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NO, Condos STILL Aren’t Good Real Estate Investments!!

by Frank DeFazio on November 15, 2012 · 60 comments

  
luxury condo

As a result of the real estate crash in 2007, local markets in many cities have been flooded with a glut of distressed, bank owned, and unsold developer-owned condos, many of which are being offered at ridiculously reduced prices.  This may lead you, the real estate investor, to wonder, “are condos good real estate investments?”.   Ever since I lost $40,000 gambling on appreciation on a condo investment I’ve always felt like the answer was a resounding NO!  Obviously we all know that all real estate is LOCAL and there are no hard and fast rules for every market but with that being said . . .

Here are the reasons I’ve stayed away from condos as investment properties.

Condo Fees

Every unit in a condominium pays condominium fees to cover the costs of the common elements and services in the building.  Condo association fees range from hundreds to thousands per month depending on the type of building, the buildings requirements, and the amenities offered.  Typically monthly condo fees are allocated towards the property’s master insurance policy, doorman/doormen, snow removal, trash removal, reserves, professional services like lawyers/accountants and possibly some utilities.  In luxury buildings condo fees may go towards other amenities like fitness rooms, pools, valet parking, 24 hour concierge and chauffer driven vehicles. These condo fees, while beneficial to the owner occupant, are problematic for the real estate investor.

Monthly condo fees make it virtually impossible for an investor to put down the minimum amount required to purchase an investment property and still end up sufficiently cash flow positive.  In order to “make the condo work” as a cash flow positive investment, a higher down payment is required which means less money is available for future or concurrent opportunities and the leverage opportunity is diminished.  Apples to apples the ROI and cash flow on a condo are less than what they would be on a single family or multifamily investment at the same price.  It’s true that condo association budgets are created annually and they can fluctuate up or down, but most owners of condominiums will tell you that they usually go up and rarely or never go down – so there’s no end in sight.

Increased Risk Alert:  Special Assessments

Condo owners always face the risk of the dreaded SPECIAL ASSESSMENT.  Over time the condo association will need money to make capital improvements like new windows or a new roof and will require each unit over to pay his or her pro rata share of the expenses.  Special assessments do improve the property, but can cost anywhere from a few thousand to tens of thousands PER UNIT.  Obviously this is catastrophic for the investor who isn’t living at the property and will likely see no increase in income as a result of the new roof or windows.  It’s not difficult to envision a scenario where a special assessment therefore negates positive cash flow or turns an investment cash flow negative for a year or several years.

Other Investment Concerns With Condos

  • Landlord Control - Owners of single family and multifamily are free to make decisions as they see fit.  Condo owners are subject to condo bylaws and must follow rules that others set for them.
  • Rental Restrictions – Too high of a ratio of non-owner occupants is bad for the financability of a condo.  To combat this recent trend, condo associations have started limiting the number of units in a building that can be used as rentals.  I’ve seen a few situations where the waiting list for permission to use a condo as rental, required a wait of 1-2 years.  If you purchased a condo as an owner occupant with the intentions of renting it out as an investment down the road, consider the effect a 12-24 month vacancy would have on your return.
  • Volatility – There’s plenty of data out there that shows condo values drop more quickly that single family homes and that condos don’t appreciate as well as single family homes.  This volatility exposes the condo investor to increased risk as real estate prices fluctuate between cycles.
  • Supply and Demand – Another concern with condos as investments in the possibility that a developer can come in and build a 100-200 unit condo building in the same space that say 20 or so homes would fit.  Right or wrong I’ve always felt that this possibility makes condos less scarce and thus less valuable.

Buying a condo as a quasi-investment might work for someone who has a full time profession, like a doctor or lawyer, if that person is willing to sacrifice ROI for the maintenance and management conveniences condos offer.  Alternatively, a condo could work as a quasi-investment for a buyer who will eventually occupy the condo but is only looking for equity build up and tax breaks in the short term.  For a real estate investor focused on ROI and cash flow, I simply can’t think of a reason that justifies buying a condo over single family or multifamily homes.

Photo: Ines Hegedus-Garcia

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{ 60 comments… read them below or add one }

Karen Rittenhouse November 15, 2012 at 8:08 am

Frank: I agree with your assessments. We have quite a number of condos, but only take them when someone gives them to us!

Another of my huge concerns with condo investment is that they just don’t appreciate. I’m happy to take them for cheap, let the tenants pay them off, then live on cash flow. But appreciation? Probably not.

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Frank DeFazio November 15, 2012 at 8:11 am

Thanks for the comment Karen! I think what you said is especially true of brownstone conversions and botique condos.

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Brian Muhr November 15, 2012 at 8:36 am

Very good article, I couldn’t agree more. I have a couple condos in my portfolio and I’m generally nervous with them, because even though I’m in the black with them now, I know the HOA’s could really hurt down the road. I personally know investors who have units in high rises with lots of foreclosures and have seen HOA’s double or in some cases triple. Owners will stop paying HOA’s way before they stop paying their mortgages which means the HOA will look to other owners to cover the money lost, which of course means increased dues.

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Frank DeFazio November 15, 2012 at 11:59 am

Increased due and/or decreased amenities. Thanks Brian!

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Greg November 15, 2012 at 9:33 am

As an investment? Never. But my family owns a town home in Florida that we use all the time. Being able to work from home, we travel down to Florida and spend a month down there. Being 30 minutes away from Disney World, we avoid the $250-300/month HOA fees (only about $133 for us). Buying an 1800 sq. ft. unit for less than $75,000 has been a great source of family memories.

10-20 years from now, it might have appreciated into something valuable worth selling, but today it’s perfect…for us to vacation in around the year.

Tenants? Not on your life.

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Frank DeFazio November 15, 2012 at 12:00 pm

Sounds like a great vacation home for your family!

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Paul Francis November 15, 2012 at 10:24 am

Hmmmm… Don’t know. I’ve been pretty happy with the 10% cash on cash returns for my cheap condos and they’ve actually been the properties with the least amount of headaches.

Guess it depends where you are and what type of condos you are talking about.

Are they all good investments? No. Are they all bad investments? No.

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Joshua Dorkin November 15, 2012 at 10:56 am

Hey Paul – Would you be willing to share all the numbers on one of those condos for us to check out?

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Paul Francis November 15, 2012 at 10:37 pm

Sure thing Joshua… $33K for one I got in early 2011 when they were giving them away in LV. Add about another $1K for closing costs. Spent about $300 cleaning it up / carpets cleaned… Rented it out in one week and it’s been rented out to the same person ever since for $650 a month. (Desirable area and it’s pretty much the cheapest you can pay in rent to be in the particular area.) Total Monthly Association Dues are $200 due to it being in a Master Planned community. (Two Associations — One for the Condo Complex and one for the “Master Plan Fee”.) Annual Property taxes are around $350 a year.

Run a Before Tax cash flow analysis on that one.

And for the area… there are no four plexes. Cheapest SFR in the area at the time when I picked this one up was around $100K with plenty of work needed that could only rent out for about $900 a month.

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Joshua Dorkin November 16, 2012 at 7:29 am

Paul – I encourage you to look at the numbers over the life of your property. You’re going to have CapEx (seen as special assessments), vacancies, management expenses, turnover expenses, insurance, HOA, and maintenance costs. Of course, you also have P&I as well.

Can you give me the numbers including all expenses?

Ace November 18, 2012 at 7:11 pm

Hi Paul,

What master plan community did you get your condo at?
$200 doesn’t seem bad for a master plan community.

I have one in LV near the airport that I pay $115 a month, but it’s not in a master plan.

Frank DeFazio November 15, 2012 at 12:01 pm

Condos can certainly work I just think dollar for dollar you’d get more return and less risk with a single or multifam.

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Mark November 15, 2012 at 3:05 pm

I guess it’s all about where you are- the guys who were slurping up cheap condos in Phoenix last year seem to have mostly doubled their money. At the lower price points, some appear to have tripled. I don’t like condos, but I haven’t done as well on my sfr’s bought at the same time.

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Frank DeFazio November 15, 2012 at 4:56 pm

That’s just speculation and they got lucky gambling on appreciation. The investors who bought those same condos as “investments” in 2006 didn’t fare so well. It’s a much higher risk strategy and lot’s of investors speculate and get lucky but lots also get crushed.

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Bryan Jaskolka November 15, 2012 at 5:52 pm

Nope. Been there, done that, condos are a waste of time. No appreciation is truly the biggest reason, especially with plummeting values right now in so many big cities. And with the uncertainty of the New Year, few can afford to hold onto risky investments. Unfortunately, that’s what condos have become. I agree, I simply don’t find them at all attractive as investment opportunities. Now, if we’re talking primary residence……I wouldn’t give up my condo for anything!

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Frank DeFazio November 15, 2012 at 6:43 pm

Great point! I too live in a condo and LOVE IT. As a primary res they are great.

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Pauline November 15, 2012 at 7:57 pm

I feel nervous now with reading this article, I am in the process of buying a condo in the 19103 area in Philadelphia. It is really nice! Views are unobstructed of Love Park. The building is gorgeous. Any thoughts? It will be an investment property not a primary residence. Any thoughts?

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Frank DeFazio November 16, 2012 at 2:22 pm

Call me on my cell to discuss. Sorry for the late response…busy day!

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Joshua Dorkin November 16, 2012 at 3:13 pm

Pauline – Have you ever invested in real estate before? Do you know how to manage tenants? Do you know how to find and screen them? Do you know all the local laws that come with being a landlord? Are you familiar with how to conduct a cash-flow analysis? If the answer to any of those questions is no, I strongly recommend you not purchase the condo. Buying property without this knowledge or a plan of who can help you run the property is a recipe for disaster.

I strongly recommend you read through this blog for the articles that cover the topic of landlording and dealing with tenants/renters. I also recommend you spend time going through our forums to focus on discussions in the same areas.

Until you’re comfortable and have a plan, I think you should slow down. There will always be investment deals to find. You want to be prepared when you do AND you want to know if what you think is a deal really is.

I hope that helps,
Josh

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Steve P November 17, 2012 at 2:59 pm

Pauline, I also have an offer on a condo in 19103 right now and I’ve owned an investment condo in Vegas post-crash. It all comes down to the numbers for me.

I look at the base return as: (rent – monthly condo fees) x 12 less taxes all divided by initial investment.

In Vegas, this was (745-190) x 12-500=6160/44000=14%

As Joshua points out, you then need to adjust your return for repairs, mortgage interest, vacancies, advertising, property management etc. You also get to deduct depreciation but this is a non-cash item. These expenses occur on Single Family Residences as well as Condos so they are not a deciding factor – you should compare the net returns on both types of investments after these factors.

One good thing is the condo fee covers repairs to the external elements of the building, building insurance, and common amenities. You are only responsible for what goes on inside your unit (except for special assessments).

As more investors flooded into Vegas, vacancies went up and rent went down. I sold the unit for a 10% nominal gain to new investors due to super low inventories right now. After closing costs, I made a slight capital loss but figured the long term returns were headed south.

I have since purchased a unit in Atlantic City (no hurricane damage – phew) and have an offer on one in Rittenhouse. I constantly compare the returns on single family, multi-family, and condos using all expenses.

Yes, there is a risk to condos from the loss of control over condo fees and special assessments (which is probably why they trade at a discount to SFRs). However, as President/Treasurer of my AC building, I have a lot more control than most. Also, you can lose your roof in a hurricane in a single family as easily as a condo and you’d have to find the money for the deductible in any case (which is often what a special assessment entails). I’ve also learned a lot about the process and I can closely monitor other boards.

Bottom Line: There is generally no free lunch. Everything else being equal, the risk adjusted return on a condo should equal the risk adjusted return on a single or multi family. In all cases, there are deals to be had, but you have to know what to look for.

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Kumar November 16, 2012 at 11:42 pm

Are townhomes any better or is it preferred to go with a multifamily? The other issue is that, for example, a condo may sell for $30K, but a 6 unit sells for $350K. How do you justify the much higher per unit price?

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Frank DeFazio November 18, 2012 at 7:40 pm

It’s really tough to make blanket statements about real estate b/c every market is different but my guess is that you can’t find a condo for 30k in the same neighborhood as the 350k multifam. I’m sure there are scenarios where condos can work I just feel that if you have 300k to spend and you’ve identified a target neighborhood buying a single/multi is better than buying a condo. There are definitely places where cheap condos exist in worthwhile locations but most of these projects are unfinancable b/c they are viewed as too risky by Fannie/Freddie. If that’s the case I’m not sure I’d want to use my cash to purchase one of these condos regardless of price, location, cash flow or anything else.

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Paul November 18, 2012 at 3:13 pm

In the past 4 years I have purchased 18 condos and town homes. All of these have association fees and they are all cash flowing at least 10% assuming a 100% cash investment. I manage all of these and I have a full time job unrelated to real estate. I think it’s important to run the numbers on any property you buy and it hard to generalize on any specific type of property. It’s also important to check the association docs to see what kind of shape the association is in and to verify that they allow rentals.

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Frank DeFazio November 18, 2012 at 7:41 pm

I agree with everything you’ve said. Are you actually paying all cash for these properties?

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Paul November 19, 2012 at 5:59 am

Most of the condos/town homes I have purchased have been bank owned and I have found that I can purchase for a discount if I pay cash and close fast so that’s what I’ve been doing. After I close I get a HELOC from a local credit union. If I keep my LTV below 70% I can get a rate slightly over 4% for a 15 year fixed HELOC. The nice thing about a HELOC is that the closing costs are very low (usually between $500 – $700).

One other comment. I’ve been looking at purchasing an apartment building but in my area these are only producing somewhere around 6% cash on cash return so I have stuck to purchasing individual units.

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Ziv Magen November 19, 2012 at 12:27 pm

Same in Japan buying the entire block is less profitable from an income perspective. But then again, there’s no comparing the appreciation and redevelopment options, which is probably what most investors look at entire blocks for.

Ziv Magen November 18, 2012 at 4:12 pm

Fascinating article, Frank, thank you. I know close to nothing aout investing in the US, but we deal almost exclusively in condos – and from our experience in Japan, Australia and soon hopefully in Italy as well, I’d have to agree with Paul – if you pick your condos right, and put all those numbers into your spreadsheet well in advance, assume worst case scenarios and still come out positive, they’re excellent deals, easily netting 10-16% Pre-tax p/a (happy to supply some numbers to demonstrate this). And if you cycle them every few years, when market conditions allow for plrofitable exit, you can claim depreciation and purchase expense, in those countries that allow it, virtually forever.
I think the first pragraph of your personal account there explains why you (and so many others) may have been burned – condos, barring super prime locations, have very little to do with appreciation and speculation thereof, and everything to do with pure cashflow. You also have to look deeply into the management/building company (existence of sufficient pool funds pool, renovation history, “hidden fees”, etc etc), as well as into vacancies and rentability – but once you’ve done all those and the numbers still make sense, the biggest advantage is that, with small space and no structural issues, maintenance and renovation expenses are greatly reduced, as is the “surprise” factor (and oh, the number the of things that a house can throw at you, particularly in moist climates, is really endless. Condos have very little, almost none of these surprises in them, and when they do, they’re far cheaper to sort, in our experience).

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Frank DeFazio November 18, 2012 at 7:49 pm

Ziv – thanks for the great comment! The article was targeted more towards the beginner/intermediate investor who is looking in his/her city/state and not nationally or in your case internationally. I wanted to point out the sometimes overlooked risks involved with condo investments but admittedly a sophisticated and seasoned investor will know how to properly evaluate and mitigate the risks with any investment including a condo. There are some advantages to condos as you point out and in some cases amenities and services yield greater income than comparable rentals. Maybe I’ll write another post about under what circumstances condos can be good investments. Thanks again for a great comment!

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Ryan November 18, 2012 at 5:56 pm

Like Ziv and Paul I also own condos and they cash flow better than our single-family & multi-family properties. So much so that I get over not having total control over the property. Like Siv mentions, and I have had similar experience, we seem to have more issues/surprises/deferred maintenance with our houses/multi-family. We have had fewer problems with our condos (so far).

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Frank DeFazio November 18, 2012 at 7:53 pm

Are your operating expenses more annually on your sf/mf or on your condo? Do you include the condo fee as an operating expense?

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Ziv Magen November 18, 2012 at 6:19 pm

Another advantage to consider is diversity and versatility. At normally a 1-2/1-3 of the price of a SFR, you can spread your eggs into a few more baskets, which is always a plus too.

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Shari Posey November 18, 2012 at 6:57 pm

I think it’s really hard to say a sweeping statement like condos aren’t good investments. As many have pointed out, it’s all about the numbers. And about appreciation, it really depends when you sell, just like with an SFR. Condos are not in a bubble immune to an appreciating real estate market. If the market has gone up, condos go up too but just not as much as an SFR or multi-unit. I think the current short sales prove it happens for condos and SFRs. While I think it will be a very long time for our markets to reach that level again, they will go up eventually and hopefully it will be when I’m ready to retire and can sell them.

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Frank DeFazio November 18, 2012 at 7:55 pm

I agree with you that there are times when condos actually can work as investments but there is also data that shows the condo market is more volatile and that condos lose value more quickly and don’t appreciate at the same rate as single family homes.

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Paul Francis November 27, 2012 at 10:02 pm

Shari,

One thing to keep in consideration on some of these dirt cheap condos (which can enable a great positive cash flow) is that financing is not available for many of them at this time so they are cash deals. That’s why they are dirt cheap and in many cases, a 1/4 of the price that they were in the credit bubble days when they were handing out loans to anybody.

If current lending guidelines on condos change from some silly bureaucratic guidelines and the chances of some stellar appreciation is pretty high.

Personally, I consider banking on appreciation as speculation anyways and base my investment decisions on cash flow. If you can get 10%+ in cash flow on an undervalued asset, it’s a good investment….. no matter what type of property it is.

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Ziv Magen November 27, 2012 at 11:27 pm

Bravo, my sentiments exactly. If the numbers aren’t over 10%, in a reasonably manageable area, it’s pure gambling and bad business, no matter how much of a lucky gamble it turns out to actually be. Condos can often provide that quite reliably.

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Shaun November 21, 2012 at 2:07 pm

I’m glad that mention in a few of the comments that they can be good investments in some circumstances.

I own several condos as rentals and the work fine. Some better than others but that is solely based on a few bad estimates that lead me to pay a little too much.
But that is a risk on any SFH or multi as well.

The thing I like about the condos is that they are much easier to manage than those other types. If you want to selfmanage your portfolio it won’t be any easier than going with condos!

Also while I agree that you have little to no control over the fees and there is always the risk of a special assessment these things can be minimized by doing your due dilligence when examining the condo docs. If the reserve is to small to cover a roof repair then you are at a much bigger risk.
But again you should still put money aside for “CapEx” in case this happens. A special assessmen to fix a roof or a common heating system in the condo isn’t any different than doing these singularly in a SFH.

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Frank L. DeFazio November 26, 2012 at 5:16 pm

It a city like Philly it can be. Take my special assessment for windows this year. I paid $6,000 but in a row home I may have paid 2500-3500 depending on how many windows and what type. Same thing would be true for a roof which would be $2500-$3000 in Philly but certainly much much more (pro rata) for a condo.

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Steve P November 26, 2012 at 6:32 pm

Why so much difference for the windows? Was it a high rise? Special glass?

PS The new roof on my building in AC worked out to $1000 per unit. Luckily insurance covered it (after a sizable deductible).

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Tracey November 22, 2012 at 6:58 pm

Frank, thanks for the article.
I appreciate everyone’s contribution and I believe that sometimes condo can be a great investment if you buy right! But I will strongly advice that it’s not something you want to have too much in your portfolio.
In my neck of the wood there are some banks that will not refinance/ lend on condos.

I bought one last year for 35k, rents at $850, HOA is $210. Tax is $1800/year. You cannot own more than one unit in the community and the HOA is very strick. It’s in a great location and close to a big hospital. Rent well for single medical professionals.
I’ll rather invest in SF knowing what I know now but I love the return am getting on my condo.
Tracey.

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Frank L. DeFazio November 26, 2012 at 5:19 pm

The funny part is that lenders won’t lend on the buildings where many investors are buying condos b/c they see them as too much risk. Your return is pretty great.

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Chris Clothier November 26, 2012 at 4:13 pm

Frank –

Two years ago I spoke at an event in Canada where many real estate experts were ripping the penchant for Canadian buyers to purchase real estate in the U.S. One of their big beefs were Canadians choosing to buy condos in Phoenix, Vegas and Orlando. Their advice was, if you want to buy condos make sure you buy them in Toronto where there is virtually no way they can over build. I have stayed in contact with them and sent them this article asking if they still felt the same way…

http://news.feedzilla.com/en_us/stories/business/real-estate/262604895?client_source=feed&format=rss&sb=1

It seems like condos are going up a dime a dozen everywhere and a lot of investors are getting ready to go down the toilet with their condos.

Great article – Very timely!

Chris

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Shaun November 26, 2012 at 4:26 pm

Interesting article Chris.
I hope the best to all these speculators that are buying pre-construction with the plan of selling them for a profit when they are ready.

I am not a fan of investing for pure appreciation anyway and this is the WORST form of that. I hope they don’t all get crushed but it was a ridiculously risky move.

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Chris Clothier November 26, 2012 at 5:50 pm

My last comment was a little crass to say the least. I’m glad Shaun brought a little levity with his one comment. I have made risky bets in the past and gotten caught up in hype and have certainly lost plenty due to my bad decisions, so I don’t wish that upon anyone.

My reasoning for posting was to point out that a lot of experts north of the border thought their cities were insulated and their economy would shelter their investors. Right now, it appears as if condos in Toronto are going to be tough sledding for a while.

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Frank L. DeFazio November 26, 2012 at 5:23 pm

As Shuan notes this is really just gambling masquerading as investing. I think the days of buying condos and selling them off for huge profits in a just a few short years are long gone. I really agree with your point about how they are going up a dime a dozen and I was trying to come up with a more clear way of saying that in the article. Every time you turn around someone is building 200+ condos but rarely do you see 30 town homes going up, especially in a city like Philly. Thanks for the great post!

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Joe White November 29, 2012 at 7:44 am

Interesting article. The comment dialog is helpful as well.

Condos are easy to get sucked in as investments. They are often a fairly clean, finished, presentable property, located in a better neighborhood and they can sell at a fairly lower price even compared to a polished two story home in a less desirable neighborhood.

I used to think of them as good investments for my 1st time investors because of the association or condo fees – specifically, the maintaince that comes with it. Snow removal, for instance – it can help an investor if there is already a mechanism in place to remove it.

I also thought of the amenities, like gyms, as an asset to treating the property as a rental. Especially in a center city environment, like we have here in Philadelphia.

But this article (and the comments that followed) are really on the money (no pun intended). I do see benefits to condos, but they are never enough to compete with single family homes or multi-family properties. Now, after reading this I’m even more wary.

Thanks

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Philip Gusterson December 11, 2012 at 8:49 pm

Agreed, unless you buy the condo at below current market value. The pressurew I have identified on Las Vegas condo yields include the below:

- One of the advantages as a condo owner-resident is that water, trash and sewer are all included in the monthly Home Owners Association (HOA) fee. However, as a landlord this is a disadvantage because the HOA fee is a fixed cost during periods of vacancy.
- Las Vegas is awash with cash buyers, many of whom are buying at historically low prices in condo communities. Not only is this increasing the number of rental units, it is also increasing the number of landlords with lower rental rate hurdles to clear to meet their return targets. These factors combine to increase vacancy and lower rents.
- Condo units are uniform in layout and amenities so it is difficult to position an asset as unique when marketing it for rent. Price tends to be the biggest distinguishing factor and the condos with the lower asking rents are those that lease first – it only takes a couple of condo owners to lease at below market rents, and you will either have more vacancy than you planned for, or a lower rental rate than you budgeted for.
- As a result of foreclosures being bought by investors there are more single family homes available as rental properties than has historically been the case. This is increasing the competitive pressure on condos, especially with some houses being rented out for as low as $800 p/m.

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Frank L. DeFazio December 12, 2012 at 7:42 am

Thoughtful analysis. I think you hit the pros/cons right on the head. Even if you’re stealing the condo it’s tough for me to put up my cash on a property that lenders feel is too risky to finance in addition to all of the other risks we’ve both mentioned. Maybe I’m just too conservative!

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Mike Buckland December 14, 2012 at 8:03 am

Sorry I’m late to this conversation. First, let me say that I really appreciate your posting this. I’ve been thinking along these lines for a while after reading similar comments by a number of investors here. But also let me say I completely disagree with your conclusion — in most markets condos are the best single family investment going.

First a couple of points to your main points — condo fees and special assessments. They’re there in a single family house, they just go by a different name — maintenance. Sure, you don’t get hit for $300 monthly maintenance charges to a SFH, but do you really spend less? Don’t forget this usually includes insurance on the buildings, maybe worker’s comp on anybody who subcontracts on the property. As an example, my personal residence is in a complex that charges $312 monthly but provides cable TV and internet, maintains 30 acres of grounds including a pool, maintains a gated entry as well as insurance on the buildings and liability for everybody on the grounds. A lot of these things can only be done cheaply because of the economies of scale an HOA gives.

And quickly to your other points:

Landlord control. Not sure how big this is. You’re going to lose some control as you get to higher population density. In other words, you’re going to have more control of your property that’s in the country as opposed to one in a subdivision, and more control in a subdivision than in an urban area. Condos have people living in close proximity, therefore there’s often a need for tighter control.

Rental Restrictions. Sure there are sometimes rental restrictions. But why would that be needed? Because lots of investors find condos a great investment. There would be no need to restrict something that “still aren’t good real estate investments”. The market speaketh, and it doesn’t agree with you.

Volatility. To misquote Inigo Montoya of The Princess Bride — “Volatility, you keep using that word. I do not think it means what you think it means.” Price volatility means that the prices go up faster and come down faster than a reference asset. Volatility isn’t going down faster and rising slower. But as a statistician in real life I would be very interested in data that you’re talking about. When are the dates you’re talking about? What areas? What was the age of the condos in question? Is the data pre or post 2009? Assuming such data exists, I would have a hundred questions to the applicability of the here and now.

Supply and Demand. Sure there’s a possibility that a developer confirms that your area is a good area for condos. New developments tend to bring up the value of older dwellings in the neighborhood, not bring it down. There will be at least a decade when the owner of an older condo has a price advantage over the brand new ones in attracting renters. Not totally a bad thing.

The reality is that a condo will almost always cost less per square foot than a SFH in the same neighborhood because of more efficient use of land resource, making them more likely have a cash flow. They will usually be built better than surrounding SFH because multifamily building codes tend to be higher in most places. Things like maintenance is cheaper to do for 100 families than it is to do for 1. And really expensive repairs like a new roof is likely to be shared by everybody in the complex, reducing purchasing risk.

One more note: Passing up condos puts you on the wrong side of really strong demographic trends. Few 20-somethings have any desire to drive a John Deere in their 2 acre suburban back yard. Once the housing track for young people was to rent an apartment –> rent a house –> buy a house. Now a lot more want to live near (but not in) urban areas and probably aren’t going to have enough kids to fill a 4 Bedroom house. So the track is changing to rent an apartment –> rent a condo –> buy a condo. Such trends are the stuff successful investment strategies are made of.

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Ziv Magen December 14, 2012 at 3:32 pm

Thank god for the voice of experience and reason. I quit this discussion after the first few comments, when I noticed the waves of negative prejudice are too emotional to argue with :)
As mentioned earlier, we deal almost exclusively in condos here in Japan, with spectacular results for our clients, all of whom live one or more continents away from their investment, and couldn’t be happier. My own portfolio is also strictly condos – got rid of my last house a few months ago, and haven’t looked back since.

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Alex January 1, 2013 at 11:44 am

Good article Frank. I agree with what you said but the things you mentioned apply more if you are leveraging a property. This is why 95% of condo buyers (in my area) are cash buyers. Using a cash buying strategy you eliminate a lot of the factors associated with your article and still make a decent profit. I came in the game a little late trying to buy my first property now but there are still good deals out there.

For example I just put in a bid on an older 2/2 condo in a lower middle class neighborhood for the asking price of 45K. If I get it at that price (chances are 50/50 as the condo market is more competitive these days) I will buy it, if not I will keep looking. The association fee is $310 which includes all maintenance of common areas and building/fire insurance. The property tax comes out to $100/mo. No restrictions on renting, small pets allowed, great location and common laundry area (that last one is the only disadvantage).

Since this unit was built In 1976 I looked it over carefully. It looks to be in good shape. Also I spoke to some residents and they said the roof was replaced just a few years ago. This is another good sign that I won’t get hit with any special assessments in the time I own this rental. Of course, before I commit to the contract I will look over the association documents to make sure that the finances in order. It will cost me $1500 to renovate the unit and approximately $1200 in closing costs. These units rent for $900-1000. So even assuming only $900 a month for rent I’m getting a return of 12.7% on my investment. Even after taking into account any unforeseen circumstances like vacancy and repairs I will easily profit at least 10%.

Also when I plan to sell in 6 years this unit should sell for at least 55K (based on the current appreciation in my market). This gives me another 1.7% added to my ROI/yr. after I account for all the seller fees. So overall conservatively I can expect anywhere from an 11.7%-14.5% ROI on my investment. So condos can make a lucrative investment as long as you’re in the right area and have the right strategy.

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Cory July 29, 2013 at 4:00 pm

What should I do? I am looking to buy a condo in downtown San Jose CA. I have been renting the past 7 yrs and found a 2 bed 2 bath 1,500 square foot condo I like for 499K hoa is $480 per month. I am 35 yrs old & in a wheelchair so yard work is not my thing these days. After reading this I am a little nervous. Any advice is appreciated!

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A.C. Cooley August 5, 2013 at 3:10 pm

Is there an article about when IS a condo or townhouse a good investment?

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Greg August 5, 2013 at 3:30 pm

Well, in my humble opinion, I don’t know if it’s a good investment from a cash flowing real estate perspective.

But saying that, I own a town home in Florida that we visit all the time. We got it at a great deal we use it all the time. The equity build up of that property is pretty rock solid. But this only works if you have the spare cash to pay the mortgage and the extra utilities. I get a periodic bonus check, and essentially use that check to fund our town home.

For more perspectives on condos and townhomes, I suggest you read http://shaferfinancial.wordpress.com/2008/01/15/410k-condo/.

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Gary September 9, 2013 at 12:00 am

Currently own a condo with my brother 50-50 in Bel Air MD-been renting it out for the last 2 years. Am considering buying my brother out for about 90,000. Would like to continue renting it out- owning it strictly as an investment- at this time. With all the negative posts here I still think that my purchase makes good sense. I would profit about 300 each month and the tax write off seems worth it.
Any thoughts?
Let me know.
Thanks.
Gary

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Reese September 13, 2013 at 8:53 am

Considering backing out of a deal in FL. 75K and $900 rental income, HOA $300, but no rental restrictions with 300 units and I live on west coast. Newer bldg. Just a 7% ROI, CoC and Cap Rate. Thoughts?

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Jack September 19, 2013 at 3:14 pm

Location is probably the biggest factor. In my area condos area viable because multi-units are bid up and there is not much room to build.

I’ve compared the two and decided I get better net return on my condos. My expenses are around 40% and that includes the condo fee. I would be losing income if I sold out and got into a multi-unit. I’ve seen a very very few mutli-units that have better returns but those are dated and appear in need of repair.

Each have their pros and cons, and the selection of the properties. Many have been mentioned in the comments here.

Investors need to study carefully what will work in their area.

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Bill C. January 11, 2014 at 5:49 am

I own several condos in Carolinas, but I live in Jersey. I hire a professional management company to lease and manage the condos. I like to know what other condo investors do when it comes to managing condos out of your local area.

The management fee eats into the NOI.

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Anuj Sharma January 18, 2014 at 4:57 pm

Good article Frank,
I started my investment with condos and still going for condos . Even though now I am trying to come out of my comfort zone and thinking about duplexes, townhouses, single-families and last but not the least Multi-families. The reason I went for condos is because I never picked hammer in my life and did not want to manage anything but let some HOA do my work in return of monthly check. I was little hesitant about managing all house related work so I end up buying my first condo as primary residence. After that I kept buying condos because they were less hassle for me . I will be honest with you , they are not positive cash-flow and merely breaking even with tenant. However with the blessing of good location, they all are appreciating decently and have not been vacant for more than a month (fingers crossed everybody :-)). My strategy was for long-run to imagine my fantasy world :-) of paying off & owning bunch of properties (of any type) in my 40s and using them as cash cows , even if each cow gives me 500 bucks worth of milk every month:-) . I think I am on the right track but as I mentioned now I am open to any type of property (as I am now living in single family as primary residence and learned little bit house work). In the mean time I have a specific number in my mind for each of my condo and the day they reach at that number, I might be open to sell them too, so I am open and flexible. In general condos are easy to rent but might not appreciate as much as single-families. In short if my condos are even just breaking even every month and appreciating, I will keep buying them since they are less hassle to manage with full time job as an engineer. On the other hand if HOA keeps raising fee and becoming hard to deal with then condos can become real pain and can make your life hell as landlord. Thanks for such a good discussion

This article summs up everything for me http://realestate.aol.com/blog/2013/02/28/how-to-choose-investment-property/

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Jim V March 30, 2014 at 10:00 am

Great article great posts! One comment that I think adds value is to look at the financials of the association. I have owned 5 condos- When evaluating condos…very high on the list is(Hire a CPA if you can not read them yourself) A well run association, there will be no LARGE unexpected assessments.

I owned 3 units in a 8 unit complex and took over the mgmt of the association. I started 3 lawsuits on 2 former owners and 1 current owner and we needed an expensive roof replaced. After all that nasty business, the dues had a small money set aside for replacing the roof etc. that was 12 years ago, the dues are the same. (though I no longer own any units) They were an excellent investment. But they were a pain. I bought the first from an investment company who carried the loan. When I went to refinance, the mortgage company at that time said that one person was not allowed to own more than 10% in a complex. well 1/8=12.5% which is more than 10%!. (Eventually found a lender with a brain)

This is not to turn anyone away from purchasing into a small complex. A small self run assocation can be very economical. What seems to be happening with the larger complexes is they outsource the mgmt to a “professional” mgmt company. Obviously they are operating at a profit, so dues are going to be higher. will it be better managed?

Having said all that I am shopping for a vegas condo right now, which is how I found this site. THe market has been flooded with investment purchases, but I still see potential if purchased in the right areas. (easy to rent at positive cash flow rate) Loc Loc Loc. Thanks to all the good posts!

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Tiffany Alexy August 26, 2014 at 3:14 pm

I’m not a big fan of generalizations, and I’m also of the opinion that real estate is hyper local. Sure, condos don’t work in every real estate market. But nor do multifamilies and nor do single family rentals. I think there are just so many ways to play your hand in real estate, having a blanket statement as “____ does not a good rental make” is antithetical to the whole point of real estate, which to me is being creative and resourceful about finding opportunities.

In the Raleigh/Durham, NC market where I am, I’ve found that I keep looking at more and more condos, because the numbers make sense. There are hardly any multiplexes around. Condos/townhomes and single family homes abound. It’s a tricky market because while many SFHs are decent or great, the numbers just don’t make sense – they sell for $200K-$300K while you could maybe rent it for $1800. Just an example. I go by the 1% rule so I don’t even bother looking at these places. However, condos on the other hand can work. I don’t find many screaming deals, but my first investment was at the 1.4% mark so that was worth it to me.

In the Midwest, though, it looks like (based off what I’ve read from other BP members) SFRs are great and are all sorts of cash flow positive. That’s awesome! But they don’t work here (for the most part).

I have nothing against condos – actually they’ve done me pretty well so far. If the numbers continue to work, I’ll continue to invest. :-)

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