Why would anyone buy a condo (from an investment standpoint)

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Christian NY
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Why would anyone buy a condo (from an investment standpoint)

Post by Christian NY »

Hi,
Note: I posted this here because I am comparing buying vs. stock market investing (such as the simple 3-fund portfolio)
I am looking at this building and the condos are selling fast and for all cash. However I can't figure out why would anyone buy a condo there as opposed to rent.
Visited friends who are renting in this building and looked at a couple of units for sale.
The price of a typical unit is $300k.
The numbers look like this:
RENT:
Income from alt. investment +$21000
Expenses (rent) -$19200
Net +$1800
(What I am trying to say is if you put this 300k in the stock market @7% return and pay rent of $1600 a month your result is positive $1800. Yes I know it's not guaranteed and it may go down but I am using average long-term return,let's say we are comparing renting for 15 years vs. buying)
PURCHASE:
Income from alt. investment $0 (cause your $300k is tied up so you don't get the $21k income as above)
Expenses (maint+prop. Tax) $12000 (maintenance is $560 and prop. tax currently $5020/yr which is $418 a month but I rounded up to 1000 for both)
Net -$12000
So if my calculations are correct, renting brings +$1800/Yr and buying is a loss of -$12000/Yr
Yes I know if you finance it starts to make sense but in this market most people pay cash.
Also, some people say there is some sense of security in buying but I disagree. Why? As I said I stayed with my friends for a few days and there is a barking dog next door that is DRIVING EVERYONE CRAZY and spoiling the whole "resort living" experience. Complained dozens of times - no change. So they are moving at the end of the lease which is in a few months. If they bought this place instead-they're stuck.
Going back to my original question-why would anyone buy considering all of the above? :confused
Hypersion
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by Hypersion »

You need to include the value of the condos going up each year. Also a lot of the owners might have bought the units when they were $200K or $100K.

My condo is worth about $330K now but I bought it for $215K at 3.3% mortgage. If I was shopping around now i might just decide to rent.
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by junior »

Christian NY wrote:Hi,

(What I am trying to say is if you put this 300k in the stock market @7% return and pay rent of $1600 a month your result is positive $1800.
I don't understand your post. Most people can't put 300k in the stock market instead of buying a condo. They borrow money to buy the condo. They can't borrow that money to invest in stocks.

I don't follow your analysis and I doubt it's account for everything like home equity.

You should compare with the rent vs buy calculators:

http://www.nytimes.com/interactive/busi ... ulator.php


The Michael Bluejay one is even better because it can account for real estate tax deduction:

http://michaelbluejay.com/house/rentvsbuy.html

In my local market buying is better after a few years.
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JoMoney
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by JoMoney »

We often talk about broad averages, but when you look at a specific property there are unique factors that will make the situation unique.
Different regions and even neighborhoods can have different cap rates (the relative rental income cash flow vs cost), generally areas with very high cap rates are places seen as having slow or declining growth in the market, low cap rates generally imply high growth expectations in the area.

For some people, buying a home is not an investment decision, its just another consumption choice, and there may be value that's not denominated in money for things like being in a certain neighborhood, school district, etc...
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
AlohaJoe
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by AlohaJoe »

Christian NY wrote:The price of a typical unit is $300k.
Income from alt. investment +$21000
Please tell me this investment that yields 7% a year guaranteed. If we're going to make up fantasy numbers why not an alt investment that generates $50,000 a year? Then buying looks really dumb!

Also, rent goes up. Mortgages don't.
kjvmartin
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by kjvmartin »

AlohaJoe wrote:
Christian NY wrote:The price of a typical unit is $300k.
Income from alt. investment +$21000
Please tell me this investment that yields 7% a year guaranteed. If we're going to make up fantasy numbers why not an alt investment that generates $50,000 a year? Then buying looks really dumb!

Also, rent goes up. Mortgages don't.
PITI payments often go up, quite a bit. I'd think it's more fair to say they generally both go up.
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by MossySF »

For a condo, HOA definitely goes up. My HOA is now +45% higher than 8 years ago when I bought. Property tax is has also gone up but more slowly due to CA Prop 13. Most other states, it goes up with property values.

I bought at the nadir of the housing bust and I've finally turned an overall profit after 8 years. Basically, rents collapsed at the same time that housing prices did so I had no choice but feed the alligator the first 5+ years.

Yeah, if I include appreciation, I would be up a lot but I calculated putting that same money (downpayment + monthly bleed) into Vanguard REIT would have left me with an even larger balance. Obviously, Vanguard REIT has been up a lot this period but so has housing so that's a wash.

Some good things about going the condo rental route versus a house rental route:

1) More renters are looking for apartments so a condo would be in the same pool

2) HOA includes the overall building/grounds maintenance so it's easier for a hands-off landlord.
Last edited by MossySF on Sat May 13, 2017 10:59 pm, edited 3 times in total.
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Christian NY
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by Christian NY »

junior wrote:
Christian NY wrote:Hi,

(What I am trying to say is if you put this 300k in the stock market @7% return and pay rent of $1600 a month your result is positive $1800.
I don't understand your post. Most people can't put 300k in the stock market instead of buying a condo. They borrow money to buy the condo. They can't borrow that money to invest in stocks.

I don't follow your analysis and I doubt it's account for everything like home equity.

You should compare with the rent vs buy calculators:

http://www.nytimes.com/interactive/busi ... ulator.php


The Michael Bluejay one is even better because it can account for real estate tax deduction:

http://michaelbluejay.com/house/rentvsbuy.html

In my local market buying is better after a few years.
Well, in the market I looked at it's usually all cash.
I own a house myself and of course know all the benefits of home ownership.
I am only confused by why people are buying in this particular scenario. There is a lot of activity and sales in that building and surrounding buildings.
VaR
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by VaR »

They say that most people buy because of pride of ownership, right? It sounds trite but it is a big factor that you can invest in improvements or make it "just so". That's a big factor for me since I tend to like things a certain way. How else could I get a heated towel bar and wired ethernet in every room? Not to mention renovating the bathrooms and kitchens when they start looking dated and replacing the carpet in the bedroom with hardwood flooring?

But I think you're looking at a very specific situation in a building, right? Everyone who bought in that building is in a particular situation and has different assumptions like:
1. Comparison might be more appropriate to bonds for the level of volatility you'll have to live with.
2. Pulling out 7% income from equity investments to pay rent means you'll have to take taxable income, which means paying income tax. You might get a break by paying dividend or capital gains rates, but if you're in the wrong tax bracket you'll be subject to exemption phase-out, the ACA surtax, and the phase-out of deductions.
3. Even for equities, everyone seems to think 7% is too high. What do the numbers look like at 6%?
4. Assuming a conservative 2% annual increases in property value, that's $6,000 a year.
5. It's an inflation hedge - you don't have to worry about rent increases if inflation goes up.

So all in all, it's like buying a municipal bond (no income taxes) and a inflation protected bond (you get imputed increases in value from the underlying property price) at the same time. Hey, and you get to live there too (though not "for free" since you're giving up your coupon for the privilege).

BTW, I'm not sure where this is that people buy $300k condos for all cash and live in them year-round, but that might help us come up with the correct explanation.
rebellovw
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by rebellovw »

We did and it worked out really well. When we moved to Az - we wanted our two sons out of the house (they were driving us nuts) - so we put them in a condo in a college town. Get them out on their own - let them fend for themselves (sorta) - get them to go to school etc.

5 years later kids out sold the condo for a nice tidy profit (bought 150 sold for 200).

I now have an extra 150K in savings.

I wouldn't try to get rich of this plan - but heck - I'm sure glad we did it vs renting them a place. With property taxes and mortgage on the condo - we may have also saved on some additional $ our our taxes.

I'm extremely happy we went this route.
wander
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by wander »

I buy a condo because I want to make sure that I do not have to move if the landlord decides to raise the rent; feel settle; affordable (easy to pay off quickly and live rent free); don't have to worry about landscape or yard work; someone else (not me) removes snow.
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Nate79
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by Nate79 »

I surely hope you don't do your retirement math like that. Try a 3.5-4% withdrawal rate on the $300k as an income stream to pay the housing cost perpetually inflation adjusted. That would be at least getting somewhat closer to a realistic comparison vs the staged scenario you made up.
Valuethinker
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by Valuethinker »

Christian NY wrote:
Well, in the market I looked at it's usually all cash.
I own a house myself and of course know all the benefits of home ownership.
I am only confused by why people are buying in this particular scenario. There is a lot of activity and sales in that building and surrounding buildings.
We need a geographic reference- -where do these numbers come from?

In Toronto, Vancouver, NYC, Miami you do get a lot of foreign buyers who are cash only. Particularly, but not only, Chinese. A Venezuelan or Columbian professional buying in Miami will likely not get a mortgage from a US bank.

BTW in Toronto you won't get much condo for $300k. Not in the City proper (ie the 2.1m residents, rather than the 6.0m in the Greater Toronto Area).

You also get trading downers. For example with my relatives (in Canada), selling a more valuable farm to trade down to a condo-- another cash buyer. Renting is not a great option if you are a Senior, because you can be evicted with less than 6 weeks notice. You need the security of tenure. Also given the current tax rates and low potential returns, even dead money is better than no money (from investing in fixed income) or risky money (stocks).

Portland OR is another city that comes to mind, where you get an inflow of people from California who can pay cash.

A Condo is partly a lifestyle choice for older buyers or young buyers (on high professional incomes) who don't have children (usually) and wish to live/ work in the city centres.
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by itstoomuch »

We bought rental condo with inheritance as a way to diversify income streams. Seattle, late 2015. ~20% total appreciation :moneybag plus very nice ROI :dollar
That's why. :sharebeer
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TheJoker
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by TheJoker »

1. Appreciation of value. (Location San Diego)
2. Depreciation. (to offset earned income.)
3. Diversification of investments.
4. No additional interest income or dividends while being employed.

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Re: Why would anyone buy a condo (from an investment standpoint)

Post by Pajamas »

The economics of buying vs. renting changes over time. When I bought my co-op, it was significantly cheaper than renting, but now it might go in the other direction. But there are some benefits to owning over renting even if it is slightly more expensive and for me, they outweighs the negatives.

From an investment standpoint, buying was an excellent financial decision for me, in retrospect. If I had invested the full price of my apartment instead and had received a 7% return, the total would be well under half of the market value of the apartment, and that's ignoring any tax benefits and the significantly reduced monthly cost of ownership compared to renting. (Thanks for inspiring me to calculate it.)

The benefits depend greatly on timing, and so to some degree, on luck.
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by Valuethinker »

Tons of empirical evidence (See Shiller; also Neil Monnery Safe as Houses: 8 centuries of housing prices) shows that housing in the long run is a poor investment.

This should not surprise us, because housing provides another service (place to live) that commercial property or stocks don't provide the holder.

One should not expect to make good long term returns on condominiums. Conversely, it's a place to live and there are (some) advantages to ownership.

Beware physical depreciation though. My guess is that's higher for a tall building with all the electricals and mechanicals than for a Single Family detached home.
Valuethinker
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by Valuethinker »

Pajamas wrote:The economics of buying vs. renting changes over time. When I bought my co-op, it was significantly cheaper than renting, but now it might go in the other direction. But there are some benefits to owning over renting even if it is slightly more expensive and for me, they outweighs the negatives.

From an investment standpoint, buying was an excellent financial decision for me, in retrospect. If I had invested the full price of my apartment instead and had received a 7% return, the total would be well under half of the market value of the apartment, and that's ignoring any tax benefits and the significantly reduced monthly cost of ownership compared to renting. (Thanks for inspiring me to calculate it.)

The benefits depend greatly on timing, and so to some degree, on luck.

Real estate investing is leveraged-- most of us borrow money to do this. That means our upside (and downside) is magnified. If it's a place we happen to live in *and we keep our jobs* then a RE downturn and negative equity can be ridden out.

That's fundamentally different from investing in stocks. With stocks you can get margin called, and you can't live in your stock portfolio.

So like-for-like we have to look at the *unleveraged* returns (but taken after tax). The data on returns for residential RE does not inspire confidence that, in the long run, it comes out ahead of stocks (on a before tax basis)-- stocks have done a lot better in the long run.

Owning your own home also has a lot of location-specific risks. Conversely, the repayment of debt is forced savings- -so you build equity by doing that (with an amortizing loan).
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Pajamas
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by Pajamas »

Valuethinker wrote:

Real estate investing is leveraged-- most of us borrow money to do this. That means our upside (and downside) is magnified. If it's a place we happen to live in *and we keep our jobs* then a RE downturn and negative equity can be ridden out.

That's fundamentally different from investing in stocks. With stocks you can get margin called, and you can't live in your stock portfolio.

So like-for-like we have to look at the *unleveraged* returns (but taken after tax). The data on returns for residential RE does not inspire confidence that, in the long run, it comes out ahead of stocks (on a before tax basis)-- stocks have done a lot better in the long run.

Owning your own home also has a lot of location-specific risks. Conversely, the repayment of debt is forced savings- -so you build equity by doing that (with an amortizing loan).
The returns were calculated without considering any leverage on my apartment. (" If I had invested the full price of my apartment instead")

However, I did take out a mortgage for 80% of the purchase price, although I paid it off very early. The leveraged return would have been much higher.

I also use some leverage in my brokerage account, much less now than at some times in the past. Returns have been much higher than margin interest rates over the past few years. (I use a broker with relatively low margin rates, though not the lowest available.)

When using margin on stocks, yes, you can get a call and have to sell stocks, but many people have had their mortgage loans "called" too and found themselves on the street. A secured loan is a secured loan.
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dm200
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by dm200 »

It seems to me that, to be financially successful, becoming a landlord would probably require some degree of work and knowledge in addition to the financial investment.
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by grabiner »

Christian NY wrote:Hi,
Note: I posted this here because I am comparing buying vs. stock market investing (such as the simple 3-fund portfolio)
I am looking at this building and the condos are selling fast and for all cash. However I can't figure out why would anyone buy a condo there as opposed to rent.
Visited friends who are renting in this building and looked at a couple of units for sale.
The price of a typical unit is $300k.
The numbers look like this:
RENT:
Income from alt. investment +$21000
Expenses (rent) -$19200
Net +$1800
(What I am trying to say is if you put this 300k in the stock market @7% return and pay rent of $1600 a month your result is positive $1800. Yes I know it's not guaranteed and it may go down but I am using average long-term return,let's say we are comparing renting for 15 years vs. buying)
The fact that this is not a guaranteed return is important. You probably don't have 100% of your investments in stock, because you have a risk tolerance. Therefore, you would prefer a guaranteed return of 6.4% to a stock investment.

A more reasonable comparison would be a low-risk bond. A bond portfolio which pays $19200 annually for 15 years, growing with inflation, would cost about $250K (invested in TIPS) but would be exhausted after the 15 years.
PURCHASE:
Income from alt. investment $0 (cause your $300k is tied up so you don't get the $21k income as above)
Expenses (maint+prop. Tax) $12000 (maintenance is $560 and prop. tax currently $5020/yr which is $418 a month but I rounded up to 1000 for both)
Net -$12000
Again, if you had a TIPS portfolio to cover the expenses, that would be $150K.

So, if you have $450K to invest, you could buy the condo and $150K in TIPS, or buy $200K in stock and $250K in TIPS. Either way, you would have a place to live for the next fifteen years. If you buy the condo, you would have a condo worth $300K plus any change in housing prices; if you rent, you would have $200K plus any change in the stock market. Both of these are risky investments, and they are reasonably comparable; the stock market tends to rise somewhat faster than housing prices. (However, any gains in the condo would be tax-free, and you could even sell the condo for a $500K profit and still pay no tax on the gain.)

So with these numbers, buying looks slightly better than renting, given the fifteen-year period. The time frame is important because of the costs of buying and selling, which are high but are a one-time cost.
Wiki David Grabiner
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by LarryAllen »

Christian NY wrote:
junior wrote:
Christian NY wrote:Hi,

(What I am trying to say is if you put this 300k in the stock market @7% return and pay rent of $1600 a month your result is positive $1800.
I don't understand your post. Most people can't put 300k in the stock market instead of buying a condo. They borrow money to buy the condo. They can't borrow that money to invest in stocks.

I don't follow your analysis and I doubt it's account for everything like home equity.

You should compare with the rent vs buy calculators:

http://www.nytimes.com/interactive/busi ... ulator.php


The Michael Bluejay one is even better because it can account for real estate tax deduction:

http://michaelbluejay.com/house/rentvsbuy.html

In my local market buying is better after a few years.
Well, in the market I looked at it's usually all cash.
I own a house myself and of course know all the benefits of home ownership.
I am only confused by why people are buying in this particular scenario. There is a lot of activity and sales in that building and surrounding buildings.
A lot of investors like real estate better than stocks. A lot of other investors like to diversify real estate and stocks. Some people like the tax advantages of real estate ownership. There are a lot of reasons. I think your analysis is far to simplified.
Valuethinker
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by Valuethinker »

Pajamas wrote:
Valuethinker wrote:

Real estate investing is leveraged-- most of us borrow money to do this. That means our upside (and downside) is magnified. If it's a place we happen to live in *and we keep our jobs* then a RE downturn and negative equity can be ridden out.

That's fundamentally different from investing in stocks. With stocks you can get margin called, and you can't live in your stock portfolio.

So like-for-like we have to look at the *unleveraged* returns (but taken after tax). The data on returns for residential RE does not inspire confidence that, in the long run, it comes out ahead of stocks (on a before tax basis)-- stocks have done a lot better in the long run.

Owning your own home also has a lot of location-specific risks. Conversely, the repayment of debt is forced savings- -so you build equity by doing that (with an amortizing loan).
The returns were calculated without considering any leverage on my apartment. (" If I had invested the full price of my apartment instead")

However, I did take out a mortgage for 80% of the purchase price, although I paid it off very early. The leveraged return would have been much higher.

I also use some leverage in my brokerage account, much less now than at some times in the past. Returns have been much higher than margin interest rates over the past few years. (I use a broker with relatively low margin rates, though not the lowest available.)
Unleveraged returns on residential property tend to be a lot lower than stocks. For the reasons I have outlined. One should be aware that the long run returns on residential RE are quite poor (more or less inflation). That's where we have pricing data like-for-like: periods of c. 100-120 years for Canada, Australia, USA; for centuries we have the Herengracht Canal data from Amsterdam (since 1630s), Paris (since 1300s), UK (since 1800s or 1700s) etc.

We are at the peak of a remarkable global RE boom. It's almost unprecedented in history (1910-1913 was probably its predecessor) and there are a number of demographic and other factors which may mean we have hit "peak RE". And it is quite concentrated: New York City, San Francisco Toronto, Vancouver, London, Miami, Sydney, Melbourne, Auckland, Hong Kong ... a common factor is international Chinese investment and international capital generally seeking a safe haven in a world of negative real interest rates. (San Francisco it is around tight zoning laws and the tech industry boom).

When using margin on stocks, yes, you can get a call and have to sell stocks, but many people have had their mortgage loans "called" too and found themselves on the street. A secured loan is a secured loan.
How can a mortgage loan be "called"? If a mortgage is 25 years, it cannot be called until it expires? You drop into negative equity on a 25 year mortgage, it doesn't matter as long as you make the monthly payment.

UK mortgages tend to be floating rate, albeit 25 year term. US mortgages tend to be fixed rate, 25 year term?
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by Valuethinker »

LarryAllen wrote:
Christian NY wrote:
junior wrote:
Christian NY wrote:Hi,

(What I am trying to say is if you put this 300k in the stock market @7% return and pay rent of $1600 a month your result is positive $1800.
I don't understand your post. Most people can't put 300k in the stock market instead of buying a condo. They borrow money to buy the condo. They can't borrow that money to invest in stocks.

I don't follow your analysis and I doubt it's account for everything like home equity.

You should compare with the rent vs buy calculators:

http://www.nytimes.com/interactive/busi ... ulator.php


The Michael Bluejay one is even better because it can account for real estate tax deduction:

http://michaelbluejay.com/house/rentvsbuy.html

In my local market buying is better after a few years.
Well, in the market I looked at it's usually all cash.
I own a house myself and of course know all the benefits of home ownership.
I am only confused by why people are buying in this particular scenario. There is a lot of activity and sales in that building and surrounding buildings.
A lot of investors like real estate better than stocks. A lot of other investors like to diversify real estate and stocks. Some people like the tax advantages of real estate ownership. There are a lot of reasons. I think your analysis is far to simplified.
Given the specific risk of owning particular rental properties, the main attraction is that one can use more leverage, and more safely (as mortgages typically have 25 year term). Otherwise owning apartment REITs would be a quite similar investment, more stable, and far more diversified.
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by Jags4186 »

Pajamas wrote: When using margin on stocks, yes, you can get a call and have to sell stocks, but many people have had their mortgage loans "called" too and found themselves on the street. A secured loan is a secured loan.
Unless there are some extremely unusual circumstances a mortgage issued by a bank for an owner occupied residence in the United States cannot be called. That's the appeal of real estate.
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by Pajamas »

Jags4186 wrote: Unless there are some extremely unusual circumstances a mortgage issued by a bank for an owner occupied residence in the United States cannot be called. That's the appeal of real estate.
Plenty of owners are evicted and houses and apartments are repossessed every day because they don't make payments. Granted not the same as a margin call, which is why I put it in quotation marks. Plus plenty of people are still underwater on houses they bought before 2008-2009 crisis.

I'm don't think being able to over-leverage and ride a bad investment down is the appeal of real estate; I would call it one of the significant problems with it.
Valuethinker wrote: We are at the peak of a remarkable global RE boom.
Maybe, maybe not. It also looks like we are at the peak of a remarkable global population boom, at least for humans and the plants and animals that we eat. But it may or may not be the peak.
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by Jags4186 »

Pajamas wrote:
Jags4186 wrote: Unless there are some extremely unusual circumstances a mortgage issued by a bank for an owner occupied residence in the United States cannot be called. That's the appeal of real estate.
Plenty of owners are evicted and houses and apartments are repossessed every day because they don't make payments. Granted not the same as a margin call, which is why I put it in quotation marks. Plus plenty of people are still underwater on houses they bought before 2008-2009 crisis.

I'm don't think being able to over-leverage and ride a bad investment down is the appeal of real estate; I would call it one of the significant problems with it.
That's not calling a loan. If you don't make your payment you're defaulting on your loan. Big difference.

You can buy a home, watch it tank in value, and merrily go on paying your monthly payment and wait it out. You can't do that with callable loans unless the lender allows it.
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by Pajamas »

Jags4186 wrote:
That's not calling a loan. If you don't make your payment you're defaulting on your loan. Big difference.

You can buy a home, watch it tank in value, and merrily go on paying your monthly payment and wait it out. You can't do that with callable loans unless the lender allows it.
Thanks, I understand it well. No need to explain. :beer
Arthur Digby Sellers
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by Arthur Digby Sellers »

Christian NY wrote: RENT:
Expenses (rent) -$19200
PURCHASE:
Expenses (maint+prop. Tax) $12000 (maintenance is $560 and prop. tax currently $5020/yr which is $418 a month but I rounded up to 1000 for both)
If those numbers are correct, I also don't know why anyone would buy a condo in that building as opposed to renting. The fixed expenses for renting (rent) are $1,600 per month, whereas the fixed expenses for buying (maintenance + property tax) are $1000. Those numbers are extremely close to one another--so much so that I wonder whether there must be a mistake somewhere.

Unlike the example you posited, most condos have MUCH lower fixed expenses as compared to rent. For example, my condo has fixed expenses (COA + property taxes) of about $950 per month whereas the cost to rent a similar unit would be about $2,500. (Of course there are other increased costs of owning, including unexpected maintenance/repairs, homeowners insurance, mortgage, etc. that make buying less of a slam dunk, but it is still a much better deal than in the OP's scenario.)
Valuethinker
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by Valuethinker »

Pajamas wrote:
Jags4186 wrote: Unless there are some extremely unusual circumstances a mortgage issued by a bank for an owner occupied residence in the United States cannot be called. That's the appeal of real estate.
Plenty of owners are evicted and houses and apartments are repossessed every day because they don't make payments. Granted not the same as a margin call, which is why I put it in quotation marks. Plus plenty of people are still underwater on houses they bought before 2008-2009 crisis.

I'm don't think being able to over-leverage and ride a bad investment down is the appeal of real estate; I would call it one of the significant problems with it.

It is only by leverage that you can get higher returns on residential RE. Otherwise returns over the long run are extremely pedestrian.
Valuethinker wrote: We are at the peak of a remarkable global RE boom.
Maybe, maybe not. It also looks like we are at the peak of a remarkable global population boom, at least for humans and the plants and animals that we eat. But it may or may not be the peak.
It isn't about population in aggregate-- all of those countries where those cities are that I named have declining rates of population growth (due to low domestic birth rates and an outlook for lower immigration). Australia and Canada the Baby Boomers are starting to sell out and downsize. The first Baby Boomer retired at 65 in 2011. The last one will do so in 2036.

I'll stick with my forecast. Those cities I named are at or near peak prices for this cycle. They have crashed before, they will again. Home Capital Group (Canada) these last 2 weeks is the thin edge of the wedge. It's going to get worse.

You'll note I didn't say the same thing about Mumbai, Delhi or Lagos, for example. Demographics in those countries are much more favourable, and we are nowhere near where they might go in terms of economic growth in the future. That said, I know little about these markets, and it may well be that homes in India are overvalued, waiting for the next bust. Just in the case of India (and Nigeria) I suspect that whatever bust happens will be followed by a subsequent boom-- like any nation going through an amazing economic transformation.

China? Not so clear. There's a heck of a lot of bad debt out there. Chinese labour force is not increasing-- the country has developed world demographics.

New York, London, San Francisco? Brexit of course muddies things. If there's another financial crash (or the tech industry goes through one of its periodic spasms) then you could see those housing prices come back, a lot. But there are restrictions on land supply (and condo heights) and although things are totally overcooked on some metrics, these are places that have long term histories as destinations of international wealth. For example when the Brexit vote came in, London became significantly *cheaper* for foreign buyers and their interest seemed to pick up.

But Vancouver Sydney Melbourne Toronto Auckland are way into bubble territory. Impressively so.

Generally in the US residential RE markets do not look overvalued. There is probably a good few years to go on this. But some places have a bubbly feel to them.
Last edited by Valuethinker on Tue May 16, 2017 11:19 am, edited 1 time in total.
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Hawaiishrimp
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by Hawaiishrimp »

Why would anyone buy a condo?

Because they can't afford a house yet.
I save and invest my money, so money can make money for me, so I don't have to make money eventually.
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by FedGuy »

Hawaiishrimp wrote:Why would anyone buy a condo?

Because they can't afford a house yet.
I own a condo and have zero interest in owning a house, whether or not I can afford it. I don't want to have to mow the lawn or shovel the snow, or have to maintain the roof or the exterior walls. I enjoy the social benefits of having dozens of neighbors under the same roof, and like having an on-site condo employee to receive packages while I'm at work. Owning and maintaining a house seems miserable to me.
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ether161
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by ether161 »

With real estate you want 18% of the properties' value in gross rents every year. So a 300k property, you want $54,000/yr in rent.
Of that $54,000 you will have expenses of:

5% property value is the opportunity cost of investing in debt/equity (-15,000)
3.5% property value is lost b/c of not collecting rent 20% of the time (-10,500)
3% property value is lost to depreciation (HVAC, roof, foundation) (- 9,000)
1% property value is lost to sewer and water fees (- 3,000)
1.5% property value is lost to local property taxes (- 4,500)
3% property value is lost to management fees. Advertising, paying (- 9,000)
a property manager, or just reimbursing yourself for the time
spent coordinating the property
-------------

So of that 54k in rent, $51k is lost to expenses and opportunity cost. Leaving you a reward of 3k for taking the risk of concentrating so much capital into one investment(Or paying off the HOA :D ). Aka that 3k is a 1% alpha you get over just doing boring old debt and equity investments. Since you would never be able to rent a 300k condo for $4,500/month, most investors would either buy a distressed condo for much cheaper or look for alternative investments. Remember always rent the property for 18% of the property value!
Last edited by ether161 on Tue May 16, 2017 4:29 pm, edited 1 time in total.
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by Valuethinker »

ether161 wrote:With real estate you want 18% of the properties' value in gross rents every year. So a 300k property, you want $54,000/yr in rent.
Of that $54,000 you will have expenses of:

5% property value is lost to opportunity cost of investing in stock (-15,000)
3.5% property value is lost b/c of not collecting rent 20% of the time (-10,500)
3% property value is lost to depreciation (HVAC, roof, foundation) (- 9,000)
1% property value is lost to sewer and water fees (- 3,000)
3% property value is lost to management fees. Advertising, paying (- 9,000)
a property manager, or just reimbursing yourself for the time
spent coordinating the property
-------------

So of that 54k in rent, $46.5k is lost to expenses and opportunity cost. Leaving you a reward of 7.5k for taking the risk of concentrating so much capital into one investment(Or paying off the HOA). Since you would never be able to rent a 300k condo for $4,500/month, most investors would either buy a distressed condo for much cheaper or look for alternative investments. Remember always rent the property for 18% of the property value!
That looks massively conservative to me! Where I live no one would ever invest in property at all on those numbers.

The metric I use is cap rate around 6%. Taking Net Operating Income/ Value.

Say NOI = gross rent - 1 month void pa (1/12 or 1/13) - 10% for management fees.

For residential property that seems reasonably conservative. In London, that would be hard to achieve (only possible in outlying areas) which makes me think London is too expensive.
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ether161
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by ether161 »

The metric I use is cap rate around 6%. Taking Net Operating Income/ Value.
If you only shoot for 6% ROI, when you factor in the cost of fixing depreciated roofs, HVAC, plumbing, electric, foundations and the cost of property taxes you're not looking at a return much higher than just investing in long term corporate debt. Like many have said, homes are consumables and luxury items, it's hard to achieve alpha over standard investments with renting property. Now brokerages, tax foreclosures, wholesaling, property management, that's a different story :twisted:
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by junior »

The only thing I'll add is I believe studies show people have more satisfaction with their homes when they own rather than rent. I don't know if any of those studies looked at condos though.
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by bhough »

OP,

I didn't read all of your replies, but I feel obligated to answer your question directly.

1. Most real estate investors function like musical chairs, assuming appreciation and hoping to sell to the next person. The idea is to us leverage and the magic of inflation and wait a few years. This is despite what happened 10 years ago. Some will say they can estimate demand based on local growth, etc. Maybe on the professional really do this. It is unlikely you will profit from this strategy.

2. One might invest in condos if you have enough capital to buy > 50% of the units and become the board, making all the decisions about rehab, common ares, etc. If you can't control the board, you may be on the receiving end of deferred maintenance and "special assessments" which you have no control over. Specifically, you can't control the timing or the cost.

3. Some large RE family dynasties own hundreds of condos in many stable buildings. I can't know this, but I suspect they invest the old fashioned way, expecting stable cash flows from the difference in rents vs costs. These families (or what I read about them publicly) have a property management arm and likely sit on the board of the condos so they can influence things to their advantage, even if they may not own > 50%.

Buying one condo in a building that is way overpriced will likely mean a very quiet, very subtle financial ruin for you. Please avoid this trap.

b
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by Bogle826 »

ether161 wrote:With real estate you want 18% of the properties' value in gross rents every year. So a 300k property, you want $54,000/yr in rent.
Of that $54,000 you will have expenses of:

5% property value is the opportunity cost of investing in debt/equity (-15,000)
3.5% property value is lost b/c of not collecting rent 20% of the time (-10,500)
3% property value is lost to depreciation (HVAC, roof, foundation) (- 9,000)
1% property value is lost to sewer and water fees (- 3,000)
1.5% property value is lost to local property taxes (- 4,500)
3% property value is lost to management fees. Advertising, paying (- 9,000)
a property manager, or just reimbursing yourself for the time
spent coordinating the property
-------------

So of that 54k in rent, $51k is lost to expenses and opportunity cost. Leaving you a reward of 3k for taking the risk of concentrating so much capital into one investment(Or paying off the HOA :D ). Aka that 3k is a 1% alpha you get over just doing boring old debt and equity investments. Since you would never be able to rent a 300k condo for $4,500/month, most investors would either buy a distressed condo for much cheaper or look for alternative investments. Remember always rent the property for 18% of the property value!

This would be impossible in coveted areas.

In which areas are you getting $4,500 a month on 300K units? These properties have negative appreciation?
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by Valuethinker »

ether161 wrote:
The metric I use is cap rate around 6%. Taking Net Operating Income/ Value.
If you only shoot for 6% ROI, when you factor in the cost of fixing depreciated roofs, HVAC, plumbing, electric, foundations and the cost of property taxes you're not looking at a return much higher than just investing in long term corporate debt. Like many have said, homes are consumables and luxury items, it's hard to achieve alpha over standard investments with renting property. Now brokerages, tax foreclosures, wholesaling, property management, that's a different story :twisted:
Hi. You may well be right. I have been trying to justify to myself RE prices in places like London, Toronto, Vancouver. In the central areas of these cities cap rates may be below 3%, even 2%. I was trying to adjust Net Operating Income to make it suitably conservative but perhaps not factoring in sufficiently physical depreciation on the property.

Property taxes in London would be very low by US standards. On the other hand there are transaction taxes (Stamp Duty) and all sorts of new restrictions coming in.

I agree to make money in residential property is a business decision rather than an investment one per se-- not like for like. That said, if I had put all my spare cash into London property rather than into stocks the last 25 years... ;-). I'd be retired by now.
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by Valuethinker »

ether161 wrote:
The metric I use is cap rate around 6%. Taking Net Operating Income/ Value.
If you only shoot for 6% ROI, when you factor in the cost of fixing depreciated roofs, HVAC, plumbing, electric, foundations and the cost of property taxes you're not looking at a return much higher than just investing in long term corporate debt. Like many have said, homes are consumables and luxury items, it's hard to achieve alpha over standard investments with renting property. Now brokerages, tax foreclosures, wholesaling, property management, that's a different story :twisted:
I should add. 6% Cap Rate is not 6% ROI unless the beginning price and the end price don't change (net prices). Cap rate is just the income yield of a property, net net-- we call it "yield".

To make the numbers work you have to assume some kind of property price appreciation. If I assume say 4% pa (the average in London over the last 25 years is something like 7-8% pa ;-)) then you get a 10% pa return which probably compensates you for the risk. Of course, the long run real return on housing is between 0 and 1%, so that means this unprecedented period has to continue-- this time it's different ;-).
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by ether161 »

Valuethinker wrote:
I agree to make money in residential property is a business decision rather than an investment one per se-- not like for like. That said, if I had put all my spare cash into London property rather than into stocks the last 25 years... ;-). I'd be retired by now.
You're right 100% The real money in real estate is from property appreciation. Who would of thought that areas that were once public housing would be filled with multi-million condos!
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ether161
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by ether161 »

Valuethinker wrote: To make the numbers work you have to assume some kind of property price appreciation. If I assume say 4% pa (the average in London over the last 25 years is something like 7-8% pa ;-)) then you get a 10% pa return which probably compensates you for the risk. Of course, the long run real return on housing is between 0 and 1%, so that means this unprecedented period has to continue-- this time it's different ;-).
With a 7% property appreciation, no wonder everyone is buying condos and not renting them! No utilities, little depreciation, no management fees, only property taxes!
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by Hawaiishrimp »

FedGuy wrote:
Hawaiishrimp wrote:Why would anyone buy a condo?

Because they can't afford a house yet.
I own a condo and have zero interest in owning a house, whether or not I can afford it. I don't want to have to mow the lawn or shovel the snow, or have to maintain the roof or the exterior walls. I enjoy the social benefits of having dozens of neighbors under the same roof, and like having an on-site condo employee to receive packages while I'm at work. Owning and maintaining a house seems miserable to me.
Sure. Good for you. Whatever float your boat.
I save and invest my money, so money can make money for me, so I don't have to make money eventually.
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by Valuethinker »

ether161 wrote:
Valuethinker wrote: To make the numbers work you have to assume some kind of property price appreciation. If I assume say 4% pa (the average in London over the last 25 years is something like 7-8% pa ;-)) then you get a 10% pa return which probably compensates you for the risk. Of course, the long run real return on housing is between 0 and 1%, so that means this unprecedented period has to continue-- this time it's different ;-).
With a 7% property appreciation, no wonder everyone is buying condos and not renting them! No utilities, little depreciation, no management fees, only property taxes!
Property taxes in London are de minimis-- the burden comes when you buy, the Stamp Duty (5%+).

A £1m home will pay around £2,500 in property tax, depending on area. A £10m home will pay around £2,500. Yes, you read that right. 0.25% and 0.025% of property value. Property taxes are set by 1992 property value (business property taxes are not, and are soaring).

The logic you outline has buoyed the Toronto and Vancouver housing markets. At some point, this will crack. London? It's hard to say because the supply of housing land is sharply limited by the green belt (since 1948 London has not increased in physical size), and by the tortuous planning process, height limits etc.

BTW condos still pay all those fees. An empty condo is *not* a cash flow neutral proposition. Particularly as the building gets older.

This is a world of surplus capital and negative interest rates. So far, so good, for property owners.
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by Marjimmy »

FedGuy wrote: Mon May 15, 2017 11:05 pm
Hawaiishrimp wrote:Why would anyone buy a condo?

Because they can't afford a house yet.
I own a condo and have zero interest in owning a house, whether or not I can afford it. I don't want to have to mow the lawn or shovel the snow, or have to maintain the roof or the exterior walls. I enjoy the social benefits of having dozens of neighbors under the same roof, and like having an on-site condo employee to receive packages while I'm at work. Owning and maintaining a house seems miserable to me.
I'm curious if you don't mind sharing, how old you are and if you're single or not
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius
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Re: Why would anyone buy a condo (from an investment standpoint)

Post by JFKtoSFO »

Marjimmy wrote: Thu Apr 05, 2018 10:30 am
FedGuy wrote: Mon May 15, 2017 11:05 pm
Hawaiishrimp wrote:Why would anyone buy a condo?

Because they can't afford a house yet.
I own a condo and have zero interest in owning a house, whether or not I can afford it. I don't want to have to mow the lawn or shovel the snow, or have to maintain the roof or the exterior walls. I enjoy the social benefits of having dozens of neighbors under the same roof, and like having an on-site condo employee to receive packages while I'm at work. Owning and maintaining a house seems miserable to me.
I'm curious if you don't mind sharing, how old you are and if you're single or not
I’ll bite. Married, closing in on 40, spouse and I have no desire to be SFH owners, ever.
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