Buying units in a condo complex

I am looking into the pros and cons of buying a number of units in a complex of about 200 units. I would only buy units if I could get them for <$30K, and average rent would be @$700/mo each. There is a HOA fee of about $200/mo that includes all exterior maintenance, garbage P/U, water, and property insurance. They should cash flow fine. My questions are about buying into a complex that has a HOA and fees. Drawbacks other than the cost? Advantages? This seems like a scalable way to get into an "apartment complex" with a decent CAP rate. If things went well, I'd like to buy 25 of them over the next couple of years.

I'd pay cash as I went and then ideally do cash out mortgages in groups of 2-4 units. Maybe finance 70-80% LTV. Any issues with doing this type of financing? Other considerations?

Edited: 06/26/2010 at 06:56AM

Jon Klaus

Real Estate Investor · Dallas, Texas

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Icon_minipost Jan 13 '09, 12:50 AM

Tactics: I would mail a letter to the owner of record asking if they would enertain a cash offer for the home. Most are investor owned. I would follow up with a series of 4-6 postcard mailings over the next 3 months.

Other marketing ideas for buying? Contact property manager for leads? Spiff them? No bandit signs allowed in the complex.

Edited: 06/26/2010 at 06:56AM

Dave Finnerty

Real Estate Investor · Las Vegas, Nevada

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Icon_minipost Jan 13 '09, 02:28 AM

I think your strategy can work. You plan to be on the HOA board of directors??

Why not spread your risk out to a couple condo complexes in the area rather than 25 in just one association?

Edited: 06/26/2010 at 06:56AM

Jon Klaus

Real Estate Investor · Dallas, Texas

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Icon_minipost Jan 13 '09, 02:33 AM

The reason for staying in one complex is that I think I can get more for the package at resale time. Like an apartment complex with in a complex.

Yes, I would be active and seek to join the board and work towards appreciation.

Edited: 06/26/2010 at 06:56AM

Dave T

Real Estate Investor · South Carolina

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Icon_minipost Jan 13 '09, 07:53 AM

Not sure I agree with your resale pricing expectations. A package will only be interesting to another investor who will want to make money going in and demand a discount.

I expect that you will get more in the long run by selling one at a time to prospective owner occupants.

Edited: 06/26/2010 at 06:56AM by Dave T

Jon Holdman

Real Estate Investor · Denver, Colorado

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Icon_minipost Jan 13 '09, 09:47 AM

You should check into "nonwarrantability" issues with lenders. If more than a certain percentage of a property is owned by a single person, the property will become nonwarrantable, and it will be difficult for anyone to financing. I believe this would only happen if 40% of the units were owned by non-owner occupants. But, you should be sure you know the current situation and don't get caught by surprise.

I'm not sure condos make the best rentals. They're essentially apartments, but lack the onsite management.

Edited: 06/26/2010 at 06:56AM

Jon Holdman, Flying Phoenix LLC

Ben Duq

Accountant · Honolulu, Hawaii

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Icon_minipost Jan 14 '09, 01:27 PM

The biggest problem is the HOA fees. These can increase dramatically from year to year, my fees increased 17% this year and 47% since I purchased my condo 3 years ago. Additionally there could be special assessments for unforeseen repairs or inadequate budgeting/building reserves by association members. Not to mention missapropriation and theft of dues etc.

Edited: 06/26/2010 at 06:57AM

Mark Yuschak

Rehabber · Grand Blanc, Michigan

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Icon_minipost Jan 14 '09, 06:42 PM

I couldn't agree more with Ben. He hit the nail right on the head. I own one condo...and that's one condo too many. The special assessments and constant rate increases of HOA dues can really strain the cash flow.

Furthermore, in my complex anyway, tenant occupied units are frowned upon. They've even gone so far to personally review my perspective tenant before signing a lease with that person.

When my tenant moves out I'm selling the place. Too many games to play, and I don't the time, money or patience for it.

Edited: 06/26/2010 at 06:57AM

Mike Seluk

· Fort Myers, Florida

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Icon_minipost Jan 16 '09, 12:12 PM

This is too funny...I just found myself crunching the numbers on a unit in my neighborhood that is almost identical to the one he mentioned. It's a condo in a large development offered at 29.9k, rents range from $600-750, HOA is $227/mo.

Though we DID have an assessment spread over the last 3 months where we had to pay $300/mo., supposedly to make up for what they didn't collect due to foreclosures.

Edited: 06/26/2010 at 06:58AM by Mike Seluk

Jeff Tumbarello

Real Estate Investor · Fort Myers, Florida

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Icon_minipost Jan 16 '09, 10:01 PM

It is hard to get a good cash flow with HOA fee's. You also have the interaction of the other condo owners ad the Board.

I would determine how many condo's are in foreclosure, and how many are not in foreclosure but are behind in the condo fee's.

You also want to determine what percentage of the complex in owner occupied and rental

Take a look at the budget and reserves. We have condo complexes in Fort Myers that are toast. I know of one that can not have a board as it only has one functioning owner.

I know of another that just liquidated its reserves to keep the water on,

There is another complex, it was a conversion,only 2 of the units are paying the HOA fee's

Not all of condo's have these issues. I sure would make sure you are not buying into one of these.

Edited: 06/26/2010 at 06:58AM

Mike Seluk

· Fort Myers, Florida

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Icon_minipost Jan 16 '09, 10:13 PM

Jeff, I'm glad you posted! I was actually going to PM you and say, "Talk me out of this! It looks like it could work!" But condos...sheesh...man, I don't wanna go that way.

At one of the meetings a while back, a 'deal' very similar to this was brought up by someone and you and Tom B. kicked it around for a bit and pretty much shot holes in it every which way. THAT was an eye-opener. BTW - What happens when a place like that becomes toast, as you said?

Edited: 06/26/2010 at 06:58AM