Read an Excerpt
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.
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