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Cuckoo for condos!
Get in early! Get out fast! Sound familiar? Everyone knows how the dotcom party ended. Right? Right?
August 24, 2005: 5:31 PM EDT
By Stephen Gandel, MONEY Magazine
Latest home prices
Fastest growing counties
The top 10 by percentage growth, from July 2003 to July 2004.
County, StatePopulationGrowth
Flagler County, FL69,00510.1%
Kendall County, IL72,5488.3%
Loudoun County, VA239,1568.1%
Hanson County, SD3,7867.9%
Lincoln County, SD31,4377.5%
Lampasas County, TX20,7187.3%
Lyon County, NV43,2307.2%
Camden County, NC8,4377.2%
St. Johns County, FL152,4736.7%
Dallas County, IA49,5916.6%
Source:U.S. Census Bureau

NEW YORK (MONEY Magazine) - Late May, early evening. Chris Cowen cools his heels in a Minneapolis restaurant, waiting for a table. His buddy Keith is 15 minutes late.

Cell phone rings. It's Keith. Got a proposition for you, Chris: a one-bedroom condo under construction in Scottsdale, Ariz. -- 1,800 miles away -- for $135,000. The catch: Only 60 seconds to decide. Sight unseen. Over the cell.

"It was a no-brainer," recalls Cowen, 32, who owns 28 condos (solo or with partners) in various stages of completion. Two months after his impulse buy, Cowen figures the unit's ultrafast appreciation has covered his $3,500 cash down payment 10 times over.

"I've already made $35,000," he crows.

Know this guy? If you don't, you probably will soon, because condos are to the real estate boom what Internet stocks were to the 1990s bull market. And like the Internet day-traders before them, the new condo flippers, with their talk of instant riches and easy money, are about to become the life of every cocktail party.

And why not? Condo prices have soared 80 percent in the past five years, making the same period's 40 percent rise for single-family homes look almost pokey. Developers are constructing new condo units at nearly twice the pace they were in 1999, and investors are literally lining up to buy one, two, three or more. In Miami, as much as 75 percent of some condo towers are investor-owned.

No cash? No problem. Banks, with their loosened lending standards, no-money-down loans and teaser mortgage rates, are making it easier than ever to be a mogul-in-training.

Chris Cowen is betting his retirement that the wonder years won't stop soon. He cashed out his 401(k) to put $246,000 into a highly leveraged condo portfolio that he thinks could sell for $6.2 million. Estimated equity so far: $868,000. Cowen is so bullish, he quit his corporate job at Siemens to develop his empire full time.

"Even if you make six figures, you still work for someone else, paying 40 percent taxes and putting in 60 hours a week. What do you get for that?" he scoffs.

A volatile mix

Mix it all together -- rising prices, record levels of construction, fast-and-loose mortgages and swelling ranks of new investors -- and you get a market more volatile than Tom Cruise.

"To some degree, what's driving condo prices is sheer greed," says economist Gleb Nechayev of Torto Wheaton Research, which forecasts a relatively mild drop of as much as 3 percent for U.S. housing prices overall in the next year. "Condo prices have increased faster than single-family homes -- and they will fall faster."

As they did little more than a decade ago. Overbuilt and over-concentrated in city centers, the condo market collapsed in the early '90s, smashing overstretched owners in the process.

No one knows when history will repeat itself. But c'mon: The easy money has been made. The right time to invest is not after a record five-year run-up in prices. It's not when the supply of new product is set to nearly double.

If you're really drawn to the market, you need a deeper understanding of what's driving prices up -- and what can drive them down. Above all, don't confuse what's worked in the recent past with what will work over the long haul.

The case for boom

Condos still have plenty going for them -- namely, 76 million baby boomers. You know the demographic drill by now: As they become empty-nesters and retirees, they'll sell their rambling homes in the burbs and move into yard work-free condos (or at least purchase them as second homes).

They're expected to continue flooding into aging-friendly locales like Arizona, Florida and Nevada, but they'll also be flocking to traditional city centers as downtowns become safer.

Don't forget the children of boomers, adds veteran condo investor and National Association of Realtors chief economist David Lereah. They'll need affordable places to get started, and many already see entry-level-priced condos and townhouses as a great way to build equity so that they can trade up.

"It's hard to concoct a scenario where condo prices collapse in most markets," Lereah argues.

A good condo pick that's soundly financed can be about as hassle-free as real estate investing gets. Gary Eldred, author of "Make Money with Condominiums," notes that association fees typically cover the standard repairs you'd have to oversee on a traditional house.

"Condos," Eldred says, "are perfect for people who want a passive investment."

The case for doom

Even the best investments can get overvalued, however. Condo fans cheer the 15 percent average annual spike in prices these past four years, but fail to remember that number was about 2 percent in the '90s. Last year, for the first time, the median condo cost more than the median home -- $9,500 more.

Prices in some parts of the country look even more ridiculous when you compare them to the low rents that condos currently generate.

In Minneapolis, for instance, the average downtown condo sells for just over $256,000, up 77 percent from mid-2000. But area apartments rent for a measly $915 average a month, down from $918 four years ago, according to Torto Wheaton Research.

Even with a 20 percent down payment, a 30-year fixed-rate mortgage would cost $1,150 a month. This condo investor is $235 a month in the hole -- even before paying association fees and taxes.

Growing fears of overbuilding are also cause for pause. With so many condos being built today, one has to wonder: Who's gonna rent them? Apartment vacancy rates have been rising.

"My guess is construction is growing faster than demand in some markets," says Raphael Bostic of the University of Southern California's Lusk Center for Real Estate.

Next: The three myths of condo investing.


The other real estate boom: Scams.

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