Make Money with Condominiums and Townhouses

\ Make Money with Condominiums and Townhouses\ \ \ \ By Gary W. Eldred\ \ \ John Wiley & Sons\ \ \ \ Copyright © 2003\ \ Gary W. Eldred\ All right reserved.\ \ \ ISBN: 0-471-43344-6\ \ \ \ Chapter One\ \ \ The Lazy Investor's\ Way to Wealth\ \ If you're like most people these days, you would like to find a safe\ investment that yields high returns. You probably know that you\ could profit big in real estate, but you hesitate to take on the part-time\ job of landlording. What to do? Invest in condominiums.\ In the beginning you will need to put forth some effort to\ learn the market. Once you're past that step, though, the condos\ will operate on automatic pilot most of the time. Most condo investors\ I know put in less than 10 to 20 hours per year for each\ unit they own.\ How can condo owners earn high real estate returns with\ minimum hassle? It's easy: Because the condominium association\ takes care of all exterior (and maybe some of\ the interior) maintenance for the units.\ \ Condominiums Attract Better Tenants\ You will gain a partner to help manage your\ tenants. The homeowners' association (HOA), as\ well as the individual homeowners who live in\ the other units, will keep an eye on the behavior\ of your tenants. Even better, as it turns out,\ well-run condo and townhouse developments\ actually attract a better class of tenants than\ comparablypriced single-family houses and\ apartment buildings.\ \ Why Condos Attract Better Tenants\ Condos and townhouses tend to attract low-maintenance tenants\ because these residents actually prefer to live under the strict\ rules and more pleasant environment of a home-owning community.\ Think about it. If you were the type of person who likes to\ hang out at the swimming pool on Sunday afternoons and get\ rowdy, would you choose to live in a home-owning community or\ an apartment complex? If you plan to ask six of your closest\ friends to move in with you to help pay the rent, do you choose to\ rent in a townhouse community of homeowners, or would you try\ to rent a single-family house?\ Experience shows that trouble-making tenants avoid well-run\ condo and townhouse developments because they know that\ they will not be able to get away with their antics.\ \ Well-run HOAs Take note that I emphasize well-run associations.\ To gain the "association effect," you must carefully select\ the projects and buildings in which to buy your units (a topic that\ will be covered in later chapters).\ Early on, I learned this lesson when I invested\ in a cheap condo unit in a building that\ had slid downhill. Apathy and lack of care prevailed.\ Rules went unenforced. Owners moved\ out. More unruly tenants moved in. Property\ values stagnated. Vacancies and turnover increased.\ \ Happy Ending Fortunately, my mistake turned a remarkable\ profit. Eventually, the investors and homeowners elected a\ new board of directors for the HOA. We hired a new management\ company. We developed new rules with teeth in them (daily accelerating\ fines for repeated offenses). Within three years of our project\ turnaround, our units had appreciated by 40 percent. In fact,\ for investors who are willing to accept a little more risk and put in\ a little more effort, the turnaround play can yield big profits within\ a period of a few years.\ \ The One Easy Test: Who's Moving In, Who's\ Moving Out\ How can you tell whether a project offers a\ promising future? How can you tell before you\ buy whether the HOA will prove to be an asset\ that helps you attract and retain good tenants? Again, I will go into\ this topic in more detail later. But one helpful way is to learn who's\ moving in, who's moving out, who's selling, and who's buying. In\ other words, before you commit to a building or development, review\ the demographics (age, occupation, incomes, and household\ composition) of the owners and the residents. From these data\ you can figure out whether the project is moving upscale, holding\ its own, or sliding down.\ \ Your Procedures Count, Too!\ Of course, even with a watchful and well-run\ HOA, you can't just rent to the first person\ who's willing to write you a check. Later I'll tell\ you exactly what you need to do to enjoy care-free\ rent collections from the perfect tenant.\ \ Can Investors (Lazy or Not) Really Build Wealth with Condos and\ Townhouses?\ William Nickerson wrote the all-time classic get-rich-in-real-estate\ book (How I Turned $1,000 into a Million in My Spare Time)\ more than 45 years ago. Since then, hundreds of similar books have\ promised to show readers how to build wealth in real estate. These\ authors have urged their readers to buy fixer-uppers, foreclosures,\ apartment buildings, and single-family houses.\ Yet not one such book tells readers how to\ build wealth with condos and townhouses. Indeed,\ I plead guilty to this neglect. My own best-selling\ book, Investing in Real Estate, Fourth\ Edition (Wiley, 2003) focuses exclusively on\ single-family houses and small apartment buildings.\ \ Why Such Neglect?\ Why have real estate authors shied away from recommending condos\ and townhouses as investments? Presumably condos usually do\ not appreciate as fast as houses. "When condos become in short\ supply in an area and prices start to appreciate, more complexes\ are built and the oversupply cycle begins again.\ Houses, however, can't be built quickly (if at all)\ in most areas because very little land remains."\ Although this quotation was written by\ other authors, it's similar to the explanation I\ have given over the years when my readers and\ seminar attendees ask about condos and townhouses.\ "Condos don't appreciate as fast as\ houses. Condo prices can suffer when a glut of new apartments\ floods the market." Okay, that's the bad news.\ Experience Trumps Cliche Now here's the good news.\ When I reviewed the actual experience of investors (including myself),\ I found that total returns have often exceeded the returns from\ owning single-family houses. Why? How? Here are the reasons.\ * Because of periodic oversupply, it's easier to buy condos at\ a steeply discounted bargain price.\ * In nearly all markets, condos yield more cash flow than\ houses for each dollar invested.\ * Condos typically yield more tax shelter for each dollar invested.\ * Condos present less risk of cash flow shock (i.e., new roof,\ exterior paint job, major electrical upgrade, etc.).\ * Condos/townhouses often prove easier to rent and consequently\ suffer lower vacancies.\ * Condos require much less managerial time and effort.\ When you compare investment choices, you must compare the\ total returns, not just the so-called average rate of appreciation.\ You must also compare the time, trouble, and energy that you will\ put forth to oversee and look after the investment. When you look\ at this total picture, you will find (as I have) that\ condos and townhouses can help you achieve\ very strong returns, an inflation-protected\ stream of income, and a multimillion-dollar net\ worth.\ It's Your Choice! By pointing out the\ fact that you can make money with condos and\ townhouses, I am not urging you to forgo single-family\ houses or apartment buildings. I am not arguing\ that you will necessarily earn more with\ condos than you could with other types of real estate.\ No one can say for sure how you will do with any type of investment-real\ estate or anything else.\ However, I am urging you to weigh the merits of condo investing\ against your financial goals and personal resources. Too\ many investors pass up real estate because they don't want the\ supposed hassle of landlording. Other investors who choose real\ estate pass up condos and townhouses because they erroneously\ believe that a low appreciation will make condos an inferior investment.\ Do you hold either of these beliefs?\ If so, you're in for a pleasant surprise. In the following pages,\ you will gain a newfound appreciation (no pun intended) for condos\ and townhouses. In the end, you may\ choose not to follow through. But if you do pass\ up this opportunity, you will not be able to justify\ your decision with the usual reasons.\ There's simply no question that over the next 5\ to 15 years, well-selected condos and townhouses\ will reward investors with very handsome\ returns for relatively little effort.\ \ How You Will Profit with Condos\ In the remainder of this chapter, I detail more closely the how and\ why of the rewards of investing in condos. Essentially, you can\ profit in six ways.\ 1. Appreciation\ 2. Mortgage paydown\ 3. Cash flow\ 4. Tax shelter\ 5. Value creation\ 6. Diversification\ Now we look at each of these sources of profit with more\ precision.\ \ Appreciation\ The evidence clearly shows that over the long term, condos do appreciate.\ Those who argue in favor of houses over condos only allege\ that houses appreciate at a faster pace. No one claims that\ condos won't appreciate at all.\ \ The Historical Record\ I traced some condo and townhouse prices back to the 1970s and\ then compared the same units to the prices at which they're selling\ today.\ As you can see from Figure 1.1, the least appreciating complex\ tripled in value, whereas several others have multiplied in\ value four to eight times over. In fact, although I researched\ records from all over the country, I could not find any units that\ had not at least doubled in value since 1980. In other words, the\ absolute worst record equaled an average rate of appreciation of\ about 3 percent a year.\ But before you shout, "Three percent? That's lousy!" you need to\ consider that the rewards of 3 percent appreciation are really quite\ generous. That's because nearly all investors leverage their returns.\ To buy a $100,000 condo, an investor might invest\ only $20,000 of his or her own money\ (often less). When that $100,000 unit moves up\ to $103,000, the investor has actually experienced\ a 15 percent return on invested cash-and\ that's just from first-year appreciation:\ 15% = $3,000/$20,000\ After five years, still assuming 3 percent a year, the property is then\ worth $115,900.Therefore, year six appreciation equals\ 0.03 X $115,900 = $3,477\ And the rate of return on original cash invested increases to\ 17.38% = $3,477/$20,000\ When I read in the financial press that by registering\ a total return of 10 to 12 percent a year,\ "stocks outperform all other types of investments,"\ I don't know whether to laugh or cry. As\ you can see, the weakest performing condo\ record in the country has out-earned stocks by\ a wide margin-just from appreciation!\ \ What Does the Future Hold?\ "Okay, Eldred," you might say, "you're talking history. I want to\ know what's going to happen in the future. Don't you understand\ that we're in a real estate bubble? All of the financial press is talking\ about it."\ I realize the financial journalists are trying to compare real estate\ prices to the inflated high-tech stock prices of early 2000. Infact,\ I am interviewed by such journalists almost\ weekly. I will tell you from firsthand knowledge\ that the great majority of these journalists\ couldn't value a property or calculate an investment\ return if their lives depended on it.\ I have attempted many times to explain that\ the values of rental real estate are supported by a\ real and provable stream of income, whereas\ many of the high-flying tech stocks never earned a nickel of profits.\ Even solid companies like Microsoft, Intel, and Cisco Systems were\ valued at absurd multiples of 60, 80, or 100 times actual earnings.\ The term bubble means no underlying fundamentals to support the\ price of the investment-as in the Florida land boom of the 1920s\ that the Marx Brothers spoofed in their movie Coconuts.\ Will today's housing prices stall (or even drop some) within\ the next year or two? Possibly. Will condo and house prices crash,\ as did the NASDAQ and S&P 500? Absolutely not. Will condo and\ home prices continue to set record high prices 5, 10, and 20 years\ from now? Barring economic or national collapse of the United\ States, positively, yes.\ More Historical Perspective With talk about a housing\ bubble, or as the Wall Street Journal recently wrote, "Homes no\ longer are the place to put your money," you need to gain more\ historical perspective on the decade-by-decade performance of\ home prices since the end of World War II.\ Among all of the lessons history teaches, none is more certain\ than the fact that home prices will go up. Regardless\ of how high you think prices are today,\ they will be higher 10 years from now and\ much higher 20 or 30 years into the future.\ Don't make the mistake of believing that home\ prices have reached their peak. Before you put\ faith in the naysaying of so-called economic experts,\ take a quick trip through some of their\ faulty predictions from years past:\ * "The prices of houses seem to have reached a plateau, and\ there is reasonable expectancy that prices will decline"\ (Time, December 1, 1947).\ * "Houses cost too much for the mass market. Today's average\ price is around $8,000-out of reach for two-thirds of\ all buyers" (Science Digest, April 1948).\ * "If you have bought your house since the War ... you have\ made your deal at the top of the market.... The days when\ you couldn't lose on a house purchase are no longer with\ us" (House Beautiful, November 1958).\ * "The goal of owning a home seems to be getting beyond\ the reach of more and more Americans. The typical new\ house today costs about $28,000" (Business Week, September\ 4, 1969).\ * "Be suspicious of the 'common wisdom' that tells you to\ 'Buy now ... because continuing inflation will force home\ prices and rents higher and higher'"(NEA Journal, December\ 1970).\ * "The median price of a home today is approaching\ $50,000.... Housing experts predict that in the future\ price rises won't be that great" (Nations Business, June\ 1977).\ * "The era of easy profits in real estate may be drawing to a\ close" (Money, January 1981).\ * "In California ... for example, it is not unusual to find families\ of average means buying $100,000 houses.... I'm confident\ prices have passed their peak" (John Wesley English\ and Gray Emerson Cardiff, The Coming Real Estate Crash,\ 1980).\ * "The golden-age of risk-free run-ups in home prices is\ gone" (Money, March 1985).\ * "If you're looking to buy, be careful. Rising home values are\ not a sure thing anymore" (Miami Herald, October 25,\ 1985).\ * "Most economists agree ... [a home] will become little\ more than a roof and a tax deduction, certainly not the lucrative\ investment it was through much of the 1980s"\ (Money, April 1986).\ \ Continues...\ \ \ \ \ \ \ Excerpted from Make Money with Condominiums and Townhouses\ by Gary W. Eldred\ Copyright © 2003 by Gary W. Eldred.\ Excerpted by permission.\ All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.\ Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.\ \

The Lazy Investor's Way to Wealth.Bulls, Bears, and Cash Cows.Get to Know the Development.Do the Association Finances Look Good?What Do Condo Residents Say?More Likes and Dislikes of Community Living.Understand the By-Laws.Understand the Declarations.Understand the Rules and Regulations.Choose a Profitable Location.Predict the Future.How to Buy and Finance Your Condominium.Tailor Your Lease Agreement.Your Easier Path to Wealth and Income.