Investment Property
Four Major Types of Real Estate You Should Consider To Invest II - Condominiums
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Feb 12, 2006, 23:18

Now let's talk about condominiums, which is an interesting subject. Condominiums are a form of real estate that have required the establishment of brand new laws. The first new laws regarding real estate since the time of Napoleon. When you buy a condominium, essentially what you are buying is a cube of space.

Picture that you are on the sixth floor on the east wing of a high rise condominium. Should that building fall down, burn down or be blown up by a bomb, you would still be the proud owner of a cube of air that was exactly where your unit originally was. You get title to that cube of air. You get title insurance on that cube of air, and the bank lends you money based on your ownership of that volume of space. The rest of the building, in one form or another, is owned by a collection of all the other unit owners, including yourself, in some form of a stock cooperative. Whenever I am running seminars on this subject, I ask the audience, "What is the reason for condominiums in the first
place?" Most often the answer is that they are low maintenance or carefree maintenance. To which I respond that a condominium is by no means low maintenance. As a matter of fact, one could argue that a condominium, due to its communal areas and entrances and interior walkways, is greater maintenance per capita than single-family type dwellings. People say condominiums are low maintenance because they are not the ones out there cleaning the windows, servicing the pool, sweeping the hallways, and patching the roof. But they indeed are responsible for it and they indeed are paying for it through their monthly maintenance fee.

I contend that the main reason for condominiums has been and always will be location. The concept behind condominiums is simply that if you want to reside in a location in which your budget will not allow you to purchase the land and build a single-family home, then you share the cost with another fifty, one hundred, or two hundred owners.

For instance, if you insist on being on the beach in Fort Lauderdale or Miami, or on the slopes in Boulder, and you are not blessed with a millionaire's budget, then the only way you are going to have access to million dollar locations is by sharing the cost of the land and purchasing a condominium. I emphasize that condominium are about location and if location is why you are buying, a condominium can make a lot of sense. But, on the other hand, I caution you if you find yourself considering the purchase of a condominium that does not have that particular special location attached to it, I then have to ask you why are you doing it.

Condominiums with location have fared well in terms of appreciation and have proven to be good investments. However, in many areas, particularly in areas known for resort or retirement, there has tended to be an over building of condominiums which has caused appreciation to be less than spectacular, and in some cases, none at all. In addition, I believe (and I caution that there is always the exception to the rule) that condominiums general come along with a lot of misconceptions and liabilities about which you need to be aware. I emphasize that it may be worthwhile purchasing a condominium if its cost reflects the purchase of a particularly spectacular location. I simply say that you must go in with your eyes open and know what some of the downsides of condominium living are.

Though there are different forms of condominiums, not all condominiums are vertical apartment-type buildings. They can also be the horizontal, attached town home type. However, condominium living generally comes with expectations that laced to be looked at carefully. We've already mentioned the expectation of low maintenance and pointed out that it is not low maintenance at all, but maintenance you pay somebody else to do. l also think condominium people look at condominiums, particularly in out-of-state real estate purchases, as coming with an implied sense of community. They understand that they will be relocating, whether permanently or for part time residency, to
an area where they are not part of the community. They figure that at least there will be lots of other people who are in close proximity who are their neighbors, and that they will probably meet people at the pool or the clubhouse and can start forming a social context.

I have to remind you that your purchase of out-of-state real estate more than often is going to be in a resort, vacation and/or retirement area, and a high percentage of such locations are inhabited only on a part time basis. (I am familiar with the statistics in Florida in which in many areas over 70 percent of their condominium units are not occupied full time.) As matter of fact, a lot of people reading this book will be looking towards purchasing a condominium. Many of them will be looking to purchase condominiums for use on a part time basis. Condominiums seem to promise the low maintenance and security required by the part-time resident. They offer the affordability of good location and amenities at a shared cost. Many of these buyers are going to look towards renting the unit out when they are not there, to help defray the cost of ownership of that unit. This is a very common practice. This means that if you are in your condominium for extended periods of time, the people in the unit next to you and the people down at the pool are probably not your neighbors. They are probably on holiday for a week or two and are renting it from the owner of a unit in the building.

This raises another problem that is notorious to condominiums, and that is invariably the amenities are not sufficient to handle a large percentage of the occupants in the units using them at any one time. However, the rub here is that, particularly in peak season times, you have both owners and renters (from owners) all there on holiday and they are bound and determined to use the less than adequate amenities. Consequently, it's usually tough finding space around the pool, getting out on the tennis court, or getting into that little exercise room. Condominiums are built with the expectation of full time residency, meaning that the residents will be using the amenities on a steady stream basis and not all at one time; however, this does not hold true, particularly in the resort areas, where there is peak usage of the amenities in season.

Another obvious downside to condominium living is that it is often apartment-style living and there is not the privacy of a free-standing single-family home. Condominiums also come with the problem that you were looking to purchase a unit, but in reality you got a lot more for the bargain. You are a partial owner of a large real estate development and business. You are one of the owners of that development. When the developer has sold off the units, you and your fellow owners must manage the enterprise. This can be a time consuming and sometimes frustrating exercise.

If you own that unit for part time use you might be sitting back in your full time residence in the middle of off-season and receive a letter indicating that you need to show up for an important discussion regarding some form of rehab to the building--a new roof, new roads, whatever the issue might be-- and you don't particularly feel like getting on a plane and going down to this meeting in which case you will either end up voting by proxy, or having others decide issues that could be financially significant to yourself.

Often the person who ends up in charge, in particular the president of the condominium association, is undoubtedly the most politically active resident, who, I hate to say, more often than not, proves to be the most obnoxious resident in the building and has some sort of maniacal bent on controlling the smallest issues of your existence and often attempts to pass ridiculous and inappropriate rules and regulations.

The other issue in buying a condominium is the maintenance fee, which is also an issue we will discuss later because it affects not only condominiums, but subdivisions and manufactured home parks as well. The question you need to ask is -- is the maintenance fee you are initially paying realistic? Or are you looking at the likelihood of significant increases in the cost as ownership passes from the developer to the individual unit owners. Sometimes the true maintenance cost is substantially higher than the subsidized fee initially charged by the developer. This is discussed later in the chapter Monthly Maintenance Fees.

It may seem as if there is a lot to say about condominiums that is discouraging, but that would be missing the point, because the condominium you are looking at may not have the common  pitfalls noted. They may have plenty of amenities per capita for use by the residents on vacation in peak season times. Your condominium may have a good location which will bring appreciation on your investment, and your condominium association might run smoothly because there is good professional management to run it.

I am just pointing out all the things you must think about. After all, my job here is to be a devil's advocate. You must decide whether the purchase of the unit and the location is worth some of the downsides that you will have to put up with.