When condos are a great play

Just had coffee with a regular reader who told me about his exploits buying condos as rentals during 2011-2012.

Now, generally I dislike the condo-as-income-property business. It’s incredibly rare to be able to purchase condos with a decent yield in Southern California (because there isa huge ownership premium). And owning a bunch of condos in different buildings presents a real maintenance headache (your assets are spread out and each unit has its own, idiosyncratic problems, increasing the hassle of repair).

But, by wading through the muck of the REO and shortsale condo market (where prices were very low during the period in question), he managed to leg into some very nice cash yields in decent locations. Then, as the market improved, he saw the value of his (highly-levered) holding increase, generating very large paper-profits.

What he’s experiencing is one of the interesting things about buying condos in a distressed market: They behave like (decent, not great) income properties but, unlike income properties, have upside unrelated to the cashflow, because, when the market’s hot, buyers are willing to pay the irrationally high ownership premium that generally attaches to SoCal residential real estate.

This brings me to one of my lessons from the bust, which I occasionally write about here: In a distressed market, if you can get a reasonable yield buying condos in decent areas, do so with as much money as you have available.

P.S.: Hat-tip, KP!