Should I buy a condo as an investment?

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Had two conversations with people interested in buying condos for investment purposes yesterday, so figured I’d repeat what I told them here.

The first thing to understand about buying condos (and single family homes) in Los Angeles right now is that doing so is not really an investment.

Why?

Because prices are so high relative to rents that you can’t get a fair yield on your money. Consider a standard condo deal – say, an 800 sq ft 2/2 for $500k. Let’s say you can rent that condo for $2800 / month (it’s in a good area, etc.). That’s $2800 x 12 = $33,600 / year. At $500k, that’s a 14.9x GRM… which probably equates to a 4% yield or something. And the reality is that many condo deals out there are far worse than that.

“Ah, but what about appreciation?,” you ask. Well, prices have risen in LA for something like 5 straight years now. What’s more likely: That they will continue rising for, say, another five years, or that they will fall? My sense is that the latter is more likely (though, of course, I can’t predict why or when).

So buying a condo is, except in rare circumstances (like finding a cheap, off-market deal), not a great investment right now. But that doesn’t mean you shouldn’t buy one.

After all, people need to live somewhere. And, if you derive a lot of satisfaction from owning, as opposed to renting, your home, it’s not crazy to buy a condo to live in. Just treat it as a consumption decision, rather than as an investment.

Interestingly, we at Adaptive have developed a bunch of expertise around buying condos (both as investments, back in 2009-2011, and also for people who just want housing). Tomorrow, I’ll discuss some of the key things to watch out for in buying a condo in LA.

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