Condo Conversions and Condomania: How to Invest in Condo Conversions in YOUR City

So many condo conversions going up for sale today-- do you know how to invest in condo conversions? Are condo investments still lucrative? How long will the trend continue? Which one do you choose?


If you find yourself asking these questions, rest assured this article is dedicated to you…


First thing's first…


As professional investors, we need to understand what is causing this boom. As the real estate prices continue to climb developers/investors are finding that it is much more profitable to sell the apartment complex as individual condos rather than holding on and renting it or selling it as a single apartment complex.


Let me give you an example to illustrate a point. Consider a 112 unit apartment complex I recently examined. This complex generated approximately $2,000 yearly net operating income per unit. If it were to sell as an apartment complex you may get it under $75,000 per unit or $8,288,000. However if you sell this complex as individual condos you are looking at an easy $13 MILLION DOLLARS. Let me ask you a question. If you owned this apartment complex, would you not sell it as condos if the conversion cost numbers worked? Of course!


Are condos still lucrative?


The answer to this question lies only in the condo project or conversion you're looking at, as well as in analyzing and understanding the market trend. Before I give you the key areas to analyze a deal like a pro, let's lay the foundation.


Never buy an investment condo without knowing your exit strategy. You have to cater to your potential end buyers. In most locations, a condo conversion will appeal mainly to young first-time home buyers and/or retirees looking to downsize. What does this mean to you? Simply this: does the market you're looking in have a large and growing demographic of these customers?


With that exit strategy in mind let's look at some of the key areas that have to be analyzed to determine if that condo will work for your portfolio…


Market Growth: There are three important factors to take into account that will help you determine if the area you are analyzing will work:


1. Appreciation: A rule of thumb is to focus on areas that have a history of appreciating at a healthy rate of 10%.

2. Population: The population growth is another vital piece to know if that market will support growth. Remember your customers. Don't fall into the trap of "if you build it they will come".


3. Income: Employment growth is another ingredient that will reveal weather you are in a good spot for condos. Homeownership trends parallel higher and growing incomes. A true investor wants to know that people want what he has AND that they can afford it.


Demand: Does the market clearly show and support the desires of the end buyers more likely to buy your condo? This is usually seen in areas where people would feel proud to buy. (Example: Clean environment, close to shopping, close to work places, convenient to mass transit/highways, etc.)


Supply: The best question to ask in this category is… Are there more condos than end buyers in this area or is it limited? Don't forget that there can be a multitude of condos for sale in a large metro area and still have a limited supply in the area you are looking at.


Quality: The quality workmanship of the condo conversion is a key element in assuring that people will want to live there. Remember that real people will be looking at your unit when you sell- which means that ugly won't cut it. Nor will the average or "standard" upgrade get you the top price you want…not when the comps are right next door and across the parking lot.


Affordability: How much is the price compared to the home median values in the area? Make sure that your purchase price is lower than the like-kind competitors in the community. The safest way to invest is to stay within the context of affordable housing in that area.


Cash Flow: To determine your cash flow, you have to start with knowing your rental comparables (include the yearly average vacancy rates for the subject area) and know all of your total costs. The figure you get will determine your net operating income (NOI). Keep in mind that most of the condos that meet above criteria will negative cash flow. It is what it is. However, if the numbers work and you can project a higher appreciation that exceeds the costs and you have the pockets to carry the cost- go for it!


I also make sure that the developer gives as many incentives as possible.


When I buy a condo, I am looking for price discounts, HOA fees waived for 1 to 2 years, Developer fee waived, possible cash back after closing, guaranteed rent and more. Remember, if you don't ask…you don't get. I get to negotiate these types of terms because I work with a buying group. When you buy in bulk you always have a better chance of sweetening the pot. So, when you find a condo in the right area make sure that the developer gives you as many incentives as possible.

Rick Melero and the Board of Advisors of America's #1 Real Estate Network have completed 100s of real estate transactions with over $100M completed. Invest with the group and learn more about HIS Network's real estate buying group