Real estate investors, like baseball players, are inclined to try for the home run. Yet hitting singles and doubles can be more effective – ask Tony Gwynn.
Yesterday we wrapped up a 12-month-long escrow!
It was a short sale of a one-bedroom condo in La Mesa for $60,000:
LGS, a frequent contributor here and long-time investor, was the buyer.
This is his fourth recent condo purchase in the area. The lack of financing available has caused the prices to plummet, and cash buyers are able to get a decent return on investment. But the potential for appreciation looks promising too, based on past results.
He has been down this road before, literally – he owned the 1br across the hall in the same condo complex:
His purchase price in 1994 was $50,000, and he sold it for $215,000 in 2006.
In 1995 he paid $45,500 for unit #101, and sold it for $219,800 in 2006:
These units are nothing fancy, just your basic housing where rents are $800 to $900 per month.
LGS has no illusions about appreciation being in the distant future, but we agreed that one day the government is likely to flip the switch and make condo financing available again. In the meantime he’s getting 10% annual returns.
For those who are looking to build a real estate portfolio, you may want to consider this type of property as a good place to start. Occupants of one-bedroom units tend to be single people who stick around – in the past he had tenants stay for years. Combine that stability with the low maintenace of condos and you have a relatively painless investment!
10% may be pushing it, but I’ll take it if it comes. The cap rates are closer to 7.5-8% on these, after adding in a management company to collect rent and do turnover, etc.
Thanks to Jim for extraordinary persistence re: the short sale.
It is nice when investors have low end opportunities where they don’t have to compete with FHA buyers.
Congrats lgs, looks like you got a deal that works even without appreciation.
And I second JTR’s comment that condos can be low maintenance stable rentals. I have a condo investment where I have had the same tenant now for 17 years.
Good work, love it when I see people get high UNLEVERAGED returns going in.
That is not speculating, its great investing!
Well done LGS/JTR we have capitation rates like that in South Africa but an inflation rate of 6%. With USA inflation rates it is a brilliant investment, well worth waiting a year to get it in my opinion.
That’s a slam dunk.
Let’s note that lgs is willing to make offers without seeing the properties, because what you get with a 1br condo is fairly predictable.
In this case, he put up $5,000 non-refundable early on, and we didn’t see the property until this week!
I love the short sale angle for investing–I have been seeing some short sales closing for less than Trustee Sales and REO’s. However, and not to knock the purchase (6 times gross should provide for a great IRR) personally buying condos in distressed complexes scares me. Here are my concerns–First, the HOA can easily become unstable since the first thing people typically stop paying is their HOA payment. I saw a case in Escondido recently where water for the entire complex had been shut off since the HOA failed to pay the water bill–what are my tenants going to do then??? Second, once lenders stop lending on a particular complex, it will probably be a long haul until they start lending again, keeping prices surpressed. During this period, there will need to be a lot of cash buyers stepping up, and, since these cash buyers are usually investors, the occupant ratio then becomes way out of line and then it will remain difficult for conventinal buyers to obtain conventional loans until owner occupants purchase and move-in (seller financing?).
Agreed, there is risk. In the four buildings there are 97 units, and 11 have sold since 1/1/08, so the turnover is underway. If they all end up being purchased for rentals, the financing won’t be available but investors pay their bills, so hopefully the HOA will stay intact.
I’m guessing that Fannie/Freddie will change the rule about owner-occ ratios at some point, and then problem solved.
I heard this one my first week in the business in 1984:
Risk and reward ride the same elevator.
I like that saying Jim. I agree without risk there is usually little potential for reward and with a $60,000 purchase you’re keeping risk at a moderate level.
I currently manage a number of condo units and can validate that the average condo tenant stays longer and seems to be easier to deal with than an SFR tenant.
One word of caution though – HOA costs have been shooting up on several of my properties due to high vacancy rates from foreclosure activity. When doing your cost analysis make sure you pad what you think those costs will be otherwise it could eat up all your profits.
LGS- $60k investment, ~$9500 in revenue (95% occupancy $850x12x95%). Revenue is over 15% of capital investment. I know that I have not considered expenses, such as dues, but your capital investment at $60k keeps potential losses low, and if demand suddenly returns, then you might realize a nice profit. If values go down by 50%, then the loss on sale would be $30k (not considering depreciation–I assume this is a rental, but let’s ignore these complications).
Basically the potential upshot is for a double in five years, more or less. The downside is a reduction by 50% in the same period. Who knows what’s going to happen, but this is a risk that I’d personally take. The biggest risk, which I’ve seen happen in Vegas, is that rental values collapse. This could happen, but your break-even point is probably sufficiently low to minimize the threat. Even if rents go down to $600 (1% of purchase price), it’s still interesting.
This is one of the few deals that I would actually have made myself. Hope this one pays off well for you.
JTR- “Risk and reward ride the same elevator.”
One better hope the elevator is going to go up and not down. The other statement is, “Risk and heavy losses ride the same elevator.”
Any good places to start learning about RE investing like this? The wife and I have saved some decent money and are potentially looking to get into something similar.
So buy when prices are low and sell when they’re high. Seem like such a foreign concept in today’s economy.
shadash- It’s the new economy–buy high and sell higher.
Sounds like the lgs/jtr team has got it goin’ on!
Totally agree that $60K has limited downside. That amount doesn’t even rate as a downpayment on most houses JtR features.
Ummmmmm……got any more like that?
It appears this senario confirms the bubble. It appears the true value of the unit is around 60K, not 200+K/
Uh? I don’t get it. I looked under that zip code and nothing under $150k. Is this LA LA LAND again?
Nicely done, both to JTR and LGS.
Even I would probably go for that deal.
You also have to factor in possible special assesments into your cash flow analysis. Like $5k-$10k a pop sepcial assesments.
Also, watch out for condos buildings built from 1980-1995 as many have polybutelene plumbing, which can be a nightmare. Pipes bursting in walls, units leaking down on others, etc… The condo I rent in now just had to undergo a $325,000 re-plumb to blow out all the PTB plumbing and put in copper.
Local boy’s post was very good. Non warrantable condos become un-financeable. Then only cash investors buy causing all the units to be tenants. But I think JTR is right, eventually fannie and FHA will have to loosen guidelines. If only just to protect their own loans already in those buildings from becoming worthless.
Also, since so many of these condos were converted at the peak, and sold at the peak, many of the owners short selling or walking away haven’t been paying there hoa dues for years. Therefore the hoa’s maintenance reserves can be very low, and general maintenance on the building can have been neglected for years. Not a good combination.
…eventually fannie and FHA will have to loosen guidelines.
Don’t hold your breath. They’re already hemorrhaging red ink so badly that further tightening is more likely.
“Don’t hold your breath. They’re already hemorrhaging red ink so badly that further tightening is more likely.”
The whole schedule of government action seems to be pumping money into the banks. FHA support of otherwise unsalable condos fits that pattern.
ctr- If you are not willing to take some risk, then definitely don’t buy real estate. At the same time, don’t make bad bets.
What do you think of buying 6-8 multi-units complex to rent?
What exactly caused escrow to last a full year?