Investments
Why a Condominium? Why Not?
GEORGE RANDOLPH'S WIFE ALMOST LEFT him after that summer holiday in Galveston three years ago. It wasn't that Jean was so fed up with George. It was that she was fed up with all of George's friends mooching. Plus the fact that she'd had it, as she put it, "with four weeks of being nothing but a bloody maid."
"You call that a vacation?" she asked as they packed up the car and headed back to Dallas after a month at their modest cottage on the Gulf.
"I didn't get to play tennis once," she said, her normally cheerful features distorted into a scowl of martyrdom. "All I remember about the month is buying groceries for those big-eating, so-called friends of yours, going to the laundromat with the kids' clothes and communing with the cook pots in the kitchen. That was no vacation. That was a seminar in hotel management on the cheap—with me giving all the demonstrations!"
So good old George, kind and considerate, upper middle class but not very rich George, promised to put the cottage he had inherited from his family on the market and look around for an alternative vacation.
It was just after the Randolphs had priced a two week vacation for the six of them (including kids, 10, 12, 14 and 16) at a resort hotel—estimated minimum cost $1000—when George sold the family place and decided to put the proceeds into a condominium at a resort.
"This really gives me the best of both worlds," George explained to me a year later. "Sure, it gives us another mortgage payment to come up with each month. That's tough for us at this stage. But I really like the idea of owning my own place. Why should I keep bankrolling some motel and then have nothing to show for it?"
"Besides," he added, "this is a really nice resort where the kids have plenty to do, and Jean and I can get in some tennis with people we like. We go there several times a year. And we rent our unit to other vacationers when we're not there."
"I like it," said Jean, "because it's compact and efficient. There's not enough room for guests, but that's a plus as far as I'm concerned. Everyone knows we're doing this as a business venture. We're not making any money, but it allows us to refuse family and friends who'd otherwise like to borrow it when we're not there. We just tell them 'Sorry, that would spoil it with the IRS.'"
George Randolph isn't the only guy who has decided that when it comes to vacations, dialing for deductibles might beat dialing for dollars. Like other families who are snapping up resort condominiums, the Randolphs like the arrangement between resort developer and condominium buyer: namely, that the developer builds and sells a modern unit, complete with electric kitchen, washer-dryer, the works. Each condominium unit, which may be called a villa, apartment, patio home, casita, townhouse or cabana, is owned outright. In real estate vernacular you buy the horizontal air space, although the walls and the land around the multi-unit structure are held in common by owners of all units. Each owner pays his share of total exterior maintenance. When the owner is not using his unit, he may (and usually does, for this is the lure of such condominiums) rent his place through the resort, at a commission of 15 to 50 per cent, thus giving the resort more available "hotel" rooms without any capital outlay, while giving the owner some income out of which he may pay for maintenance and other expenses.
You have to look at a condominium as a resort, not with the greedy beady eyes of a big-time land investor. Forget all those rules about a good real estate investment requiring a 12-14 per cent profit. That's not the point. The point probably won't be monetary. You're investing in fun and games—hoping like blazes that your property will appreciate in value, of course. But unless you are lucky enough to buy in an early phase of a resort which is sensationally popular (and sensationally reliable) thereafter, it's highly unlikely that you're going to make your fortune here. In fact, even if you never stayed in your condominium and left it available for rent lOO per cent of the time—which seems pretty absurd—you might break even.
Moreover, long gone are the days of running such a place as a business—as in "Schedule C (Form 1040)—Profit (or Loss) From Business"—and deducting expenses including travel, way beyond minimal income, giving you a lovely tax loss. According to recent complex and somewhat vague regulations (best discuss this with your tax advisor for the latest scoop, as IRS is currently looking at this type of investment with the same critical eye they have cast on "hobby" ranching of late), you must prove that you are engaged in business with "an intention to derive a profit," in order to deduct expenses beyond income. The burden of proof is on you.
IRS also insists that expenses must be allocated so that portion attributable to personal use is not deductible (taxes and interest are, however, 100 per cent deductible). The IRS will look with a jaundiced eye at a condominium owner who occupies his own unit during prime vacation time, rarely rents to others the rest of the year, but still deducts expenses for the latter portion on Schedule C.
It also means that the ideal location for a profitable resort condominium is going to be a year-round resort where rental arrangements are efficient. Excellent builders and honest resort developers who operate as rental agents have come to grief over their inefficient housekeeping departments or their unreliable reservations divisions. Some builders just build condominiums in an attractive resort area, sell them and move on to other sites, assuming no responsibility at all either for the quality of surrounding development or for any rental arrangements. So a prospective buyer needs to look at the rental side of resort operations and the master plan for the area around him, not just at the quality of the particular unit he is considering buying.
Reputable resort developers will not emphasize the financial advantages of condominium investment. If they were to make any rental guarantees, by the way, they would by law be required to register their venture with the S.E.C. As with so many other types of real estate, look for the soft sell if you're considering buying a condo. The most successful complexes sell more by word of mouth, friend-to-friend, than by expensive promotional gimmickry—sweepstakes, free trips, etc.
In other words, proceed with caution. Consider fully all the pros and cons, problems and pleasures.
First of all, condominiums are expensive. It's hard to find one these days for under $25,000. If you can't scrape up the 10-30 per cent down payment by borrowing on your life insurance or hocking the family jewels, forget it.
Second, that down payment was just for starters. There are also closing costs, often up to and over $1000 (watch out especially for bank add-on "points" in lieu of a higher interest rate) and furniture. Early attic decor is not only discouraged at most of these places, it is often forbidden. The resort, if it is a first class resort, may demand both quantity ("everything on the attached list is required: service for eight, broom, vacuum....etc.") and quality. Under such stipulations, rarely can a two or three bedroom unit be furnished for under $4500. Most large condominium sales organizations offer optional "package deals" to furnish units in a choice of decors; a few include all furnishings or all but linens and kitchenware in their selling price.
Rental agents claim that the more attractively furnished a condominium is, the more it will rent and the better care renters will take. Unlike hotel owners who are considered faceless corporations, condominium owners make their renters feel like personal guests. They often leave guest books for renters to sign, notes on what to do where, and a few enterprising owners (checking on what they fear is the sloppy maintenance job of the rental agent) leave self-addressed post cards for renters to send them reports on anything which displeases them—a broken toaster, a dirty refrigerator, or the like. My friend, George Randolph, tells me he has received several completely unsolicited "thank you" notes from renters, complimenting him on the way he furnished his unit and telling him about their good time.
That's a good point, for renters rarely steal from people they seem to consider their hosts. When glasses disappear from units, though they may have been broken, it's more likely that they have "travelled" next door to the adjoining unit. Often friends get together and rent two or three units in the same area, then visit back and forth, sharing meals, silverware, and what have you. Most rental units do include lock-up storage areas where owners' personal or fragile items (liquor, for example) may be stored while they're away.
There are some disadvantages in all this. Wives seeking a respite from household chores still get stuck with the cooking, unless the family budget can stand eating in the resort dining rooms. If a family has several small children and the resort has no children's program, old Mom and Dad may end up getting little recreational time for themselves. Still, most condominiums provide all the comforts of home, plus a pool at least; and many have supervised play programs for little ones and golf or tennis clinics and beach parties for the older kids.
Another drawback: you're stuck with your resort as a permanent vacation spot. Which brings up an important bit of advice: if you're going to commit yourself to all those vacations at the same resort, not to mention all those mortgage payments, better take a long hard look before buying. Visit the place. Talk with owners. Rent someone else's unit. Who knows? You may end up hating it. Better to find out before the marriage.
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