Is a condominium a good investment?

Two Similar Emails on Condominiums: Question #1: “sir, thanks for all your financial guides...i just want to ask questions about investing in condo...a lot of condo projects are coming up, their selling point is "good investment". may i ask, is buying or "investing" in this type of project is really an investment? what are promises or good possibilities of having this kind of investment? at the current situation in phils, is it really wise to invest in pre-selling condos?” Question #2: “Moving towards financial stability that I learned from your books, I'm thinking of purchasing a condominium unit, because not only it's much cheaper compared to a regular house and lot (here in Metro Manila), it also allows you to choose one that's near your work. However, I have these questions that make me skeptical. Is it a good investment? I mean, will the unit value appreciate over time? Will it be the same with the other unit of the same size or will it differ base on the location. Is it the higher the floor the better, or vice versa? I know that you have a title and all, but is it also true that it will be demolished after 50 years? If so, what happens to your property? My impression is like this; the floor you're stepping is the roof of another people. Just like the wall you have, you're sharing it with someone else. It's like the ownership is really not established. What happens in case of fire and the building (God forbid) turns to dust? Do you still own anything? I've asked these questions to real estate agents but they can't give me any straight answers.” REPLY: You can check out http://www.geocities.com/reibs.geo/Informative-condominium.html to answer your questions on how a condominium is to be built and operated. If you are buying real estate to establish your home, your parameters should be more focused on what is most convenient for yourself and your family. As a home, it should not be looked at as a financial investment. Rather, it should be considered as a life goal. However, if you just want to invest, please make sure that you have carefully analyzed a real estate investment versus other investment options based on your personal financial plan. If you definitely want to just invest in real estate, choosing between a condominium and a house and lot would use the same parameters in analyzing its financial viability. Here are some of them. 1. location which includes convenience and attractiveness of neighborhood and security. 2. reputation for quality of development of the builder (this is particularly true for condominiums which are high-rise) 3. rules of the association governing the neighborhood and costs in relation to this association 4. your ability to maintain all amortization and maintenance (association, repair, taxes) payments. If you intend to rent out your condominium, you need to project your income and costs and assume that there will be times when the unit will be vacant and will need repair. Rental rates normally over around 5% of the market value of the condo unit provided rental income is constant throughout the 12 months in a year. Vacancy rates therefore have a very strong impact on the effective return on the rental property. In considering buying a condo unit for rental purposes, you must assume at least a 20% vacancy rate over the life of the property. The condominium requires you to live in closer proximity to others and that could be difficult. At the same time, it gives you better security because you can leave your unit and it will be more secure (if it is a good condominium, of course). It is all a matter of personal preference. There will always be a group that will prefer an individual house and a group that will prefer a condominium. Many who have cash to invest like to buy condominiums that they will have their children inherit eventually. In the meantime, they believe that the condominium will bring them some income in the meantime plus even increase in value. However, as children grow older, more and newer condominiums will be built. Your choice may not be your children’s choice. As a financial investment, condominiums do not generally perform well over the long term compared to stock mutual funds or even balanced mutual funds and other types of securities. Except for a few notable offerings, the costs of owning condominium units drag down the resale value. Physical depreciation of units, monthly membership and maintenance dues plus real estate taxes imposed on condominium owners can be quite substantial over the economic life of the unit. There is also the issue of capital gains tax and the VAT applicable when the unit is sold. All these taxes have to be paid before you can transfer the ownership registration of the condominium unit to the buyer. If you include all these ownership costs and the reduced rental earnings due to the 20% vacancy rate, the percentage net return per year when you sell the unit (assuming you can find a buyer) can be very disappointing. Simply put, the cost of acquiring a condo unit is not your only cost. The cost of ownership and the cost of selling are real costs to the owner. And these generally make condo units marginal investments. I will also not react to issues not related to personal financial management. You can email us at info@colaycofoundation.com if you want to clarify anything. We reply to all emails to us. I will try to reply to relevant matters brought up in the blog but I cannot assure you that I will choose your topic and/or when I will write about. FRANCISCO J. COLAYCO is an entrepreneur, a venture developer and financial advisor. He has over 40 years of experience that covers service contracting in the Middle East, manufacturing, trading construction, shipbuilding, management consulting, banking and financial services. He is the Chairman of the Colayco Foundation for Education (CFE) and the author of bestsellers: Wealth Within Your Reach (2004 National Book Award for Business and Economics), Making Your Money Work (Nominated in 2005, National Book Awards Business and Economics), Pera Palaguin Workbook and Money for Kids. The books are available at National Bookstore, most other bookstores or directly from CFE. He joins our website blog to share with ordinary income earners, Overseas Filipino Workers (OFW) and students the simple principles to "Save what you earn and grow what you save." CFE conducts talks, seminars, and workshops. “Managing Personal Finances For The Future” a seminar-workshop developed in partnership with the Ateneo Graduate School of Business, Center for Continuing Education. June 21, 2008, Saturday, 9:00 am to 6:00 pm. For registration and inquiries, please call Marleth Calanog at 830-2050. CFE is also the producer of the PISObilities DVD series, available at your favorite audio-video shops in May 2008. Learn more about the advocacy at www.colaycofoundation.com, email info@colaycofoundation.com, via SMS +63917-8537333 or through (632)637-3741.