Buyer of a Budget Condo Makes
A Small, But Tangible Return

The Investor: David Pailet, 32, until recently managed a small Texas hedge fund. Following the stock market declines of 2001, he says, raising capital became difficult, and he decided to try real-estate investing.

The Property: The 550-square-foot, one-bedroom condo is one of nine units in Dallas that Mr. Pailet bought in April 2005 from a recently divorced investor whose changing finances put her at risk of foreclosure. The home is part of a 200-unit development with a pool. The 1969 complex is located in a low-income neighborhood that Mr. Pailet says is both safe and convenient to major highways.

Purchase price: $11,530. Mr. Pailet calculated the unit's price based on square footage costs for his nine-property deal. He put $2,500 (more than 20%) down on the property.

Additional investment: Mr. Pailet paid $1,900 to renovate the unit, including painting, new carpeting in the bedroom, maintenance of the unit's plumbing and HVAC heating and air-conditioning system, and replacing the refrigerator with a $280 basic model.

The Strategy: The purchase, Mr. Pailet says, is part of a plan to buy apartment units in older (pre-1985) complexes or those that require upgrades and renovations -- a niche that he says many investors bypass for hard-to-find deals on new buildings that don't require repairs. He intends to mostly buy and hold his investments, but in this case, he's selling three two-bedroom units and holding most of his six one-bedrooms for rental income. Older developments such as the one he's bought into allow for cash flow from rentals, whereas newer buildings won't necessarily provide cash flow for some time, he says. These nine units are Mr. Pailet's first deal, and he made his money upfront, he says, because the seller couldn't fund repairs and sold the properties to him at a low price.

The Pitfalls: Buyers who look to buy only a portion of a condominium complex -- known as a "fractured deal" since the investor is buying only a fraction of the entire complex -- should pay close attention to a complex's homeowners' association, he says. The association at this complex changed management around the time of his closing and the outgoing management group had overspent the complex's general repair budget, Mr. Pailet says. This meant he had to negotiate hard to make sure the association fulfilled promises to the seller (and, by extension, to him) to replace a leaking roof over the six-unit building where some of his properties are located.

The Payoff: $11,770. Mr. Pailet sold the home in July for $25,800, so subtracting the purchase price ($11,530), renovation costs ($1,900) and carrying costs ($600), he made $11,770 on the deal.

Do you think this was a good investment? Share your thoughts on this property.

-- Ms. Hodges is a free-lance writer in Seattle.

Email your comments to rjeditor@dowjones.com.