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Condominium Rental Market Opportunity and Plan | International Residential Real Estate Investors Association
Monday January 22nd 2018

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Condominium Rental Market Opportunity and Plan

Today, even the most vibrant markets offer real bargains for investors.  Perhaps as significant the housing crisis has changed home  buyer qualifications forever.  Credit requirements are greater.  Down payment requirements are greater.  Most American’s have lost faith in the home as a place to store wealth.  On top of these trends, another trend is  most renters are looking for ways to save even further.  Because of this, roommate living is more popular than  ever and probably  will be for  at least the next decade or more.

On top of these points, the Echo Boomers are entering their prime renting years.  The Baby Boomers are moving into heavier renting years.  Demographically 72% of new households for the next decade will be minority owned implying heavier rentership.  The demand curve for residential investors cannot be brighter.

So, as the recession recedes and the economy begins to pick up what opportunities exist?

The condominium market has been particularly hard hit in the downturn.  At the same time, condominiums offer one of the simpler and more reliable rental scenarios.  For condominiums with the right  association rules, a tremendous rental opportunity exists by renting by  the bedroom as furnished units.  Purchases can produce cash on cash returns of 10%, 12%, even 14% on all cash purchases.

Further, most Americans have access to favorable government guaranteed housing loans that can fund your first 4 investment units.  The  programs allow buyer cost credit from the seller, may require no down payment (plan on 5%), and offer very attractive rates.  Currently, some are below 5%.

Right now, in Washington, DC, investors can purchase 3 bedroom, 3 bathroom condominiums for under $250,000 in good neighborhoods.  Fitted for roommates and furnished these condominiums will rent for $850 per bedroom or more.

Projects are readily available from the usual retail real estate sources.  These prospects can be improved by participating in short sale opportunities and foreclosure auctions.  Additionally, the  investor should keep up with tax sales as well.

For prospects, condo fees and taxes will cost about $350 per month.  Mortgage payments including mortgage insurance will be about $1,585 per month.  Total month cost is $1,935 per month.  Yielding a profit of approximately $615 per month.

Depreciation will be about $750 per month.  Thus you will show a loss of $135.00 per month.

If this is your first investment, upon closing  you should assign the property to an LLC.  This will allow you to assign a substantial part of your day to day costs as business expenses that are deductible under the tax code.  Good examples of business expense items could be your Internet  costs, taxes, some travel, etc.

Assuming you will continue to invest in the future and depending on how much time you spend on this effort, you may well qualify  as an active investor allowing those losses to flow through to your active income (salary and wages).

Further, you should consider completing the brokerage classes.  This will give you better access to deal information through the MLS and the  real estate industry.  Also, upon becoming a professional broker, you have likely qualified yourself as an active investor further improving your position to realize real estate losses against your day to day business.

The tax advantages for the new investor could be as much  $1,500 per month.  $615 protected from the investment and up to $885 protected from regular income.  This could result in a tax savings of $3,000 or more in this example – a real gain in regular income.

Returning to the demand factors in the industry.  The residential investor can place some confidence in the strength of rental pricing stability and future growth.  While economic conditions will likely mute growth for sometime, the demand trend pressure makes likely future growth strong.

The investor should recognize that condominiums are not a land investment.  Because of this the upside is based on the material cost of replacement and location demand pricing.  Because of this, the investor in this plan must narrowly focus on the combination of economic and social factors that positively support value.  Additionally, the wise investor will not see this as an asset flipping opportunity.  Instead, the investor is building value on the revenue stream and equity pay down of the  asset over the course of time (the equity paydown is likely more than $2,500 per year).

To summarize, the key  points we have highlighted here are that a new investor can:

1) Realize immediate cash flow from available purchases.

2) Establish their own operating entity opening up access to greater tax deductions and increasing realized income.

3) Earn equity  in the property every year from principal payments.

4) Establish an executable investment strategy with low risk and high gains for you.

These items offer you a strong foundation for your residential investing future.

Propective  investors, individuals whose equity plans have been set back, and existing investors can potentially benefit from this opportunity.

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