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May 11th, 2009 11:08 AM by David W. Welch
This is an example of how an investment in a condo in Orlando could perform. The first thing you should know is that there is no condo financing for investors. I don't care what your brother-in-law said or anyone else for that matter. If you are purchasing a condo for investment in Orlando financing is gone, but that is OK. The lack of financing has forced banks to drop the the prices on their condo REO's into the cellar. I regularly see two bedroom, two bathroom condos that sold for $150,000 to $200,000 a few years ago priced in the $50,000's and $60,000's. There are condos in the $10,000's and $20,000's, but they are generally not very good locations which effects the rents. You can pick up a unit for $60,000 in a decent area that will generate an $850/mo rent. Again this is an example, but a very realistic one. Out of that $850 you will have condo fees of $250 and taxes of $200 per month. The taxes are high because the assessments are still based on last years prices, so it is likely that they would go down next year but don't count on it.
Based on those numbers you are cash flowing $400/mo. In twelve and a half years you have your entire investment returned to you. That is an 8% return on your investment. But wait there is more. You also get to depreciate that property almost $2,200 and write off the taxes of $2,400. That is a $4,600 write off on your taxes each year. If you are in the 25% tax bracket you just reduced your tax liability by $1,150 each year. In the end it you factor in the taxes paid on the income and the tax savings created by the write offs, you end up with an after tax return of 7.9%. That return is just rental income from the property with no assumption of appreciation.
When you figure that Orlando is still one of the most preferred places to live, the economy will get better, and financing will return for condominiums there is almost certainly going to be some appreciation on these properties given an appropriate time horizon. In other words do not expect to flip these properties or sell it in a year or two. Real estate investments are typically longer term investments that must cash flow to make sense. Any investment involves risk, so make sure you speak to your tax consultant about potential impacts to your tax situation. Also, work with a Realtor that knows your local market.
David Welch, Real Estate Optimist, @RealtyOptimist