Renting Out a Condo: Part One

By Steve Gillman - October 2012

My wife and I recently bought a condo as a rental unit, with the hope of making some decent cash flow. As we go through the process I will add pages here detailing our experiences and the lessons learned, along with some tips for those who want to purchase a condominium as a rental property. At the moment we are probably a few weeks away from renting the condo, so this page is about the start of the process.

For several weeks we looked at condos for sale here in Naples, Florida. We were interested in either buying, fixing and selling one for a profit, or in keeping one as a rental unit. Even when you plan to rent out a property, it can make sense to look at places that need some work. These are the rentals that will sell the cheapest, and if you plan well you can have a bigger chunk of equity from the start.

We opted for "plan c," which was to buy, fix and rent the condo immediately above us. The buildings in our complex have just two units each, so we would effectively control the whole building. This particular purchase was not necessarily the best according to the numbers, but we liked the idea of having our tenants so close. It makes it easier to be a landlord, and safer because we can keep an eye (and ears) on the place.

We still bought low enough that we figured we could increase the value of the place by about $20,000 after spending $10,000 total. That total amount was to include all closing costs, repairs, and associations dues paid prior to the first renter moving in. We could rent the place for $1,100 per month, our real estate agent assured us, and we actually saw a unit for rent in our complex at an asking rate of $1,100. It appeared on paper that our investment would pay us about $600 per month in cash flow.

Lesson: Investigate rental rates carefully. As it turns out, the owner of the advertised unit had been trying to get $1,100 for a long time, and lowered the rent to $1,000 about two days after we closed. We hope he gets that, and soon. We are now thinking to offer our unit for $995 per month, although our agent still says she can get more for us, so we may let her try for a higher rental rate for a few weeks to see what kind of response we get (she is going to work as our rental agent too).

We eventually had a nice talk with two ladies who own rentals in our complex. They get $875 for one and $995 for the other. They both said that $1,100 was too high, but that we could rent our place for $995 if it was cleaned up well. The conversation took place at a meeting of the condominium association, where we learned our next lesson...

Lesson: Check the financial information from the association carefully. Now, you would think we would be more in touch with what was going on financially, since we live here. But after several major projects in the seven months since we bought our place, the funds were low. Then a line on a map put us in a flood zone, requiring the association to spend tens of thousands more for insurance each year, amounting to about $500 more per year for each owner.

We went to a meeting of the association the day before closing and discovered that a $600 special assessment was necessary to catch up on expenses. Since the due date was a month away and the assessment was levied after we signed the contract, it would be ours to pay. Also, the dues would be going up by $20 per month. These surprises would not affect our projected cash flow as much as the lower rent would, but it was still an unpleasant surprise.

We closed as scheduled and found that the closing costs were a bit less than projected. It's nice to have a good surprise once in a while. Prior to closing we had gone through the unit with a good handy man and we knew what we wanted to fix in preparation for renting the condo. He gave us some good ideas for saving money on the repairs, and estimated how long each project would take, as well as the time frame for the whole job.

Our story continues here: Our Rental Condo Investment.

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