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Condo conversions have big profit potential, and it is also a potentially creative process. Just be ready for a few unexpected problems.
It had to happen. We were living in Tucson for just a short time when I noticed how cheap rent was in relation to home prices. There were $200,000 homes all over that rented out for $650. Investing in rental homes was obviously a losing game.
Condos were priced more reasonably, many 2-bedroom ones around $100,000 or less. This was nice for the buyer-occupant, when compared to houses. It was also nice for a renter. These units rented for just $500 or so. Obviously, there was no money here for an investor either. At least not if they were bought as rental units.
Hmm. Low rent, but high housing prices. Where could the opportunity be? Converting apartment buildings into condominiums. By the time we moved 18 months later there were condo-conversions going on all over.
The logic is simple. Apartment building were selling based on income. With rents so low, the buildings couldn't be sold for much. The rental income might justify just $60,000 per unit for a building full of 2-bedroom units. Anything higher and a buyer would be losing money every month. Since investors don't like to lose money, prices were held down.
You might find a 40 unit apartment building for two million dollars. Spend $400,000 converting it into condominiums, and keep your other costs to $400,000, and you would have just 2.8 million dollars into 40 condo units. That's $70,000 per unit If you could sell them for $95,000 each, you would make around a million dollars by the time the project was done and sold.
I didn't follow the sales closely enough to know if these numbers are close to what was going on, but there were suddenly a lot of investors interested in doing this. I assume they were making some good money. The process takes a while of course, and there are many complications, from permitting issues to building codes that have changed.
As with most real estate investments where you buy and then sell something, you should start at the end and go backwards in your calculating. In other words, you first determine what the end product will sell for, and the subtract every conceivable expense, as well as the profit you deserve, to arrive at the highest price you can pay. You may be able to buy it for much less, of course, but this way you know how high you can safely go.
Copyright Steve Gillman. This article was an excerpt from 69 Ways To Make Money In Real Estate. Want to know the other 68 ways? Visit http://www.99reports.com/make-money-in-real-estate.html
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