IS THIS BEACH CONDO A GOOD INVESTMENT?

Posted By Tiffany Hereda @ Sep 15th 2015 9:55am In: Investing

Should I invest in this beach condo 

IS THIS BEACH CONDO A GOOD INVESTMENT?

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Here in the Myrtle Beach area there are a ton of experienced and novice investors that purchase in the many oceanfront condo buildings in the Grand Strand.  Every day we get calls from people looking to break into the property investment business.  The problem is, with so many options here, it can become an overwhelming and confusing process.  We put together some basics to help you get organized and reach your investment goals.

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First, answer this, do you intend to actively manage the property or hire someone else?  If you intend to manage it, it’s smart not to buy one too far away from you.  There are many rental management options in the area for you to take advantage of: 

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  • Many condos have an onsite management company (the front desk) that markets the building as a whole and typically offers services such as daily housekeeping.  Usually the rental split is much higher due to these services  and because most of the time they will keep your place full of renters.  Typically splits you can expect are between 40-55%. 
  • There are also many offsite management companies that will manage short-term rentals for you at a much lower split (typically 10-20%).  Some have a large market share and advertising power and some are smaller boutique companies.  When you use these services, your guests will typically not receive daily housekeeping services and may have to bring their own towels/bedding. 
  • Another option is corporate rental management companies.  Instead of charging you a split, they will guarantee you a monthly fee you will be paid no matter how much they rent it.  You will typically make less in this scenario but you know what you are bringing in each month consistently. 

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Next, you want to consider these factors of the building(s) you are looking at:

  • Rental history
  • Rental rates
  • Occupancy rates
  • Building maintenance
  • Amenities
  • Location
  • Age

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Once you have determined how you plan to rent out your unit and have narrowed down to a few options, you will want to consider all of the monthly expenses:

  • Mortgage
  • Property taxes
  • HOA fee
  • Special assessments
  • Insurance
  • Utilities
  • Maintenance fund
  • Property management fees

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Now that you know the numbers, you need to calculate the Cash on Cash Return to find out if it is a good investment.  (Cash-On-Cash Return is a rate of return often used in real estate transactions. The calculation determines the cash income on the cash invested).  When you purchase a rental property, you will typically put down at least 20% as the cash down payment. The cash-on-cash return would measure the annual return you made on the property in relation to the down payment.  Here is the formula:

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Annual Dollar Income/Total Dollar Investment = Cash on Cash Return

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For example, let’s say you purchased a $200,000 condo and put down 20% ($40,000).  The unit brings in $25,000 per year.  The annual costs on the unit are $15,000.   Thus you are netting $10,000 per year.  So your calculation would be:

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$10,000/$40,000 = 25% (Cash on Cash Return)

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The percentage you are happy with depends on your goals.  Some people are very happy with $100/month in cash flow.  Not only are you paying down the mortgage, getting a tax advantage, but hopefully the property is appreciating as well.  If you are comparing 3 properties, calculating this can help you decide which on is the best investment for you.  

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We would be more than happy to assist you through this process and create an investment spreadsheet for you.  CONTACT US today to get started.  


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