Appreciation

Are Condos a Good Investment?

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Are Condos a Good Investment?

Question: How have rental rates on condos compared to appreciation in resale market value?

Answer: Last week, I compared the historical appreciation rate of different property types (tl;dr…single-family > townhouse > condo) so this week, I thought it would be interesting to drill into what a condo investment looks like in Arlington by comparing historical market value appreciation against historical rental rate appreciation.

1BR vs 2BR Condos, North vs South Arlington

Last week we learned that, since 2012, condos in South Arlington have appreciated faster than similar condos in North Arlington, and in both areas, a two-bedroom condo has performed better than a one-bedroom condo.

North Arlington Rental Rates Frozen, Moderately Higher in South Arlington

Incredibly, the average rent for a one- or two-bedroom condo in North Arlington has barely changed since 2012, while increasing about 18% and 15%, respectively, in South Arlington. I believe that is due to the high volume of new apartment buildings delivered over the last 10+ years, significantly increasing the supply of rents and delivering more modern finishes and amenities than most condo buildings offer, causing condo buildings, mostly built 15+ years ago, to become less desirable for renters.

It’s important to note that the rental data below is limited to what is in the MLS, which is mostly condo rentals and does not reflect the commercial rental market, which has seen average rental prices increase since 2012.

Table Description automatically generated

*Calculated using that year’s average 30yr fixed interest rate (5.5% for 2022), 20% down, and $50 per month on homeowner’s insurance

**Approximate first-year return on an all-cash purchase

Expect Low Return, Potentially Negative Cashflow

In most cases, real estate investments follow similar principles as other investments – more risk for higher returns and lower expected returns for more stable investments. Arlington is one of the most stable, lowest-risk real estate markets in the country/world and condos tend to have the lowest risk of all property types because they’re generally easy to rent with less exposure to costly repairs and maintenance oversights. Thus, you can expect shockingly (for some) low returns on a condo investment in Arlington.

If you’re putting close to 20% down, expect to be cash-flow negative for a while. If you’re paying cash, expect a low single-digit cash-on-cash return. It’s important to note that the calculations above do NOT include vacancy periods (expect some between tenants), property management (usually ~6-10% of gross rent), maintenance/repair, and other expenses you may incur.

Where is the Payoff?

Investment properties come with significant tax benefits from depreciation and some other expenses (not mortgage interest) so for high-earning individuals with few write-offs, the payoff for large tax deductions is substantial and can offset monthly cash flow losses. If you are financing the investment, you must consider the unrealized gain of principle buydown (unrealized until you sell) and incorporate that into your return-on-investment calculations.

Also, keep in mind that these are blended averages of one- and two-bedroom condos. If you are exclusively seeking an investment property, you will find some properties with moderately better-projected returns by focusing less on what you want to live in and more on value.

Many people end up with a condo investment property because they’ve bought it for their primary residence and then convert it into a rental property when they move out. This can be an excellent way to build your investment/real estate portfolio because you get a lower interest rate on a primary residence, with the ability to put less than 20% down, and generate value just by living there and not paying rent yourself.

Condos are, of course, not the only option when it comes to real estate investing but they tend to be the most accessible, and thus, the most popular. Investing in real estate can be a great way to build wealth, but you must first understand the risk-return profile you want and be realistic about costs, returns, and the time you’ll spend managing the investment. 

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH Real Estate | @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Which Property Types Appreciate Faster?

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Which Property Types Appreciate Faster?

Question: What type of property appreciates faster – condo, townhouse, or single-family?

Answer: Since 2012, the data is clear – single-family homes appreciate the fastest, followed by townhouses/duplexes, and then condos. Since 2012, the average single-family home has appreciated 69% compared to 27% for condos.

This pattern was true before the pandemic market sent single-family home prices through the roof
(see 2016/2018 numbers below), but was amplified over the last two years as demand intensified for
single-family homes.

South Arlington Appreciating Faster Than North Arlington

Based on appreciation since 2012, South Arlington has been a better investment than North Arlington for all three property types. I expect that trend to continue as new construction picks up steam in South Arlington, Columbia Pike development continues to thrive, and Amazon HQ2 expands hiring.

Two-Bedroom Condos Appreciate Faster Than One-Bedroom

Two-bedroom condos consistently offer a higher return than comparable one-bedroom units. South Arlington condos have appreciated so much since 2012 that even a one-bedroom condo in South Arlington has produced a higher percentage return than a two-bedroom condo in North Arlington since 2012.

Of course, return on investment isn’t the only consideration when buying a home and you certainly need a lot more money to afford a single-family home (avg over $1.3M in 2022) than a condo (avg $533k in 2022) and a 2BR condo (avg $633k in 2022) over a 1BR (avg $377k in 2022), but for most buyers, having a good understanding of how historical returns compare by property type and size should influence decision-making. But please don’t forget that most single-family homes will also require a much higher maintenance, repair, and replacement budget than townhouses and condos (even accounting for condo fees) in order to access those higher long term returns.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.
Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH Real Estate | @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Resale Value of New Construction

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Resale Value of New Construction

Question: We bought a new home in Arlington five years ago and are considering selling, but we’re concerned about the resale value of new homes given the amount of newer homes being built in the market. Do you have any data on how new homes do when they resell for the first time?

Answer: The new/newer construction market is the only Arlington sub-market that is anywhere close to properly supplied, with almost 4.5 months of inventory available (number of homes for sale divided by average sales per month = months of inventory).

Most housing economists say that a market is at balance for buyers and sellers when there is six months of inventory. For comparison, sub-markets like one-and-two-bedroom condos, <$1M detached homes, and townhouses each have between one and three weeks of supply.

New Homes Are Appreciating…

There’s a logical case to be made that when a new home (built within the last decade) gets resold, it will struggle to compete with other brand-new homes given how similar these homes have been over the last ten years, combined with the amount of supply in the market. Fortunately for owners of recently built homes who may sell in the near future, that logic does not prevail and new homes are being sold for more the second time around.

…But Just A Little

There aren’t a ton of data points yet (most people buying expensive new construction will be there for a long time), but just enough that I think we can start to get a good idea of how new homes (that aren’t new anymore) from the past decade perform when they’re resold into a market with many similar new homes.

To study this, I identified homes built since 2012 that have since resold, excluding homes that sold within one year of their original purchase or any homes with major improvements since the original purchase or clearly left in disrepair. Here’s a summary of my findings:

  • 53 homes met the criteria, nearly all in North Arlington
  • Average appreciation on resale was 6.7%
  • Average annualized appreciation was 2.1%
  • Only seven homes sold for less than they were bought
  • Sixteen homes sold for at least 10% above what they were bought
  • On average, it took 64 days for these homes to go under contract, about 30% longer than the entire detached home market during that same period
Cause For Concern?

For those who own a new(er) home, you may be underwhelmed by these numbers relative to what the rest of the market is doing — compared to other detached homes in the Arlington market, new homes are appreciating at a noticeably slower rate.

Part of that is due to the fact that there’s a much higher supply of similar new/newer homes for sale so that will naturally keep prices more stable. Another reason is that it takes longer for the upper end of the market to appreciate, so the growth we’ve seen <$1.25M hasn’t impacted the $1.5M+ market as much.

So is a new home a bad investment because it appreciates less than other homes? Not at all.

First, one of the reasons buyers pay a premium for new/newer homes is because your maintenance and repair costs should be significantly lower for the first 10-15 years. Investment value isn’t only about what you buy and sell for, it’s also about how much you spend between the two transactions keeping the house operating (often more valuable than appreciation).

Second, for most families, a new/newer home offers square footage and a floor plan they can’t find anywhere else so the non-financial/quantifiable benefits are significant. Opportunities to customize to taste also factor into the non-financial/quantifiable return that owners may receive.

The new construction market operates differently from the rest of the housing market. If you have any questions, don’t hesitate to reach out to me at Eli@EliResidential.com. And a quick plug for two custom homes on ¼ acre lots I’m selling in Bellevue Forest, being built by James McMullin, Arlingtonian and third-generation Arlington developer/builder. Demolition and excavation will start in the next month!