How do people make money in condominiums?

14 Replies

I'm going to sound like a real novice on this one....

How do people make money by owning condominium buildings? Not the units, but the building itself?

Do the people that own the units pay them a fee? How much is it usually?

Who pays for maintenance and utilities?

I would stay away from condos because you lack control. If the condo becomes non-warrantable which could happen from a major assessment, mismanagement of the HOA, too many people not paying their HOA, litigation, etc, the value can nose-dive as new buyers can't get low-down financing for the units.

Also, unlike a SFR, you can't control the fix up value.

People make money on condo buildings by BUILDING them, or converting apartments to condos, and then selling them. Condos are owned by the owners of the units and managed by the HOA - there is no single person owner of the building.

Originally posted by @Travis Lloyd :

People make money on condo buildings by BUILDING them, or converting apartments to condos, and then selling them. Condos are owned by the owners of the units and managed by the HOA - there is no single person owner of the building.

 Okay, I could see that. That doesn't make sense to me, though. 

Why not just turn it into an apartment complex or a hotel and keep it as steady income forever instead of just selling it all at once?

Originally posted by @Ryland Taniguchi :

I would stay away from condos because you lack control. If the condo becomes non-warrantable which could happen from a major assessment, mismanagement of the HOA, too many people not paying their HOA, litigation, etc, the value can nose-dive as new buyers can't get low-down financing for the units.

Also, unlike a SFR, you can't control the fix up value.

 Agreed.

And, btw... to all those people calling me a troll that doesn't listen.... see how readily I ask a question for something I don't know about? Even such a basic question such as this that would make me look like a fool.

Originally posted by @Account Closed :

Why not just turn it into an apartment complex or a hotel and keep it as steady income forever instead of just selling it all at once?

There are many reasons actually, but for an easy one - most people building new construction are not funding 100% in cash. Their money comes in various tiers of interest (some IO bridge financing, some equity with preferred return, some class b equity, etc). So while rentals produce returns every month, the developer/owner is still accruing interest every month. And with a new build, it is often a VERY long investment horizon for large rentals. You might spend $3m to get 12 units, which can rent for $3,000 each. That's 432,000 gross annually - but that $3m at just 6% is eating up $180,000 of that, not to mention your equity partners are chomping at the bit for their returns. If instead you can sell those 12 units as condos for $450-500k, you can pay off the note and equity stack, and walk away with a hefty profit.

Originally posted by @Travis Lloyd :
Originally posted by @John Farmer:

Why not just turn it into an apartment complex or a hotel and keep it as steady income forever instead of just selling it all at once?

There are many reasons actually, but for an easy one - most people building new construction are not funding 100% in cash. Their money comes in various tiers of interest (some IO bridge financing, some equity with preferred return, some class b equity, etc). So while rentals produce returns every month, the developer/owner is still accruing interest every month. And with a new build, it is often a VERY long investment horizon for large rentals. You might spend $3m to get 12 units, which can rent for $3,000 each. That's 432,000 gross annually - but that $3m at just 6% is eating up $180,000 of that, not to mention your equity partners are chomping at the bit for their returns. If instead you can sell those 12 units as condos for $450-500k, you can pay off the note and equity stack, and walk away with a hefty profit.

Well it doesn't make sense for my business model. I would only take out loans that are 20-30 years for a property like that and would make sure the rent payments would cover the loan payments and then some (otherwise known as... profit).... to me, even building and selling a condominium is akin to flipping a house.... it's just not something I would want to do. The only reason I am even planning to build and sell houses right now is to get "quick cash" to start putting down payments on hotels. Once I can do that, I will become an investor and not a builder.

Condos are often the same idea on a larger scale. Someone has enough personal money for the 20%, and access to enough capital to start a serious endeavor ($5m+) but that kind of money doesn't usually come in 20-30 year notes. Its usually a few years IO and a call date. Now if you can get the property up and running, cash flowing well, and can refinance the hard money out, great! But usually people are "trading up"... they've saved up enough to do a very large deal - but if they roll that into a condo development, it can produce enough to THEN do a rental development.

With that said, if you check out the TVM of a condo deal vs a rental - for new construction specifically, you will see why most people go the condo route. A large rental property may be operationally profitable, but until you have received 100% of your invested capital back, it's not profit. If it takes 10 years to cross that threshold, many consider that a problem. Specifically when you could have used that same money 3-4 times during that same 10 year period building and selling condos.

Originally posted by @Travis Lloyd :

Condos are often the same idea on a larger scale. Someone has enough personal money for the 20%, and access to enough capital to start a serious endeavor ($5m+) but that kind of money doesn't usually come in 20-30 year notes. Its usually a few years IO and a call date. Now if you can get the property up and running, cash flowing well, and can refinance the hard money out, great! But usually people are "trading up"... they've saved up enough to do a very large deal - but if they roll that into a condo development, it can produce enough to THEN do a rental development.

With that said, if you check out the TVM of a condo deal vs a rental - for new construction specifically, you will see why most people go the condo route. A large rental property may be operationally profitable, but until you have received 100% of your invested capital back, it's not profit. If it takes 10 years to cross that threshold, many consider that a problem. Specifically when you could have used that same money 3-4 times during that same 10 year period building and selling condos.

True. As you say, there is the opportunity cost of putting that cash as a down payment, but I have looked at deals where that cash (even if it over $1 million) would come back in a year. I would also foresee the same problem that I ran into when I was looking at constructing new hotels as a business venture..... Zoning. There is lack of properly zoned land for these ventures, and when you find it... it is expensive as hell. That is why I think I will choose just to buy existing hotels. I probably won't even rename them. Why fix what isn't broken?

I don't want to diverge this post into something entirely different - but hotels are a completely different animal. The hotel industry is actually very transparent - if you look hard enough. I worked with a group that transformed an apartment building into a boutique hotel in NYC, and while researching, we were able to find trade reports detailing everything from cost per night for housekeeping (even down to the toilet paper) to how much hotels in each class paid in rent.

In this area at least (I know very little about Orlando), hotels operate on very high break even occupancy rates - most are in the mid 60s to low 70s, and in the city, its in the low 80s! Thats a tough model, and does not include the money to build the actual property.

There are TONS of developers building massive structures down your way - I'm sure there are plenty that would show you EVERYTHING for just a minor equity investment in their venture. If you're serious about developing hotels - I would suggest throwing 25-50k (whatever their minimum is) into one of those projects and being that investor (there's always one) who wants to see EVERYTHING! If they do it well, your money will grow AND you will learn the entire inside scoop. If they fail, your money will have been well spent for the information they share.

I could also be entirely mistaken. When you talk about development and hotels, I'm thinking of the huge high-rises along the coast down your way. If you're thinking about a 50 room best western/holiday inn, I would imagine its a completely different story. Those chains usually provide their own financing for the construction.

Originally posted by @Travis Lloyd :

I don't want to diverge this post into something entirely different - but hotels are a completely different animal. The hotel industry is actually very transparent - if you look hard enough. I worked with a group that transformed an apartment building into a boutique hotel in NYC, and while researching, we were able to find trade reports detailing everything from cost per night for housekeeping (even down to the toilet paper) to how much hotels in each class paid in rent.

In this area at least (I know very little about Orlando), hotels operate on very high break even occupancy rates - most are in the mid 60s to low 70s, and in the city, its in the low 80s! Thats a tough model, and does not include the money to build the actual property.

There are TONS of developers building massive structures down your way - I'm sure there are plenty that would show you EVERYTHING for just a minor equity investment in their venture. If you're serious about developing hotels - I would suggest throwing 25-50k (whatever their minimum is) into one of those projects and being that investor (there's always one) who wants to see EVERYTHING! If they do it well, your money will grow AND you will learn the entire inside scoop. If they fail, your money will have been well spent for the information they share.

This is why I would only buy hotels that have been operating for a profit for years. I would not want to build new hotels. I don't have the brand name to attract customers to a new hotel. I have talked to managers of hotels around here that have told me that their hotel has a consistent 95% occupancy rate. And in any event, I would get the past 3 years financial statements before I even consider buying anything. It really is just as simple as plugging in numbers and seeing the ROI. (if you have the access to capital, that is). And of course, I could any place more efficiently than it was previously run. Because that's just the way I am. I am John Rockefeller making sure every one of my barrels has three welds instead of six. Why? Because it saves 10 cents for me to invest in another hotel.

Originally posted by @Travis Lloyd :

I could also be entirely mistaken. When you talk about development and hotels, I'm thinking of the huge high-rises along the coast down your way. If you're thinking about a 50 room best western/holiday inn, I would imagine its a completely different story. Those chains usually provide their own financing for the construction.

I wouldn't build a franchise. I don't know why. I just don't like the idea of it. Maybe, though. But I know many hotels that are locally own that I could buy if I had the access to capital. And... once I own once, I will have access to capital because I know "stated income" lenders, so if I own one hotel that profits even $300,000/year, that will qualify me for a loan to buy a hotel valued at $3.4 million next time around. And this will consistently grow as I buy one hotel after the other. EVENTUALLY after I have about 50, I might consider using a brand name... but I can't think of a good one and my last name is not too good for a hotel name. People wouldn't even be able to pronounce it.