TOM CRONE'S Quick Information on Investment / Income Property Action July, 2005

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Condos Are What’s Happening

Every day I open my MLS new listings and there they are – CONDOS! As an investor, there are some obvious ways to endeavor to make money with this trend. Also, there are some serious cautions.

1: Buy an old apartment building and re-hab it into condos. My friends Jim and Mary Councilman did this at 676 Summit Avenue in St. Paul. They own their own real estate brokerage, have a Realtor hired to do the entire sales program, and Mary co-lists some units. Jim has been in the apartment ownership business most of his life, and Mary has the decorator’s eye that changed these old units into desirable condos. The project now sells under the name, The Waldorf Flats. (If you want to go see it, call me.)
The point is, you need a combination of serious talents to do this. The more units, the more costly the project, as well as the more demanding the management concerns. Plus, you need great location. Summit, just blocks from Grand, is great. They have a web presence, too, if you’re interested. [Please note: The more units, the more you spread your risk. Jim and Mary had several units sold before the project was even completed.]

2: If you want a total rehab, and I mean total, buy an existing building and tear it down. I used to live on Lake Street back in the 70’s. You probably know the building, the big brown one that was right on the southeast corner of Lake Street and Calhoun Boulevard and shared the parking lot with the VFW that has been gone for years. It’s right across from the sailboat launching area and where the ice cream is sold. Many is the time in later years I drove around the lakes, looked at that building and thought, “Boy, I’d sure like to have the money to buy that and…” Well, somebody did. I can hardly wait to find out what it would cost to buy the old unit I used to live in and rented for, I think, $110 per month. (well, not exactly, because it was torn down to the dirt). You know they aren’t going to build junky units at this location. Location, of course, is the name of the game. Don’t buy to renovate or tear down and rebuild in an area that doesn’t have a great location draw, or that isn’t on the inner edge of assured “re-gentrification”.

3: Don’t build or create - Buy units and rent them out. Gain equity (possibly even against a negative cash flow), and then sell for the profit. A very dangerous game, and the one that many doom-sayers are pointing to when they talk about the dangers of real estate investing. The over-population of condos might leave you with a multiple unit white elephant on your hands – a very expensive one.
There’s great truth to this caution. The condo and loft business is burgeoning massively. At some point, possibly, some of these units aren’t going to be worth much because nobody will want to pay big dollars for what is for all practical purposes, an apartment. So, the unit has to have class, quality, location and convenience appeal. All of them are necessary. Just buying a condo unit, renting it out, and expecting it to sell for higher profits is also betting on the trends to come. It can be done profitably, though.

4: Keep an eye out for failing condo projects, buy them out and turn them back into apartments – what goes around… Said semi-facetiously, we hope.
It’s possible for individuals or an investment group to make some good money in the condo game. Some folks are going to get rich, rich, richer from it. Others are not.
One last piece of advice on this. Know your money game. Have a solidly based equity plan, know what your money is really costing you, and be careful about projecting into too rosy a future. Pay to talk to experts in these areas, from accounting to legal – and remember, your tax accountant may not be your best investment accountant, same for your personal lawyer versus a real estate attorney.

More About Millionaires

Recently the rage on getting wealthy, T. Harv Eker has authored Secrets of the Millionaire Mind. It’s highly endorsed by big name gurus in the motivation and self-help realm, and it has good suggestions for improving one's wealth status. It’s about thinking like rich people do. Whether you want to get rich, stay rich, get half-rich, or whatever, the point I’m about to illuminate remains.
Eker says, on page 163 of my version, “Long-term versus short-term: poor people work to earn money to live today; rich people work to earn money to pay for their investments, which will pay for their future. “Rich people buy assets, things that will likely go up in value. Poor people buy expenses, things that will definitely go down in value. Rich people collect land. Poor people collect bills.”
There you have it. He continues, “I’ll tell you the same thing I tell my kids: ‘Buy real estate.’ It’s best if you can purchase property that can produce positive cash flow, but as far as I’m concerned, any real estate is better than no real estate….
“Buy what you can afford now. If you need more capital to get involved, you can partner with people you trust and know well… As the saying goes, ‘Don’t wait to buy real estate. Buy real estate and wait.’ ”
Nothing more in the book is about real estate, and this advice is relative to a bigger picture called “Wealth File #15 – Rich people have their money work hard for them. Poor people work hard for their money.” It’s about the use of passive income and its essential role in wealth development.

Wanna Buy a Second House?

Second home purchases accounted for more than a third of all home purchases last year, owned second homes account for more than one third of the nation's entire housing stock, and second homes were purchased more often last year for investment purposes rather than for vacation homes, according to the National Association of Realtors.
"...Buyers were looking to diversify portfolio investments. This is now the most frequently cited motivation for purchasing a second home," said NAR President Al Mansell, CEO of Coldwell Banker Residential Brokerage in Salt Lake City.

It’s Out There

Here are three interesting properties that came to my attention recently. All claims below are quoted directly from the seller.

3339 24th Ave S
Lower unit 2/1 - rented for $1250 (Section 8)
Upper unit 1/1 - rented for $600
Fully rented duplex in a great location. Blocks from the Lake Street light rail station. Property value in this area will be enhanced greatly as a result of the Lake Street renovation project, slated to be completed in 2007. Please bring your investors to see this great opportunity!

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6 Unit Apartment Building for Sale in St. Paul, MN
Location: 1210 Randolph Ave. (Highland Park Neighborhood)
Price: $500,000.00
Cash on cash return of 6% with assumable mortgage of $325,000 at 5.17% interest.

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Great opportunity to own property in beautiful SW Minneapolis 1 block east of Lake Calhoun, parks, trails, etc.
Triplex w/ 2 ea 2Bd/1Ba, 1 ea 1Bd/1Ba. Full basement w/ bathroom & laundry. 2 car heated garage w/ carport.
Great way to move into the neighborhood as owner occupant, rent out the whole thing, or gut and turn into huge SFH. Ground floor and top floor need some work, but the 2nd floor recently redone w/ beautiful hardwood floors, built-ins and woodwork. Approx 4500 sq ft. 3349 Irving Ave South. $560,000.

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Driving around, go check them out. Don’t call the names on the signs if you are interested in more information. Call me, please.

About “Work”

In a recent conversation with a friend of mine, who said something to the effect, “I don’t know if I really want to take on the work and responsibility of upkeep of an income property.” Real estate isn’t as “passive” an income as giving your money to a financial manager and sitting back. I believe we should call it “semi- passive” income.
To see this in an accurate perspective, you need to do some income projecting and make comparisons. For the real estate, put cash flow, plus or minus, in the equation; add your best-guess minimum equity increase for a given period; then estimate the number of hours you need to spend to manage the property (or reduce cash flow by about 10% to hire a management company, or by the amount you give to a tenant to act as manager). Consider expenses. In other words, get your net.
Divide the hours into the money and get your dollars-per-hour income. If you aren’t impressed, go give your money to a money manager. My personal guess is that you’ll be hard pressed to find a way to do anything that will produce as strong a dollar per hour return on your time and work investment, and that still qualifies as semi-passive. It’s really about whether you like that kind of “work”.
Don’t get me wrong. Work is work, and if you don’t want to do it, that’s that. Many people make lots of money in the income property game, then get worn out doing it and become developers.

“But I don’t have the money…”

You might not be alone. Or, maybe you don’t want to shoulder the entire investment.
If you have any $ to invest, anything at all, and put it with the money other people have, just a little bit, maybe, and some more folks joined in, you’d have the money and the “insurance”.
If you want to, respond to this newsletter and say something like, “I’d like to buy a …, or something, and I’ve got about so much $$$ to spend. Put me together with some other people so we can pool our money and make a decent investment.”

Tom Crone