Over the last 5 years I’ve owned a condo. Here are some quick performance numbers:

  • Purchase price $101k. Sell price $179k.
  • Price per square foot ($162) 52% higher than the average ($106).
  • Rental income/free cash flow during period $50k.~ $10k per year.

I’d like to share here what I’ve learned and mistakes made - more specifically, a framework for thinking about profitable real-estate.

In an effort to simplify, I’d like to propose the most important three elements to focus on to ensure profitability in real estate.

  1. Location:

    This is the true north and most important factor in a purchase. The location must have either current or predictable future desirability in order to ensure a sale of the property and tenants who want to live there. Versus, being stuck in a situation where you’re hoping, guessing or praying that someone will want to live there.

    As a concrete example, the condo owned was near a University which for the foreseeable future will only continue to grow in interest. Equally valuable areas include beach towns, mountains, lakes, trade routes, cities with track records of interest, university towns, etc.

  2. Price:

    The lower the purchase price relative to comparable homes the greater ability you will have to sell at a higher price. This is important because every asset has a ceiling price based on local comparable homes. It would be very difficult if not impossible to sell a house for $1M in a neighborhood where the mean price is $250k even if it is worth $1M.

    A low relative purchase price also allows for a margin of safety in making renovations which create leverage. For example, $10k spent renovating a kitchen will (usually) create more than $10k in value upon a sale. Purchasing at a price higher than or close to comparables prevent you from capturing gains as it brings you closer to the price ceiling. As a concrete example, I purchased the condo for $101k and sold it for $180k. If I had paid $150k tried to renovate and sell the condo the math wouldn’t have worked.

  3. Protection:

    Do you have protection against existential threats such as a local government, HOA (home owners association), etc. Putting in place legal protection against downside events - even as odd or rare as they might be. As concrete example, I got into an legal argument with the HOA after they said I wasn’t able to own a recuse dog on the property when others were allowed dogs. This event resulted in a $5k fee which ate away at my gains. In retrospect, I should have put the property under an LLC to provide some protection - or avoided owning in an HOA all together.

  4. Bonus: 9th Inning of Opportunistic Market

    While the above factors were areas I had control over, I believe, a stronger force than all of them has been the incredible run we are in as an economy and market as a whole. If it weren’t for our current environment I don’t think this would have been nearly as interesting.

Simple Numbers (5 yr period)  
Purchase price -$101k
Renovations -$30k
Mortgage interest -$25k
Taxes -$6.5k
HOA fees -$10k
HOA fees -$6.5k
Rental income +$50k
Sale price +$179k
Net $48k

  • As of 6/2/19 last three years of data.
  • Average ppsf (price per square foot) ~$106. This property $162.
  • Average sale price $145k. this property for $179k.
  • Average DOM 30 days- this property 4 days. link

Take Aways

While the numbers here show that real estate can be profitable and quite a safe place to put money (while also providing a homestead), after reflection I don’t actually love it as an asset class due to several things - and now view it much more as a lifestyle decision that if done right can provide you a home plus an extra bonus.

The first reason being the amount of time and effort it takes to generate the returns (I imagine at scale this starts to get better though). At this stage in my life time is a very precious commodity and the nature of this created something of a ‘part-time’ job along the way. e.g. repairs, general contracting process, managing tenants, etc. (Although I recognize I learned many valuable skills along the way).

The second being the illiquidity of the asset. Even though I didn’t use a real estate agents for buy/sell process it was a decent amount of effort to acquire and unload the asset - versus say just clicking a button on my computer.

The third reason is that there are easier ways to make similar amounts of money. While this did provide me a roof over my head and extra free cash flow I’m not sure it was a better choice than something like VTSAX which for no effort over the same amount of time would have returned ~$55,580 or 9.24% for zero effort.

Other considerations:

  • AirBnB allowed me to live in the unit and rent out the other room - very powerful tool for monetizing short term rentals but takes effort.
  • Renovations are a great way to learn how to get your hands dirty and re-invigorate the literal sense of ‘using your hands’ for a living. Here are some before and after pictures.
  • This was my first ‘crack’ at real estate - so would definitely do many things differently around the second time.
  • This property also allowed me to live rent free during the majority of the 5 years.
  • I used Zillow to list FSBO and had an offer on the property within 4 days of listing. This product experience was delightful.
  • Many hours spent thinking on, renovating, and tinkering with the property of which I can’t quantify but certainly if more carefully calculated would eat away at my gains.