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Precautions/Concerns with Condos

Question:

Do you write offers on condos and apartments? And what precautions/concerns does one have to take if you do?

-W.G.

Answer:

At this point in the market, I’m not making offers on condos because it doesn’t make sense in my market. I’m buying houses way too cheap.

Some of the things you want to watch out for when you are buying condos:

1. First and foremost is the percentage of owner-occupied units to rental units in the complex. In other words, how many units are occupied by owner-occupants and how many are rentals. You need to know if you’re buying a unit located within a nice, quiet, well-maintained building that reflects pride of ownership or whether you’re about to buy a unit within a building full of low income subsidized tenants which is the equivalent of a zoo. This also affects your financing, whether you’re going to keep it and refinance it or flip it.

2. Homeowner’s Association dues may be excessive. HOA dues are tied to expenses and reserves for major repairs such as replacing the roof in the future and will only increase over time.

3. Location of the unit within the complex. For example, in high rise buildings, the higher the unit’s location, meaning the higher floor the unit is located on such as a penthouse, the higher the value. In smaller buildings and townhouse type units, end units with one common wall are typically valued higher than interior units with more common walls. Whether they have views of the ocean or whether they have views of the back of the building parking area affect the value. Everything affects the value. You’re basically buying an apartment.

4. Whether utilities are master metered, or if they’re individually metered to each unit and whether you have electric as well as gas or if it’s just electric.

5. Type of parking facilities that come with the unit whether it’s an actual garage or a subterranean parking structure, how many parking spots come with the unit (one or two), whether they’re side by side or tandem – all of these factors affect the desirability and ultimate marketability.

6. Whether the building is actually converted as a condo or co-op ownership type.

As far as apartments go, I assume you mean apartment buildings and this is considered a whole other animal than single family’s individual condo units. And if that’s correct, depending on the size of the apartment building (meaning the number of units) they are typically valued on either net income and Cap Rates (capitalization rates) or Gross Rent Multipliers (GRM), or a combination of both. There are many factors that go into calculating these values and they include but not limited to:
• Unit mix (as in number of bedrooms & baths)
• Square footage
• Year built of the building
• Quality of construction
• Desirability of location
• Amenities (pool, Jacuzzi, laundry facilities, etc.)
• Master or individually metered buildings
• Gated and security building
    

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Best areas to invest in multi-family units

Question:

Hi Tony,
Your presentation at SDCIA on Tuesday was great! Thank you for sharing your insight.
I have a question. I am currently in the process of building my real estate investment biz (I am using your free starter kit to help me). My plan is to form an entity, (my atty recommnds C corp) and start acquiring 4 to 8 unit apartment buildings to build residual positive cash flow. My next phase will be to invest in Fix and Flips.

My question is; In what area should I start acquiring apartment buildings?

I currently have my eye on San Diego, Las Vegas, Pheonix, Orlando and Tampa based on research that suggests that these are strong rental markets.

Would you advise against any of these areas and are there other areas that should also consider?

Thank you in advance for your input.
-GT

Answer:

Hi GT, and thank you for your question.

The fast answer is… I don’t have a clue. The obvious reason is presently I’m not investing in multi-residential income properties in those markets. Therefore, I simply have no need to know. Any “opinion” I would share would be just that, an “opinion” — hardly worth your time to hear.

Presently I’m focused on buying 1 to 4 residential properties and whenever possible I prefer them to ALL be detached single family dwellings with their own small private yard areas.

Also, since we handle our own property management, I am presently only buying within an hour drive from my office (located in the Antelope Valley), so my opinion of any of your preliminary markets is really not valid.

However, if you started completing the Free Starter Kit, then you already know the first thing you must deal with is Choosing a Target Market (and knowing it better than anyone else.)

The choosing of a specific place (or geographical location) to start buying apartments (or anything for that matter) is very strategic and unfortunately ALWAYS entirely up to YOU to decide. The reason for this should be obvious — it’s simply YOUR money, credit, time and effort.

You have to go through the process (learning curve) of HOW TO identify a location that is going to feed you the type of property, tenants and cash flow at the prices you think you will need to be profitable.

As far as my or anybody’s “opinion” as to whether one state or city is better or worse than another… well, honestly I would have to go through exactly the same steps I suggest that you take in the Free Started Kit to arrive at the same conclusion, so why repeat the effort?

Seek information and advice from investors who already own the same type of property you are interested in, and other real estate professionals (i.e. appraisers, insurance agents, etc. — not just the brokers and agents who specialize in that type of property who stand to get paid when you buy and not when you don’t — although honestly, they are an important part of your initial investigation.) The key is that you consult MANY individuals who have first hand experience of that market not just opinions they’ve read or heard from somebody else.)

In the past, I have purchased apartments of all sizes, shapes, types and locations in many Target Markets. I have used both a buy, fix & flip to other long-term hold investors model, and a buy, fix & hold long-term model as well.

Since I do not know your level of experience in the business I will caution you about a few things (if I may…)

1. Try to stick with properties as close to where you are physically at the beginning as this will help you to manage your tenants and/or your managers more effectively and with minimal stress and expense. (NO ONE WILL EVER MAKE DECISIONS IN YOUR BEST INTEREST AS WELL AS YOU WILL.)

2. Do all your research about the area and such, but remember you do not have to know EVERYTHING before starting to make offers. Use your contingencies effectively to both buy yourself appropriate time to fully investigate the properties, and to also withdraw from the deal should you discover it’s not what you want.

3. If you will need financing, make it an integral part of your initial research to personally visit with lenders LOCAL to the Target Market you choose. Prior to placing offers, make sure you have ALL the elements of accomplishing your goal firmly in hand.

4. Remember, properties for sale are everywhere, but a “Great Deal” is seldom found just by looking. More times than not, it’s created by your efforts, your understanding of your Target Market, as well as, the elements of doing whatever you decide to do as an investor (and the depth and breadth of your relationships within the business community you select as your Target Market.)

5. Should you decide to invest out of state, please do your due diligence slowly, carefully and deliberately. Be clearly aware of all the Pros and Cons (especially the CONS!) 😉

On the other hand, if you are an experienced investor and are already aware of the specific things I’ve mentioned above, I can tell you this – I would personally stay clear of the Vegas market since I have done research and find it very transient. I personally like the Orlando market (and Florida in general) if you can deal with the gun toting citizens (tenants), senior drivers and the occasional hurricane.

We hope we have been of good service.

Thank you for your question.

Your friend always,
Tony