One Bedroom Apartments
Ah, the one bedroom. When you're on a budget, as an investor or just for yourself, the one bedroom looks like an attractive place to go. It's cheap! Sure, it's not big, but you don't need a lot of space. What's the harm? You can always sell it later when you need something bigger. But you need to consider this property carefully.
The Problem with One Bedrooms
The problem with one bedrooms is they only have one bedroom! And usually, the price difference between one and two bedrooms isn't that much. So when things get soft - which means when the market is not hot - people almost always choose the 2 bedroom over the one bedroom. That means one bedroom prices can vary wildly in various markets.
When Things are Good in the Real Estate Market
One bedrooms in this market look like a good way to save money. Let's take a complex I know well (but shall remain nameless in this post). Currently, the two bedrooms are selling from 160-180K. The one bedrooms are 140-150K. It looks like you can save quite a bit of money there! And it looks rational. A one bedroom should be cheaper. Of course, in 2017, prices are very good! And the market is very hot. But lets say, for example, that changes? What can we expect?
When Things are Bad in the Real Estate Market
It's the downturns that are problematic, with condos and one bedrooms especially. Would you like to know how the very same one and two bedrooms that I discussed did during the last downturn? That's great, I happen to have that information.
The last downturn was very bad. Nothing was spared. 2 bedroom apartments were selling at just 85-95K in this complex. That was pretty representative of what happened. So if you bought at the last top, you lost 50K in value - and certainly your whole downpayment - and it was a long ride back up (prices didn't really recover until 2013, 2014 in many parts of MA.) But the one bedrooms did far worse. They dropped to as low as 44,000. Most of the sale prices were 55-59K, but even at 60K, you're talking about losing 60% of your valuation. Ouch.
Think ahead Investor of the One Bedroom!
And don't think - if you're an investor - that you can just ride it out. Rents also went down 25%. Which means you'll go from a property that makes "Break even" to one that is just hemorrhaging cash - and you can't sell it without taking an enormous loss. Today, you can probably get $1000 for that one bedroom, but in bad market, you'd be lucky to get $600. That's $5000 in lost income, each year. Paying someone else's mortgage is not what investing in real estate is about.
Hey, Wait a minute......
That's right if you've made it this far, you may have realized something. Buying 1 bedrooms in a downturn is an EXCELLENT way to make money! When the recovery hits, you'll be making a tremendous amount in equity. If you'd bought a 1 bed in the down turn, at 55K, you could put 20% down, (which is 11K), rent it out, and today you could sell for $140K easily. You'd probably averaged 3K in rent a year for 7 years (21K) and net 90K in equity, or almost $15K in profit per year. 15K in profit for just 11K down!!! That's a winning formula. Now, next time, prices won't get so low, but the pattern will be the same. Bottom line, make sure you know your're goals when buying a 1 bed (or any condo!) near a market top.