Low End Condos as Investments - Houston SW

27 Replies | Houston, Texas

Happy Friday.  Let's talk about something I've been wondering about for some time.

I saw some really inexpensive 1/1 condos down there in that 59 & Bwy 8 area.  The standard 'investor/handyman dream' deal, just needs a little TLC, etc.  850 sq ft roughly.  I figure it would rent for about 800 after some paint and elbow grease.  They are asking $36K for it, but I see that they have been selling recently for $21-$22K.  One unit went for $44K all fixed up with granite and the whole bit. 

Not the first time I see these deals down in that little area, there will be more deals like this one, so not worried AT ALL about losing it.  And that brings me to my question... why?  The numbers work, from a cash flow investment perspective.  Must be some cost I am not taking in to account here? 

Or is it just hard as heck to get a decent tenant down there?  Maybe I'll run down and do a drive-by, just to see how rough it is or isn't.

I kinda like the idea of plunking down $21K on this, cash - no hard money or anything.  Sink another $5-6K getting it fixed up and then rent it out for $800/month.  In fact it probably only needs $2-3K.  Collect 3-4 months of rent and resell it to somebody for $35-$40k.

Or maybe attempt to do a BRRR on it - financing might not make sense for such a small amount, though. Then go get another one - or not.

There are some things to like, and some obvious risks to not like also.  Chief among my concerns would probably be my ability to resell the thing, once improved and rented out.

Thoughts?  Anybody else playing this sandbox?

I see there is one Investment Group that owns about 30% of the complex, and there are a couple other investors that own maybe a half dozen units each.  So it's obviously working for them.

I think your thought about driving around and figuring out just how rough is a good one.  if you are just thinking flip, then just check how much inventory is on the market currently and DOM for those that have sold recently.  If you are thinking hold then you need to consider collections and time spent in the area.  Chasing money is terrible and evictions are no fun.  Almost every time I had to chase money, it was from an inherited tenant that I didn't screen so screen wisely.  If you do your own maintenance, would you be willing to drive over there at night when there is a water leak?

The other thing to consider is that this is essentially for all intents and purposes apartment living for the tenant. But you, on the other hand, don't own all the units and can't control the screening of the other tenants. At least in SFR, there is some space between neighbors.

@Mark Sewell I have been seeing that same trend. I haven't looked into the numbers for those specific units, but whenever I would look at condos in the past, the HOA tended to eat up would be cash flow, especially when buying only 1 unit.

Like you said, it's working for someone so I'll be curious to hear some others input.

@MarkSewell.  I pass by that area daily on my route to my day job. I totally agree with your math number.  Look great on paper.  You've already awared this is rough area.  You should drive around the area and judge your risk tolerance .  If it works for the complex owner , it might work for you ? Looking for your feedback

Historically the margins have just been too small or non-existent for condos. I think most that have any experiences just don't even look at them anymore. However maybe that because SFR is so inflated right now that condos are the way to go. Historically though condos don't bring much equity but do bring high turn over, repairs, evictions and fees....this means more risk. If the numbers work the numbers work.

Really interesting idea. I know the conventional wisdom (including people in this thread) is that condos are a bad deal, but that could mean it's a great opportunity because people are spooked by that very conventional wisdom. Especially in a hot market like Houston, that could be an inefficiency you could exploit to your advantage. 

As for HOAs, they aren't cheap but they reduce your insurance costs, and assuming you have a good association they take care of capital and maintenance costs, so it's not like the money is thrown away--you're basically just outsourcing certain expenses via that means. And you can also get on the HOA and try to influence matters yourself assuming you have the time.

I don't know that area too well (looking at a map, it's kind of NW of Missouri City?), but I think your concern about the costs of tenants may be part of the story. If you're constantly fixing stuff, handling crises, etc. that eats up not only money but your time, which is probably more valuable. I've heard some pretty grim stories about people who bought rental properties in marginal areas that looked like insane deals but ended up being money pits due to tenant disasters.

Range on prices is intriguing but seems weird. Why are people selling for $14k less than asking? And why did one of the units go for nearly twice as much as the others? Hard to believe that a couple thousand of repairs could double the value, but hey--if so that would indeed be a phenomenal deal. 

I had a mentor tell me on several occasions, "Don't buy condos!" he owns 1000+ doors and other commercial properties so, I listen to his advice and passed or multiple condo deals.

Now, years later, when I think of condos for investments this saying keeps coming to mind. "Insanity is doing the same thing over and over again and expecting a different result."  :)



Originally posted by @Dave Chapa :

I had a mentor tell me on several occasions, "Don't buy condos!" he owns 1000+ doors and other commercial properties so, I listen to his advice and passed or multiple condo deals.

Now, years later, when I think of condos for investments this saying keeps coming to mind. "Insanity is doing the same thing over and over again and expecting a different result."  :)


 Yep, that is a good saying, I think it's Einstein's definition of insanity. Not sure how it applies here, though. Does it mean you should stop passing on condo deals? You don't lose any money by doing that, of course, but you don't make any either.

I know the reluctance to condos runs deep, I bet well more than 80% of real estate investors share that reaction, but I wonder if it's from their experience or if it's just that they are repeating the same thing they hear from others. Consider one counterexample: BP podcast #275 has a guest, Rob Oliver, who specializes in condos and makes a lot of good arguments why their supposed downsides can actually be upsides. A perspective at least worth considering; it certainly worked for him.

I have done well buying and holding condos. Depreciation risk is biggest concern, faster declines slower recoveries. While you take more risk in that area, you take on less risk with repairs. Condo board insanity in my experience is usually more annoying than expensive. 

I sure love this forum -- so many good points.  My biggest fear is the low/slow resale values.  They just don't seem all that liquid.  Would never work as a flip.

Cash flow looks nice at first glance, but there again, I don't see how much the HOA gobbles up. Property managers will take their chunk too (well deserved). You could factor in the turnover, collections and evictions, with some experience or at least some good assumptions -- but that would eat up whatever is left, I am sure.

So yeah, probably need to just steer clear. 

Originally posted by @Ben Volkman :

@Mark Sewell I have been seeing that same trend. I haven't looked into the numbers for those specific units, but whenever I would look at condos in the past, the HOA tended to eat up would be cash flow, especially when buying only 1 unit.

Like you said, it's working for someone so I'll be curious to hear some others input.

My thoughts exactly - the $800 / m is not net as you have to figure in the dues - which can be a major hastle .

One other factor is if 50% is rented and / or more than 10% controlled by 1 entity - owner then this project will not qualify for FHA/VA financing which is key in condo market. Based upon another comment sounds like it will not qualify -30% owned by 1 person.

I was think about the same and looking at the same condos..... There are many risk buying these condos beside the the fact there are in so so areas. 

- HOAs tend to be high on these condos, averaging 250. 

- appreciating is is was slower than SFHs. 

- Many complexes have issue with bad association, some case they dont even have a reserve. which sometime make the association to raise the HOA at any time with no prior notice.

- selling these kind of condos is a pain. Who would buy them? not an investor, not someone with kids ( size and area issues)..... so there is limited number of ppl that would be interested in these condos. 

I've had great luck doing condos/townhomes. I have some in a sketchy condo complex. Fix them up, put a Sec 8 tenant in there and it's been great. HOA fees are reasonable and it cash flows great. My average purchase price is around 32-35K including repairs. Sec 8 pays $1000 (market is around $850) and the tenants don't move. HOA fee is $167 so that's a big plus. If it cash flows, I say buy it. May not appreciate as much as other stuff, but if it has great cash flow and the HOA is reasonable, do it. I look at it as diversity in my portfolio. I have some nice 175K SFR's in nice neighborhoods that will appreciate, but the cash flow isn't as much as these cheap units.

In my opinion, I would not go into condo around Houston unless you can buy the whole complex since there are so many deed restrictions (very important). Some condos has HOA deed restrictions that does not even allow rental although people are renting them out. Please read those fine prints and consult with lawyers.

Thanks for your comment @Chris Hopper , valuable! For section 8...do you just contact them and allow them access to renting your property? Also - are your condos on the south side like the original poster is looking into, just curious. 

@Jessica Wygal , for Sec 8 you just list it on their website and the tenants will contact you directly.  You can screen them however you want.  Once you select one they’ll give you their voucher and you complete it and turn it in directly.  Sec 8 has no involvement with actually finding the properties.  They just approve the tenants and give them a voucher with how much they qualify for.  Up to them to find an actual house.

Mine are on 59, but the north side in the hood!  

Mark - I have a condo in Webster that I paid $21k for 4-5 years ago and see a lot on the range/area you’re looking at. Personal experience is that appreciation is slow on these units if they’re not in a great area and a lot of the complexes are run down. On my unit I pay $200 hoa and before a recent gut rehab was getting $700-750. Anytime I moved higher than that I couldn’t get tenants and that’s in a good area (friendswood/clear lake). I think it works if you have a lot of units or you’re realistic on costs, income expectations and CoC return expectations.

I have multiple condo rentals. The complexes that my units are in are nice places, and are investor friendly. So I've not had many HOA hassles, and few evictions because the tenant quality is good.

People chose to live in my condos. They don't live there because their income forces them to live in a subpar part of town. Be very cognizant of this when you look at rougher areas. 

The comments regarding Section 8 in this string are valid and that would probably be the only way I would pursue property in a rough area. Still, I've shied away from doing this.

Either way, make sure you financially account for what low quality tenants will do to your property & numbers. One eviction alone can consume several years net income. I have personally experienced this, and recovery from filing judgements against evicted tenants is rare. 

Good luck in your investing.

@Mark Sewell I have looked at those properties too, and it would make more sense if you pay for them cash. The numbers I did with financing would eat about 50% of the market rent of ~$800 not including HOA and other expenses.

I'm not sure about the area since that's definitely not as safe as other areas in Houston. I asked myself, what type of tenants I can expect for this area/price?