YouTube Video: https://www.youtube.com/watch?v=1z8Dw8FRcmI
Okay, I wanted to record a second video this morning. I got a subscriber question. And if you don’t know what that is, is if you subscribe to this channel one rental at a time and you have a question about real estate investing, all you have to do is go to any of my videos, leave a comment, which is your question and I will do my best to answer it. So I got this question the other day about what do I think about condos? The gist of this question is this individual lives in the part of the country, which I don’t know but they made reference to the fact that condos and their market are close to the 1% rule. And you know, they were saying that those are the best investments. So there’s a lot to think about in this question. Again, not knowing the individual, the situation, the part of the country, all of those things.
I’m going to take his or her question and kind of break it apart and just give my thoughts on them. First and foremost realize that my answer is about an investment property. It is not about owner-occupants. I believe none of what I’m about to go through applies to owner-occupants. I actually live in an association and I’m very, very happy that we do. So again, this is not about owner-occupants. This is how do I buy condos or townhomes, townhouses for my real estate investing portfolio. So first and foremost I want to get into that 1% rule related to the association. I don’t really think that’s an apples to apples comparison. So what I hear this individual saying is I’m just going to use round numbers. You know, there’s a condo for a hundred grand and it rents for $1,000, but what’s not said in that statement is maybe there are $200 association fees.
So how I look at that is, is that’s not a 1% rule because what you need to do there is you need to subtract and go to the net balance. So $1,000 rent minus the $200 association fee in this example and you end up at 800. So it’s not really a 1% rule. I think the 1% rule is dangerous when you start comparing different asset classes because there are different expense expenses, there are different variables. It’s fine to use the 1% rule as a general rule of thumb when you’re in one asset class, cause they all generally speaking will have the same expenses. But if you’re going to compare a house that doesn’t have association fees with a condo, that does, it’s risky to use the 1% rule because the condo will artificially look better than a house because you’re misguided with the association fee.
So that’s what I think they’re next up. If you’ve been following this channel at all or you’ve looked at my real estate investing course, you know that I’m a cash flow investor. More specifically, I want to know how hard my money is working and I call that yield. So, generally speaking, a condo is not the most efficient use of my capital houses are because the tenants pick up more of the traditional monthly expenses, water, garbage, lawn, lawn care, things of that nature. Where in a condo, you the owner are responsible and now, yes, you could theoretically maybe get some of that back and higher rent. I have historically not seen the return in that. So generally speaking I put everything in the same spreadsheet. If you follow me on this channel, you see my course. I have a spreadsheet that I use to compare deals.
I put condos in it all the time but because of the association fee, it generally makes it less cashflow. And if you have less cash flow, you have a lower yield and they’re not the most efficient. A couple of other points. First off, I do own one. I do own a condo. I picked it up for cash two years ago. I think. I basically got it at about half price paid cash. So I own it free and clear. And I basically treat the association fee like a mortgage payment. Unfortunately, it’s a mortgage payment that never goes away, which I do not like. I will probably at some point sell this condo when the market, you know improves for that area or that part of town. But generally speaking, I don’t buy condos because the yield is not good.
The other thing I want to point out is it’s not really a problem today, but in 2010, 11, there were a lot of “busted associations”. And what I mean by that is there were a lot of people losing their homes as we all know. But when you may not know is a lot of people didn’t pay their association fees also. And what that has meant over time is associations have had to do one time assessments. They’ve had to raise fees on existing owners because they still have the pay the bills and maintain the building. And you as an owner, one of the ones that are paying ultimately can be hit with these one-time assessments, rising fees and the like. So realize that these busted associations can come around. I don’t think they’ll be around for years to come. I’m hopeful, but realize there is another downside that most folks don’t talk about, right?
The last 10 years have been good and people don’t have memories of before the crash or at the depths of the crash. So yes if you’re going to look at an association, do not, or a condo, do not do an apples to apples comparison between a condo and a house. It’s not fair. The condo will look artificially good and you could make a mistake. In addition, do I own them? I have one in my investment portfolio. I compare condos to houses all the time and frankly, I compare condos too, because I use the same calculation for everything. And just realize that condo associations can go bust. I don’t expect it to happen in the near term, but if you’re going to do this long enough, you may see another cycle where the association needs to do one time assessments and things of that nature. So in the end, if you are subscribing to my channel, thank you. If you have questions about real estate investing or want to know something about our business, leave a comment below and I’m the only one that sees this. This is kind of my hobby. So if you have a question, leave it. I will do my best to get back to you. All right. Hope you liked that. Thanks. Bye.