How to Invest in Condominiums: The Low-Risk Option for Long-Term Cash Flow
224
How to Invest in Condominiums: The Low-Risk Option for Long-Term Cash Flow
224Paperback
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Overview
Product Details
| ISBN-13: | 9780471151500 |
|---|---|
| Publisher: | Wiley |
| Publication date: | 12/11/2001 |
| Pages: | 224 |
| Product dimensions: | 6.08(w) x 9.11(h) x 0.41(d) |
About the Author
Read an Excerpt
Not a Bear or a Bull,
but Always a Cash Cow
The goal of this book's method is to give you as much work to do as a passive investor, such as a stock shareholder or an almost-silent limited partner, while having the control and earnings of a successful small business owner. The basic concept is to buy a few extra condominium homes in excellent condition and rent them out for profit. It is a direct investment in real estate but does not require the knowledge or work that an investment in a duplex or single-family home would. The structure of the condominium investment allows you to leave the devilish routine details to someone else. You don't have to become a real estate expert. You have only to get to know-- really well-- the value of the few specific condominiums in which you decide to invest. Anyone who has rented a place to live already has some of the background knowledge required for evaluating the value of a condominium that is ready for immediate occupation by a tenant or an owner.
CONTROLS LIKE A SMALL BUSINESSIn some aspects, rental condominiums are like a small busi-ness because they have revenue, expenses, a bottom line, and customers. In addition, when you own a rental condominium, you have some direct control that gives you a chance to influence results. You can select the property managers and check their performance. You can raise or lower the rents if need be. But unlike having a small business, there is almost no risk of failure. The failure rate in the first three years of operation for small businesses is huge (about five out of six). I am not even aware of a failure rate for rental condominiums, but if one exists somewhere, I'd bet it is tiny.
The work that a rental condominium requires, once properly set up, is one-tenth of 1% of what many small businesses require. For your condominium business/ investment, you should never have to sacrifice a holiday or a weekend. How many restaurant (restaurants have the highest failure rate) or store owners could say that? I read about a woman who owns three bookstores and is so busy she cannot ever go on vacation. But she is her own boss. In your condominium rental business, you will also be your own boss, but you will be a much gentler and kinder boss.
REALITY CHECK-- THE CHECK ISIN THE MAIL EVERY MONTH
My only regular contact with my five rental condominiums is a check that does indeed come to me in the mail every month. It is for the net proceeds from rents and is like a second pay-check, except that the amount varies a little bit because of property taxes and an occasional vacancy or repair bill. Getting a check like that once a month does not have the excitement of watching a hot stock move on Wall Street on a daily basis. Market psychology is lacking. Both the bulls and the bears seem to be missing. But if someone put a gun to my head and forced me to describe my condominium investments using the animal terminology of Wall Street, I guess I could let my imagination run wild. I could say that when the rental income check amount is more than I expected, I feel a little bullish about my condominiums, and when it is a little less, I might feel briefly bearish about them. At the end of the year, however, when I look back at the total results, they invariably look like a cash cow.
Now that I have been able to retire early, mainly due to the condominiums, that check from my property manager seems more like a second retirement check. Like my real retirement check, it also comes in once a month, and I also look to see if it comes in with the correct amount at the right time. But there are some differences between the two. The amounts on the retirement checks are less variable, and they come to me as direct deposits to my bank. There is nothing I can do to make the rental income checks as predictable as a retirement check from the government, but to save even more time, I could arrange to have the rental income checks deposited directly into the bank as well. But I do not intend to do this because a check in the mail is a good way of keeping me in contact with the results of my investment in my business every month. It is difficult to ignore a check you have to personally process. The amount of the check by itself already gives me an indication of how well I am doing. Success is measured one check at a time, once a month.
LOW TECH, HIGHER PROFITSMy business operations don't require the use of a computer. Using a computerized spreadsheet, for example, would not increase profits (the way to increase profits is to excel at picking the right condominiums at the start) but would merely be an additional expense. The only work I normally now do is to review the simple income statements that are included with the check from my property manager. To make this review, I enter the data the old-fashioned way, using pencil and paper, into a manual spreadsheet. Even this, however, is not essential. You can "just say 'no! '" to bookkeeping. The income statements could be just examined and then saved in a shoe box, until the end of the year, to give to your tax accountant. In earlier years I used this shoe box shortcut for quite a while to save time on monthly bookkeeping. The price for saving this time was to lose more detail into how each condominium was performing month to month.
GOOD HOURS (0.66 HOURS PER MONTH)...But to take the shortcut, you must really hate bookkeeping, because the long way around, doing the manual spreadsheet, turns out not to be very long. For the purposes of this book, I now time my manual spreadsheet efforts on a regular basis, and I now know that I spend an average of about forty minutes each month doing this. Only once in a while do I have to call my property manager to clarify something. This is objective evidence that my rental condominiums are not a first or second job but primarily an investment in real estate-- unlike the case with motels, which are primarily business and only secondarily an investment in real estate. And the condominiums have been the solid foundation of my investment portfolio for a long time. If you are a workaholic and you need 16 hours of work a day, you may not find this approach satisfying.
. . . BUT YOU CAN APPLY YOURSELF
FOR LONGER HOURS
This does not mean that investing in condominiums is not flexible. A workaholic could make them fit his style. By learning to do everything himself, he could manage the property as a one-man show. He could do the cleaning, repairing, and painting. He could attend all the condominium association meetings. He could get elected to positions on the boards of more than one condominium. Being the president or treasurer for a couple of condominiums would help keep him quite busy. Any spare time left over could probably be easily absorbed by the career he is having on the side. The method in this book, however, is antiworkaholic-- to do as little as possible, all by yourself. You want to be free of the work but not the earnings.
BOOK VALUE RISKCarefully selected rental condominiums are less risky and will probably provide a better return than the stock market in the long run. A little more work is involved in the acquisition and setup phase than what I imagine most people do when they invest in the stock market. But this extra effort up front is worth it because it allows you to feel secure about your investment. To feel as secure in the stock market as I do about my investment in my condominiums, I would have to be able to buy into the stock market at close to book value. The last time that was possible was 1974.
FEELS LIKE A BONDWhen it is properly set up, your portfolio of condominiums should feel somewhat like an investment in bonds. Well-established rental condominiums should tend to give you a relatively steady return that is similar to the regular payments you get from a bond (the return from rental condominiums, of course, is not actually guaranteed, as the interest payment is for a bond), but they also provide protection from inflation as well as shelter from income taxes and have the potential for price appreciation in excess of inflation. You receive a check every month, and all you have to do is make sure it is for the correct amount (unlike a bond payment, the condominium checks are a little different every month). It's almost like clipping bond coupons, except that with a condominium you can expect to get back all the money you invested and then still have a chance for a really big gain on top of that.
YOUR CONDOMINIUMS MAY BEWITH YOU FOREVER
If we ever have a return of a go-go era in real estate values, such as we had in the 1970s, I will be in a position to reap windfall profits. The potential for such profits, due to condominium prices blasting higher in the 1970s, is what initially attracted me to condominiums. However, to realize windfall profits, I would have to sell some of my condominiums. This would be tough to do because I have now become hooked on the monthly cash flow. But who knows, some future favorable change in the law on capital gains taxes, in combination with another boom in real estate prices, could make one or two sales irresistible.
ATTAIN INVESTMENT HARMONYSo if you invest in a half-dozen carefully selected rental condominiums now, will you have $1,000,000 in 20 years? It is possible, but nobody knows the answer to that, for sure-- just as no one knows for sure what $1,000,000 will be worth 20 years from now. A million dollars already does not seem worth that much today compared with what it did 20 or 30 years ago. It is true that even today disposing of a million dollars in a year or two would still feel like an awful lot of spending for most people. But if you look at it as a source of income, a million dollars today may not even make you feel rich, let alone filthy rich. At a money market rate of 5%, $1,000,000 would give you an annual income of $50,000 before taxes. And in 1998 a lot of people who do not consider themselves rich are making more than $50,000 just from their job. Thirty years ago, roughly speaking, a person with a fairly good income might have had to work five years to earn more income than what a million dollars would earn. The future value of the almighty dollar cannot be guaranteed, and neither can the results of any investment. But once you have your income condominiums in place, it is entirely possible that you may not have to make any decisions or choices for the life of the investment, say, the next 30 years.
You can to a large degree be free of everlasting agitation and uncertainty about your investments. By remaining in your area of expertise, condominiums, you will minimize the unknowns, leave very little to chance, and get maximum results for a minimum of effort.