The data we’ll be looking at is specific to Los Angeles, but the trends and hacks we’ll be discussing apply to most urban markets in the US right now – and the trends suggest there’s never been a better time, at least not in the last two decades, to buy a condo. I’m going to show you the numbers, then share two condo hacks that will maximize your condo investment. But first, I have a to dispel with a few ugly myths about condo ownership.
When you buy a condo, you own a unit or a townhome in a larger building or complex, and all the common space is managed and maintained by a homeowner’s association (HOA). To cover the maintenance cost, the HOA charges a fee, usually between $200 and $500 per month, though I’ve seen high-rises with HOA fees as high as $1200/month.
A lot of homebuyers – and especially a lot of investors – see HOA fees as a deal-breaker. Who wants to pay a few hundred dollars per month on top of the mortgage payment? Here’s the thing, though: an HOA fee really isn’t much more than you’d be paying in maintenance and insurance on a single-family home.
Most homebuyers don’t think about the maintenance cost of a home, but real-estate investors do. For example, a home’s roof might cost $12,000 to replace, and it’ll need replacing every 25 years. $12,000 over 25 years comes out to $40 per month. That’s the cost of having a roof on your house in addition to the purchase price of the house: $40/month.
And you can break down all the systems of a house in this manner. Foundations crack and need repair; pipes leak and need replacement; floors need re-carpeting and walls need re-painting every couple of years. Even the water heater will be another $800 every ten years – that’s $7.14 per month. Plus landscaping! You’re either hiring somebody to do it or paying for the use and maintenance of a lawnmower.
But when you live in a condo, your HOA fees go toward these maintenance items. The HOA is typically responsible for the landscaping, the roof, the foundation, the siding – everything that’s outside of the condo interiors. So the HOA fee is a bummer, but it actually takes a lot of expenses off your plate.
Additionally, insuring a condo is significantly less expensive that insuring a single-family home because the HOA usually carries earthquake and fire insurance on your condo. So when you compare a typical HOA fee to the cost of maintenance and insurance on a single-family home, it’s basically a wash.
This might be true in a smaller market where condo buildings are few and far between. But in a large city like Los Angeles or Chicago or Houston, condo buildings tend to exist in clusters, and appraisers will pull from nearby buildings when establishing comps.
Of course, your condo’s value is tied to the quality of the building overall, and sales comps from the same building will carry more weight than comps from other buildings.
But the bottom line is: condo valuations are pretty damned similar to single-family home valuations. For example, I live on a block that’s half duplexes and half single-family homes. Of the duplexes, about two thirds have the same floorplan because they were built by the same developer in 1923. The valuation of my duplex is very tied to the recent sales of those very similar duplexes – just as the valuation of a condo is very tied to recent sales of condos in the same building. But it’s not the only determinant, and ultimately, it’s just another factor to consider when underwriting the deal.
This is where studying the data really pays off. In Los Angeles, this simply isn’t true.
Below is the Federal Housing Finance Agency’s monthly home price index for metropolitan Los Angeles, courtesy of the St. Louis FED’s research arm at fred.stlouisfed.org, where you can find FHFA and Case-Shiller home price indices for every major market in America.
This index is broken up into two categories, Homes in blue and Condos in red. First a quick word about definitions: I couldn’t find the definition of “Homes” for this price index, so I’m not sure if the blue line is just single-family homes or inclusive of condos. Either way, the graph clearly shows that condos, broken out into their own category, win when it comes to pricing.
Condos saw a larger run-up in pricing before the Great Recession, suffered a smaller decline during the Great Recession, and have rebounded better since. Looking at the numbers, in Los Angeles, it’s simply untrue that condos don’t appreciation as well as single-family homes.
The graph below shows the annual appreciation rates of homes and condos as extrapolated from the FHFA home price index.
The shaded areas denote years in which condos outperform homes. So I’m not saying that condos always outperform homes or outperform homes dramatically. But it’s a myth to think that condos don’t perform as well as single-family homes.
Now why is this? Well, it’s because of how Los Angeles has developed over the past two decades or so. During the post-war boom – and that means post-World War II – development in Los Angeles meant building out: up into the San Fernando Valley and down into Orange County. Eventually, all the land within a manageable commute to LA was developed, so LA had to focus on building up.
In fact, when current LA mayor Eric Garcetti became our mayor in 2013, he annunciated a vision of Los Angeles as a city of cities – that is, a collection of dense urban cores connected by mass transit lines. These dense urban cores were being developed in Downtown LA, Hollywood, Culver City, North Hollywood up in the Valley, Long Beach down in the South Bay.
Unsurprisingly, you’ll find major metro stops in Downtown LA, Hollywood, Culver City, North Hollywood and Long Beach. Metro lines under construction will soon add Inglewood, West Hollywood, and Mid-Wilshire to this network.
Building up and more dense means, obviously, condos. New condos means new buyers, which means new residents with new spending power, which means new and more desirable communities. This Curbed LA article from 2017 notes a 32% price increase in downtown condos from the year prior, and the story’s been the same in Hollywood, Culver City, Long Beach, NoHo: new condos buildings, new demand for these thriving walkable neighborhoods, and appreciating condo values.
So that’s lesson number one: because of how LA has been developing over the last two decades, condos have actually appreciated a little better than single-family homes, and I bet it’s a similar story in markets like San Francisco, San Diego, Brooklyn, even Atlanta and Chicago. In these markets, new homebuyers prefer density to long commutes, walkability to suburban living.
Below is the same FHFA home price index of LA home and LA condos, but it’s indexed to 100 in February 2020, the last month before the pandemic wreaked havoc on the housing market.
Condos slightly outperform homes from February to March, and then they take a huge hit for the rest of the year. Between February 2020 and February 2021, condos have appreciated at half the rate of single-family homes
And we know why. Homebuyers spent all of 2020 moving out to the suburbs. City-dwellers ran for the hills, and in many cases, that meant selling the condo.
This graph below shows listing volume of single family homes, in blue, and condos, in red, as compared to the same month in 2019, the last normal year for the housing market.
In April 2020, new listings for both single-family homes and condos dropped off a cliff as pandemic fears brought the housing market to a halt. But while single-family homes took a few months to recover, condos bounced back right away. In July 2020, new single-family listings were still down 4% over the previous year while condo listings were up 13%.
The condo story over the last year is basic supply-and-demand economics. Supply shoots up while demand is low, and as a result, pricing becomes more favorable. Condos cost more than they did a year ago, but only half as much more as the run-up in single-family homes.
That’s why now’s a great time to buy a condo. I believe in cities. As a species, humans are social and yearn to congregate. We’ve been collecting in cities for literally thousands of years, and we will continue to for thousands of years more. In two to three years, when this pandemic is firmly in the rear-view mirror, a new crop of homebuyers will be clamoring for condos in downtown LA, Hollywood, Culver City, et cetera.
I speak from experience. I was a junior in college in Manhattan on 9/11. I experienced the shut down of America’s largest city. My mom sent me a care package with a gas mask, a hazmat suit, and a prescription for ciprofloxacin, an antibiotic used to treat anthrax poisoning. Some things changed for good – like vehicle barriers outside government buildings and new security rules at airports. But New York City was back within a year.
So my thesis is this: now’s a great time to buy a condo because the favorable pricing is but a pandemic-fueled blip. In two to three years, when life is more-or-less back to normal, condos will more-or-less be back to outperforming single-family homes in LA and similar markets. Then it’ll be time to sell for a tidy profit and trade up to something bigger.
And because this is House Hack Los Angeles, we’re now going to dive into two house hack strategies especially effective for condo purchases.
I know what you’re thinking: running an Airbnb is a pain in the ass, and who wants a new roommate every weekend? That’s not what I’m talking about. I’m talking about furnished rentals for traveling professionals and, specifically, nurses. Here’s a perfect example.
941 W Carson St. #108 is a 2-bed, 2-bath condo in Torrance that I viewed with a client earlier this year. It features a bright, open living room with a huge balcony and a giant master bedroom with its own en-suite bath.
And this condo is directly across the street from the Harbor-UCLA Medical Center, a 570-bed public teaching hospital and level one trauma center. How many nurses does it take to staff a 570-bed hospital and trauma center? I have no idea, but it’s a lot.
Traveling nurses works for placement agencies and spend several months at a hospital before being assigned to another. For a young nurse, it’s a great way to gain a ton of experience and be well compensated for it. According to Zip Recruiter, the average salary for a traveling nurse in California is almost $89,000.
A traveling nurse needs a convenient, safe, and furnished room to live in. Travelnursehousing.com and furnishedfinder.com are two websites that target traveling nurses, and according to furnishedfinder.com, a furnished bedroom with a private bathroom in Torrance, California, goes for anywhere from $1200 to $1700 per month. Given our proximity to the Harbor-UCLA Medical Center and this condo’s excellent layout, I think we can confidently underwrite our furnished rental at $1300/month. Let’s take a look at the numbers.
To do so, we’ll be using my House Hack Calculator, which you can grab for free here.
941 W Carson St. #108 was listed for $455,000 and went under contract just four days later at list price. Let’s assume a 10% down payment plus $2,000 to furnish the rental bedroom, and your cash to close is $56,600. After all expenses, including putting money aside for capex and vacancy, you’re looking out a net monthly expense of $1,558. Of that, $703 is going toward principal paydown, making your “rent equivalent” – the amount of money that leaves your pocket and doesn’t come back to you, like rent – just $855 per month. Not bad!
Accounting for a 4% home appreciation rate, at the end of year three, you’ll have nearly $130,000 of equity in the property – more than double your initial cash to close. And that’s assuming a 4% appreciate rate, slightly lower than LA’s long-term average of 5.3%. My belief is that, over the next three years, single-family home appreciation will probably slow down, maybe to 3 or even 2%, while condo appreciation will outperform the average as prices catch back up with where they should be. We may be looking at better than 4% appreciation for condos over the next three years.
The great advantage of condos is that you’re not individually responsible for the building’s systems – the roof and the foundation, etc. So if you buy a condo in need of a renovation, you’re really just dealing with the cosmetics. This can make a renovation less expensive, especially if you put in a little elbow grease along the way. At the end of the journey, you’ll have an updated condo to put back on the market when demand is back in full force.
Case in point: 1328 Havenhurst Dr. #201, a two-bed, two-bath condo in West Hollywood that hit the market last month with a list price of $695,000. The property went into escrow after eleven days and is still under contract at the time of this writing, so it’s unclear what the actual contract price is. Regardless, let’s explore.
This condo is in a very cute mid-century low-rise with a pool right in the heart of walkable West Hollywood. I especially love the mature trees out front. I’ll admit it, I’ve got a thing for old trees.
The unit gets a ton of natural light and appears to be in tip-top shape, until you get to the kitchen, which needs a major overhaul. And the bathrooms don’t look too great, either.
When I look at these pictures, I see a condo that’s about one kitchen, two bathrooms, and a fresh coat of paint away from selling for top dollar. All cosmetic work, all very manageable.
Let’s talk dollars. At 1,150 square feet and $695,000, this property is listed at $604.35 per square foot. Using my handy-dandy Realtor tools, I quickly looked up all 2-bed, 2-bath condos of similar square footage that sold within three months and within a half-mile. There were ten, and they sold for an average of $681.43 per square foot.
We apply this local pricing per square foot to the square footage of our subject condo, and we derive an inherent average value of $783,645.
I’m using averages to come up with a ballpark, but this is how quick analysis is done. This is the analysis we do on twenty properties a day in order to find the one or two properties per week worth pursuing.
Continuing with the quick numbers, there’s an $88,645 delta between this condo list price and what the current market says it should be worth on average. Why is it selling at a discount? Because of that kitchen and those bathrooms. How much would it cost to renovate the kitchen and bathrooms, plus re-paint the interior? I’m just going to throw out a ballpark upper end of the price range and say $45,000. So if you spent $45,000 on renovating this condo and increased its value by $88,645, how much equity will you have just created? That’s right: $43,645.
And that’s today’s equity. Add three years of appreciation, and you’re looking at even more gain before you sell.
Again, these are big, rough numbers. If we were pursuing this property together, we’d dig into these ten comps to find the renovated 2/2’s and really dial in our expected post-reno valuation. We’d also have two contractors come to the site during our inspection period to get actual bids on the work. And we’d comb through the HOA by-laws to see what work, if any, we can get away with doing ourselves or without permit to save cost. But those are the details we dig into after the initial thumbs up of — oh, hey — this property’s worth pursuing.
What makes this property ideal for a house hacker is that the $43,000 equity margin we identified, while great, probably isn’t enough for a flipper. If a property needs a ton of work and is selling at a steep discount, it will attract bids from several professional flippers, all putting in cash offers. As house hackers with careers outside of real estate, we can’t compete with that. So we have to find the properties that almost but don’t quite make sense to a flipper while totally making sense for our goals.
And this condo appears to fit the bill. It’s a great space in an attractive building in an A+ location that’s lost value this past year because of a global pandemic. The property is selling at a discount because it needs a facelift. Scoop it up while it’s still on sale, renovate, and sell in three years when West Hollywood will again be one of the hottest markets in all of the LA.