Selling Condo Conversions for Profit

Many condo conversions are going up for sale, but are they still lucrative? How long will the trend toward condo conversions continue, and how do you choose which one to buy? These are great questions.

As professional investors, we need to understand what’s causing this boom. As real estate prices continue to climb developers and investors are finding that it’s more profitable to sell an apartment complex as individual condos rather than hold it and rent it, or sell it as a single apartment complex.

Consider this example of a 112-unit apartment complex I examined. It generated approximately $2,000 yearly net operating income (NOI) per unit. Sold as an apartment complex, it may get $75,000 per unit or $8,288,000. However, sold as individual condos it could command $13 MILLION. If you owned this complex, wouldn’t you sell it as condo conversions if the conversion-cost numbers worked?

Are condos still lucrative? That depends on the condo project or conversion. First, you need to know how to analyze the deal. Never buy an investment condo without knowing your exit strategy: You have to cater to your potential end buyers.

Here are some of the key areas that have to be analyzed to determine whether such a deal will work for your portfolio:

Market Growth: Three important factors help you analyze your deal.
1. Appreciation: Focus on areas that have a history of appreciating at a healthy rate of 10%. Today, you need to buy equity. This means you have to buy the property at a fraction of the Fair Market Value (FMV).
2. Population: Population growth is another vital piece to know if that market will support growth.
3. Income: Employment growth will also reveal whether you are in a good spot for condos. Homeownership trends parallel higher and growing incomes. People must want what you have AND be able to afford it.

Supply: Are there more condos than end buyers in this area, or is the supply limited? Remember: There can be many condos for sale in a large metro area but still be a limited supply in the area you’re 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 ugly won’t cut it.

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

Cash Flow: With today’s market conditions, it’s important that the property cash flow. Start by knowing your rental comparables and operating expenses. That will determine your NOI. Most of the condos that meet this criteria will have a negative cash flow. However, you can negotiate a price below FMV with banks or motivated sellers that will enable you to cash flow.

You’ll also need to know the stability of the Home Owner’s Association. HOA problems can lower your rental income while increasing your monthly expenses.

These investments are long-term. Do not expect to make a ton of money in a few months. Be realistic and buy for cash flow. Start building your residual income now.

To your future,
Rick Melero

If you’re serious about making money NOW in commercial real estate, while building long-term wealth, all by learning how to re-position yourself to achieve INFINITE returns then you must attend our next live educational online webinar with America’s #1 Real Estate Network™. Register here, right now as a guest of Rick Melero and unlock the secrets to 6-figure pay-days and awesome monthly cash flow per deal: http://www.hisrealestatenetwork.com/393