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Are conversions crossing the condo crazy threshold?

by admin on July 4th, 2012

I have long advocated a buy and hold strategy for owning multi-family residential real estate for its generally consistent and predictable returns year after year, as well as the potential for long term, albeit, conservative growth. Deviating from a buy and hold strategy to chase the “home run” of converting a building to Condo has undone many a real estate owner. Right now, we are already seeing deals priced at less than a 5 cap by sellers, and therefore a situation that almost certainly requires a conversion strategy by buyers of multi-family residential properties. At less than a 5 cap, a deal has negative leverage, that is, the cap rate is less than the debt interest rate, an investment situation that is not sustainable if rent increases stall and/or interest rates rise.

It will be interesting to see if this deal environment is here to stay for a while, which will either see no deals getting done, or that some will get done but be back in play as soon as the equity disappears. We shall see.

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