Real estate investing has various benefits and challenges not associated with other investment vehicles. There are specific tax codes made just for those investing in real estate, whether they are commercial or residential.
I honestly thought I would have owned a second (or even a third) rental property by now, but it just hasn’t happened. I looked at a property with a buddy way back in 2014, but if I remember correctly it ended up being way too big of a project for my firt investment property, and I didn’t even go for a second look. Again, my memory may be a bit off but I think the buddy I took a look at it with, did go back a few times but he couldn’t come to terms with the price. As I write this post, I am not sure if this opportunity is going to get to the end zone, but I know I feel like writing about it since I am pretty damn excited about it.
The Investment Property Opportunity
The Wife and I went out to the north fork of Long Island a few weeks back for our anniversary. We have done day trips to this particular town and area for years (not sure I can use the term decades if it has only been 15 years). The Wife and I used to go wine tasting on the north fork way before they would even charge for flights if you bought a bottle of wine! It was a perfect date for College and Law School Evan – we got to drink some wine and it wasn’t at all expensive (which was perfect since I had next to no money)!
While our current norm is taking the hour and 10 minute drive and making a day trip out of it. However, this time we decided that we would stay overnight leaving the kids with my in-laws. Trying to find something that didn’t force the two-night minimum was challenging. Most places on the east end of Long Island (regardless of whether you are on the North or South Fork) require 2 or even 3 night minimum during the summer. After a few frustrating calls, The Wife was finally able to find something.
The something was a 2 bedroom, 2 bath condo that rented through a management company. We found the idea immediately interesting. A person buys the home, and just basically gives it to a management company to run it almost like a hotel during the busy season (basically June, July, August, and September). It was nothing more than a, “hmm, that’s an interesting model” conversation between The Wife and I…until we saw an open house sign on the Sunday before we headed back home.
We walked in and noticed that it had a similar layout to the unit we stayed in (i.e. 2 bedroom, 2 full baths with a deck) – we later found out that all the units have a similar living arrangement. We didn’t spend a whole lot of time in the unit or with the broker it because we were trying to get to a winery or two before heading back to the kids, but we spent a large portion of the hour drive back talking about it.
I requested some preliminary information the next day and we have been in talks with the broker since.
The Numbers Behind the Investment Property Opportunity
- Asking price is $345,000;
- Carrying costs are $10k a year (condo maintenance is $6,500/yr and Taxes are $3,500)
- Last year the property earned $34,000 gross.
The hotel like management service takes 30% (not an insignificant amount) so that $34,000 is really $23,800. Then we take off the $10,000 for carrying costs and are at $13,800. Just to keep it all interesting and I buy it for asking (considering it has been on the market for a few months I think I am good to negotiaite down) and I put down 20% ($69,000) I would have a note of $276,000 and at 4.5% which would be about $16,800. Slightly negative, but a worse case scenario. We could put more down, we could get a lower rate, we will absolutely negotiate a lower sale price, and most importantly we may be able to rent it ourselves keeping that extra 30%.
In addition to the numbers above, I would have a place on the North Fork for years to come for my family’s use.
I am unable/unwilling to go at this alone, I was originally thinking 3 other partners, but after some negotiation with The Wife I ended up 2 other partners (3 in total). I originally asked 2 individuals that I thought would jump on the opportunity to either say yes or no to me. I am comfortable with yes or no, but maybe just sucks. Since I received less than clear answers so I went to two more buddies and one of them is heading out with me in a few days to check it out. The buddy going out there with me is excited for the opportuinty to check it out. Again, this doesn’t mean we are rushing in, it is just that his enthusiasm has me excited again after the first 2 took the wind out of my sails.
My preliminary plan would be that each partner contributes $35,000 cash. $70,000 would be for a down payment leaving us that last $35,000 for closing costs and provide a cushion until income starts rolling in the second quarter of next year.
The Negatives With Regard to this Particular Real Estate Investment Opportunity
First and foremost, this is not going to be a quick flip and make 5 to 6 digits. I am not sure that is even a negative as that just has all sorts of risk associated with those types of deals (especially when that is not your main area of expertise). This seems like I am going to be holding this particular asset for 10+ years.
The second negative is that by most calculations it is slightly cash flow negative. This may change when we get closer to contract and/or closing, but as it stands now I am not even breaking even with regard to income until year 2 or 3.
I am not too sure about this management company as I can’t even get back information with any type of normal speed and I am trying to purchase the damn property!
The Positives About This Particular Real Estate Investment Opportunity
I think the biggest positive is that it is allowing me to get into the real estate game with very little risk. It is a property that has a built in income stream, even if I did nothing. In addition, this particular area of Long Island is only becoming more and more popular. As such, the capital appreciation should take care of itself (obviously we can always have a 2008). Beyond that, it is possible that the area gets a little more attention and there is some quick appreciation in years 2 through 5.
Another great benefit (and this may be The Wife’s number reason) we will get some enjoyment out of it. I can see myself crashing here more than a few times a year after wine tasting which would be a great addition that most wouldn’t get from a normal rental property.
The unit is a condo, and as such, I am only responsible sheet rock to sheet rock. This means, there are a lot of issues I just won’t have to deal with which is something that I loathe to think about owning a normal piece of property. Similarly, the complex was built in 2008 so in terms of items breaking it should be a little less than your normal 1960 Long Island home.
Since this would be my first investment property I am always eager to hear other people’s opinions!