Run as fast as you can

For the post in mandarin, click here. For the talk on you-tube, click here)

For many investors, especially the ones who are just getting started. Condo style rentals are normally the top choice on the selection list. The advantages are many. To name a few

  1. Cheap – easy to get one without breaking your bank. 
  2. Hassle-free – once condo fee paid, no worry about the grass cutting, snow removal, etc. 
  3. Great location – most of the condos are snazzy looking with fall in love effect situated at a great location with transits ease. 
  4. Easy to manage – get tenants in, collect rents, really what else you need to worry about?

Just like any trap, to lure you in, appearance is the key. No exception to the attractiveness of condo rental investment. From the surface, it is so “naive”, “simple” and “pure”, wait until the trap gets and eat you alive, normally it is a bit too late… 

Here are the three reasons why residential real estate investors who aim the rental market should run as fast as they could from most of the condos with very few exceptions. 

  1. Likely poor future asset growth
  2. Cash flow performance doomed disappointment
  3. The quickest way to turn your dream into a nightmare – for years to come. 

Let me explain 

First of all, to judge the quality of the long term residential rental investment, there are three key factors one should have a crystal clear picture in mind with the laser focused view on them all the time

  • First, future growth potential
  • Second, cash flow strength
  • Third, how long can you hold to achieve exponential growth. 

The real key for future growth in a piece of real estate is the land. When all the woods, construction material deteriorated over the years, what has been left that shows the true value of gold is LAND. nothing else. 

 

This is why the condo has the fundamental flaw to start with. It has very little portion land on average that you can claim the ownership even on paper, not to mention in reality, your chance to sell it is next to zero. However, many new investors are not aware of this basic fundamental fact, and behind distracted with the size and height of the building, style, etc. 

This has been demonstrated clearly if you look back for a few decades, you will find the real winner of the asset growth is very rare any piece of condo units, but single-family homes. 

The 2nd key to residential real estate investment is cash flow. It likes the egg being laid on a daily basis by a hen – it matters less if the hen is a little choppy or skinnier, as long as it produces the protein to support daily life. 

The major problems for condo units to produce desirable cash flows are two: 

  1. Oversupply overwhelming demand – due to the easy construction and multiple factors, there are thousands of units available and competing with each other for the renters most of the time. Results, lower rents, great for the tenants, and not that great for you who carry large mortgages for these fancy features.
  2. Keep hiking condo fees – you may be fooled with the lower condo fee when you start. However, you don’t need to wait for too long before the condo fee to start it hike unavoidably. And it is actually doomed without exception. Can anyone give me an example where the condo fee is decreasing year after year? It never happens and there is a good reason why it is this way (I will explain it in another post)

Your cash flow is very thin and getting worse day after day, due to the two major reasons above. 

Now, can you hold this thing for long as the secret for the real estate to grow is actually compounding effect which can only show its true power when time factors being added in?

Unfortunately, you likely can NOT. because of another dream killer – the special assessments. The invisible killer that is waiting to eat you alive… (well it is close to Halloween, let’s use this analogy to get everyone warmed up:))

To summarize, the condo investment as long term rent is a poor choice in general that most of the time, most investors should run away from them the moment you see them – they are poor with regards to the asset increase. Miserable on cash flow, and likely you can hold it too long before the special assessment to show its true ugly face. 

And yes, do not touch them. Run as fast as you can. I did warn you, didn’t?

 

 

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