38,512 gain ends up at around 27% in two years, or somewhere around 15% per year. If you use a less conservative number for valuation, like $480,000 (which is totally reasonable based on comps), it’s more like $60,000 which equates to a 40% return total, or 25%~ annualized over 18 months. That beats the S&P 500 by a fair margin. And, I’ve spent less than an hour in the past year working on it.

Tl:dr, condo investing has been pretty awesome so far.

Thinking about real estate investing for yourself?

I feel like the market is fairly near the top, but if you're interested in investing for yourself I've created a handy spreadsheet that will help you pencil out potential P/L (including taxes and depreciation) from a rental condo. Plug in your numbers below to get started!

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