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Ask Dave

Houses And Condos And Duplexes, Oh My!

Allison and her husband are in their 30s and on Baby Step 7. They'd like to invest in real estate, and they want Dave's opinion on the different types of investment properties.

QUESTION: Allison in Dallas and her husband are in their 30s and on Baby Step 7. They’d like to invest in real estate, and they want Dave’s opinion on the different types of investment properties. Dave explains what the pros and cons of each are.

ANSWER: As appreciation—all things being equal meaning they were sitting virtually in the same neighborhood—a single family will out-appreciate a condo or a duplex. The condo will out-appreciate the duplex. The reason is pretty simple. Ninety percent of your buyers of a duplex are investors. Investors are always looking for a deal. Your appreciation is limited by the fact that your client base for resale is all bargain hunters. A single family home with a little “Leave It to Beaver” picket fence around it and all dolled up—that’s the world of real estate, and that’s the best appreciation. Condos are second. Again, that’s all things being equal. A junky neighborhood with a house and a great condo with a great location, the condo will do better, right? That’s what we’re thinking about.

Condos are nice because you’re not dealing with any exterior maintenance in terms of hassle factor for your tenants. Duplexes are nice because bang for the buck, you’ll probably get more cash flow. In other words, a $150,000 duplex is going to generate more rent typically than a $150,000 home or a $150,000 condo because you’ve got two sides to it. The positives on the duplex are more cash flow. The negatives are less appreciation. The positives on the condo are less maintenance hassle for the exterior, good appreciation, a decent rental market but a little bit more limited. The house is going to appreciate more, have a bigger market for rental than the condo has assuming it’s a reasonably sized home, and is probably going to appreciate more but has hassle factor, too, on maintenance issues. I’m not against any one of them. What I’m looking for is where the best deal is.

The homeowner’s association fees don’t bother me as much as the HOAs. How many people get so drunk on so little power is amazing to me. These people have nothing to do, and then they spend all their time doing this. I’m in some good ones. I’m in a lot of HOAs. I’m in some good ones where the people are good, and my personal home is in an HOA. Those are great people. They’re friends of mine. They do a great job, but they’re not power tripping on parking spaces and stuff. That kind of stuff drives me nuts more than the HOA fees.

The other downside of something where there is an HOA is if the HOA fee or HOA in general is managed poorly. For instance, I bought into a condo one time, and they hadn’t done any maintenance on the stupid things in years. The HOA fees were too low, and so suddenly they started tagging all the units for roofs and siding repairs and parking lot repairs and man, ding, ding, ding. They were ringing the money bell pretty often. I started figuring out why the stupid thing was a bargain. It was all the deferred maintenance was built up in the HOA because the HOA had never been run well, so there was no money set aside for the things it was obligated to fix. Those are the kinds of things you’ve got to watch for in those situations, but again, I’m in some good ones. They’re not all bad. Some of them do a good job.

All of them have upsides and downsides. You’ve just got to manage the issue. That’s one of the reasons I think you make more on real estate than you do some other things. But you’re taking more risk because you’ve got to look at all these different moving parts. Check everything. The more of it you do, the more comfortable you’ll get with it. The good news is when you’re paying cash, it’s a lot easier to make the decision.

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