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Old 03-26-2015, 10:45 PM
 
Location: SF Bay & Diamond Head
1,776 posts, read 1,859,966 times
Reputation: 1981

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Quote:
Originally Posted by Jungjohann View Post
I wasn't referring to the cap rate. I was strictly referring to the maintenance costs. Read it through. And have a nice weekend.


Ho'omimi i loko ka makani
I read it as you saying that because reserves that are collected in maintenance fees will eventually become operating expenses that reserves SHOULD be counted as operating expenses at all times. If you are not saying that then you are correct.
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Old 03-26-2015, 10:55 PM
 
1,581 posts, read 2,086,474 times
Reputation: 1875
Quote:
Originally Posted by honobob View Post
I don't see where there's an argument. It's simply a matter of education. The average home owner has no need to know or understand a cap rate.

If the HOA's you're familiar with are not collecting monies for reserves they are poor managers and probably breaking Hawaii laws. The only reason to not be collecting for reserves is they are over funded or under funded. Both situations are not fair to the owners. If I buy a condo that has not been collecting for a twenty year roof that needs replacement in 5 years then the current owner is shafting me by not paying his share for the last 15 years. If the HOA is over funded then I have bought two roofs and when I sell the new owner will benefit from my overpayment.

.
First of all there is no such thing as "fair" when it comes to condo owning. The board serves the purpose of the MAJORITY (supposed to at least) so that means there will almost always be owners that do not want to spend money (or want to spend money). As a condo owner, you have no control over anything. You just have to pray that other owners agree with your ideas of running an efficient and beautiful condo project.

I sit on 3 boards. And 99% of the people that sit on these boards (myself included) are not in ANY position to manage the operations of a building effectively even with the guidance of a "property manager". The entire concept of HOAs is flawed and ridiculous.

Perhaps you are not aware but condo fees do not cover ALL costs associated with maintaining a building. For example, we just spent $1.4M on spall repair last year on one of the buildings I own units in. We had exactly ZILCH in our reserves to cover that insanely expensive fix ($15K special assessment average per unit - some more, some less). What else is missing from your reserve study? About 85% of the material that went into building your condo - glass systems, mullion systems, window systems, hand railing, all structural and non-structural concrete work (including columns, girders, lanai overhangs, architectural overhangs, eave overhangs, scupper systems, walkways and driveways), all structural steel work, all water supply piping, all storm drainage piping, all sewer piping, all electrical wiring and conduit systems, disconnects and safety equipment, fire suppression systems, insulation, all entry/exit doors, all fire stair exit/entry doors etc etc, the list goes on and on. Basically any piece of equipment or piece of anything in the building that has a lifetime of AT LEAST 30 years, can and will be 100% omitted from the reserve study. If that doesn't scare the bejesus out of you, I don't know what to tell you. Old condos are not investments - they are huge liabilities. It's like playing a game of hot potato... just hope you don't own it when the special assessments hit!

You are right that the average homeowner doesn't need to know what a cap rate is. But we are discussing investment properties; anyone interested in buying investment real estate should understand what a cap rate is.

Condo purchase - $700K 2 bdrm/2bath/2 parking

Rental income per month - $3,500
GET - $156
Property tax - $204
Maintenance fee - $800
Insurance - $30
Interior upkeep (3%/annual of the TOTAL replacement cost of all cabinets, appliances, flooring, fixtures, etc) - $150
Property management @ 10% - $350
Vacancy rate @ 3% - $105

$1,705 net income
$1,705 x 12 = $20,460
$20,460 / $700,000 = 2.9% CAP RATE

$1,705/mo services a $357,400 30 yr mortgage @ 4%. So if you wanted to buy this condo and break even on cash flow, you would need $342,600 + closing costs in CASH. That's basically 50% down just to break even.

Cap rates are particularly low in high income/desirable locations and very high in low income/undesirable locations. That's why cap rates are much, much higher in virtually any other place on the mainland. The more scary the location, the higher the cap rate. Check out multi-unit walk up buildings in Waipahu... 5-8% cap rates are not hard to find there. High cap rates are necessary to entice investors to buy in sketchy areas as the quality of tenants is questionable. A TRUE cap rate of 5% or more for in-town property is a great investment but almost impossible to find.

Last edited by pj737; 03-26-2015 at 11:05 PM..
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Old 03-26-2015, 11:17 PM
 
Location: SF Bay & Diamond Head
1,776 posts, read 1,859,966 times
Reputation: 1981
Quote:
Originally Posted by pj737 View Post
First of all there is no such thing as "fair" when it comes to condo owning. The board serves the purpose of the MAJORITY (supposed to at least) so that means there will almost always be owners that do not want to spend money (or want to spend money). As a condo owner, you have no control over anything. You just have to pray that other owners agree with your ideas of running an efficient and beautiful condo project.

I sit on 3 boards. And 99% of the people that sit on these boards (myself included) are not in ANY position to manage the operations of a building effectively even with the guidance of a "property manager". The entire concept of HOAs is flawed and ridiculous.

Perhaps you are not aware but condo fees do not cover ALL costs associated with maintaining a building. For example, we just spent $1.4M on spall repair last year on one of the buildings I own units in. We had exactly ZILCH in our reserves to cover that insanely expensive fix ($15K special assessment average per unit - some more, some less). What else is missing from your reserve study? About 85% of the material that went into building your condo - glass systems, mullion systems, window systems, hand railing, all structural and non-structural concrete work (including columns, girders, lanai overhangs, architectural overhangs, eave overhangs, scupper systems, walkways and driveways), all structural steel work, all water supply piping, all storm drainage piping, all sewer piping, all electrical wiring and conduit systems, disconnects and safety equipment, fire suppression systems, insulation, all entry/exit doors, all fire stair exit/entry doors etc etc, the list goes on and on. Basically any piece of equipment or piece of anything in the building that has a lifetime of AT LEAST 30 years, can and will be 100% omitted from the reserve study. If that doesn't scare the bejesus out of you, I don't know what to tell you. Old condos are not investments - they are huge liabilities. It's like playing a game of hot potato... just hope you don't own it when the special assessments hit!

You are right that the average homeowner doesn't need to know what a cap rate is. But we are discussing investment properties; anyone interested in buying investment real estate should understand what a cap rate is.

Condo purchase - $700K 2 bdrm/2bath/2 parking

Rental income per month - $3,500
GET - $156
Property tax - $204
Maintenance fee - $800
Insurance - $30
Interior upkeep (3%/annual of the TOTAL replacement cost of all cabinets, appliances, flooring, fixtures, etc) - $150
Property management @ 10% - $350
Vacancy rate @ 3% - $105

$1,705 net income
$1,705 x 12 = $20,460
$20,460 / $700,000 = 2.9% CAP RATE

$1,705/mo services a $357,400 30 yr mortgage @ 4%. So if you wanted to buy this condo and break even on cash flow, you would need $342,600 + closing costs in CASH. That's basically 50% down just to break even.

Cap rates are particularly low in high income/desirable locations and very high in low income/undesirable locations. That's why cap rates are much, much higher in virtually any other place on the mainland. The more scary the location, the higher the cap rate. Check out multi-unit walk up buildings in Waipahu... 5-8% cap rates are not hard to find there. High cap rates are necessary to entice investors to buy in sketchy areas as the quality of tenants is questionable. A TRUE cap rate of 5% or more for in-town property is a great investment but almost impossible to find.
I would have to agree that 99% of your post is not factual. But before I waste any time trying to educate you I'd like to hear how you as someone that wants to pass yourself off as an investor could not ANTICIPATE spall repairs. This is not rocket surgery. My newest condo building (1977) is the ONLY property that has had a special assessment since my first purchase in 1978. And that was only because our HOA kept firing onsite managers so there was no continuity in normal maintenance. It still was only about $4,000. My other older buildings have strong reserves. Even if you and the rest of your boards do not have the skills to maintain your properties your managing agent should have the skill to do a reserve study.
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Old 03-26-2015, 11:19 PM
 
Location: mainland but born oahu
6,657 posts, read 7,706,661 times
Reputation: 3136
Wow you guys sure know alot about this topic, mahalo for sharing your knowledge, your schooling me.
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Old 03-26-2015, 11:27 PM
 
Location: not sure, but there's a hell of a lot of water around here!
2,682 posts, read 7,539,557 times
Reputation: 3882
Quote:
Originally Posted by honobob View Post
This is not rocket surgery.
No, it isn't, it's brain science! And condos more than 30 years old can be great investments, as long as you know what to look for, and the RE agent provides full disclosure when promoting the property.


Uuuurrrrpppp, scuze me, blame the Prince
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Old 03-26-2015, 11:38 PM
 
1,581 posts, read 2,086,474 times
Reputation: 1875
Quote:
Originally Posted by honobob View Post
I would have to agree that 99% of your post is not factual. But before I waste any time trying to educate you I'd like to hear how you as someone that wants to pass yourself off as an investor could not ANTICIPATE spall repairs. This is not rocket surgery. My newest condo building (1977) is the ONLY property that has had a special assessment since my first purchase in 1978. And that was only because our HOA kept firing onsite managers so there was no continuity in normal maintenance. It still was only about $4,000. My other older buildings have strong reserves. Even if you and the rest of your boards do not have the skills to maintain your properties your managing agent should have the skill to do a reserve study.
Oh boy.

Please tell us exactly how a potential condo buyer should anticipate spall repair. Can you give us some guidance on that? (and please don't ignore this - it's an important question)

What good is a strong reserve when the monies in the reserve only cover a fraction of the building's true maintenance costs? A building can have a $500,000 reserve when it is only "required" to have $350,000 but then 6 months later owners are notified that there needs to be a $3,000,000 special assessment because it's going to cost $3,150,000 to replace the plumbing in the building. After the work is done, the AOAO needs to ensure that they still have the minimum reserve amount to cover what is listed in the reserve study. And reserve studies are notoriously inaccurate... for a few thousand dollars, someone is to provide an evaluation of each component as to its "industry average" service life, "probable" remaining life, and "probable" replacement costs all without consulting with a single contractor. It's basically a big fat guess. Good luck!

Managing agent conduct the reserve study? Yikes. It's a blatant conflict of interest for the property manager to conduct the reserve study. It's almost always conducted by a third party entity like Barrera, Armstrong or similar. And even then, those studies do not look at ANY items that have a life cycle of at least 30 years. Do I need to relist the plethora of building components that are not considered in a reserve study? If the items aren't considered, all the repair/replacement of those items need to be funded by......... A SPECIAL ASSESSMENT.

Not rocket science indeed.
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Old 03-26-2015, 11:45 PM
 
Location: SF Bay & Diamond Head
1,776 posts, read 1,859,966 times
Reputation: 1981
Quote:
Originally Posted by pj737 View Post
Oh boy.

Please tell us exactly how a potential condo buyer should anticipate spall repair. Can you give us some guidance on that? (and please don't ignore this - it's an important question)


Not rocket science indeed.
How Long do Buildings Last? | RDH Blog
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Old 03-26-2015, 11:47 PM
 
Location: Kahala
12,120 posts, read 17,753,246 times
Reputation: 6175
Quote:
Originally Posted by honobob View Post
Why?
Well. Because.

A 7% cap rate is a far greater ROI than a 3% cap rate. I buy turnkey properties. I'm not into kicking out a tenant and doing a renovation. I compare the properties equally at the same point in time.

I've also stated cap rates are just one of many metrics one should use.
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Old 03-26-2015, 11:53 PM
 
Location: SF Bay & Diamond Head
1,776 posts, read 1,859,966 times
Reputation: 1981
Quote:
Originally Posted by pj737 View Post
Oh boy.




What good is a strong reserve when the monies in the reserve only cover a fraction of the building's true maintenance costs?


Not rocket science indeed.
Oh boy. If your reserves ONLY cover a fraction of the building's TRUE maintenance costs then you DO NOT have a strong reserve.
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Old 03-26-2015, 11:57 PM
 
1,581 posts, read 2,086,474 times
Reputation: 1875
Quote:
Originally Posted by honobob View Post
Sorry, that doesn't explain anything. A potential buyer needs to know what the cost consideration of spall repair will be so they can make a decision on whether to buy or pass. So again, please explain how to prepare them rather than post a link to "what to expect if you live in an average area, in an average built building in an average climate with average maintenance and average upkeep".
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