Just Starting Out: Condo/Townhouse vs waiting to save on SFH

[Danielle Tran]

Hello Bigger Pockets Community,

I would really love to get the advice from those who understand the Orange County, California market. I am just starting out and would love to invest in a property here in Orange County, CA. I have saved up enough to qualify for a condo/townhouse. I would love to invest in a single family home or multifamily property however I am unable to afford that at this time in this location. Since this will be my first property, I would prefer not to ask family or friends for help financially. I would start off with either house hacking or use an FHA/conventional loan where I live in it for one year and then rent it out after. I know it has been mentioned many times to not invest in a property that has an HOA however if I purchased a condo/townhouse, all of them comes with HOAs. I found a townhouse that has an HOA half the amount as all the other townhouses around the area. I am debating if I should jump on this opportunity to finally get started in investing in real estate or wait and save money for a single family home without an HOA. I keep hearing in my head "Time in the market is better than timing the market." I also don't want to become "house poor" if I choose to invest in a single family home. Would love to hear your opinions. Thanks!

[Theresa Harris]

Why is the HOA lower and will it allow you to rent rooms while you live there? My first place was a condo as it was affordable and the mortgage and condo fees were less than what it would have cost me to rent. I did rent out the second room. I kept it for many years, but ultimately sold it as the condo board was not doing a good job running it and it kept having special assessments.

Look at your current costs to rent vs owning.

[Josh Alexander]

Hey, live here in OC. So a few things, with OC and most places, SFR will always appreciate faster than condos and there are less regulations and rules to worry about as well so in terms of leverage in the long term and property management SFRs are the way to go. However, I also understand that the price difference as well as the down payment required to get the property to eventually cash flow are going to be significantly higher with an SFR and it really doesn't make sense in a lot of cases in OC. Yes, there are deals out there, but they will be harder to come by in OC and whether you go with condo or SFR, you'll definitely want run the numbers carefully especially if you don't have a significant down payment. Another option if you want to invest close to home, depending on your flexibility, would be to look slightly outside OC in areas of Corona or even Murrieta where it makes more sense in terms of cash flow because you can get an SFR there for the same price as a condo in OC and that area is still growing due to LA and OC buying homes out there now because of the work from home trend.

[Bradley Dosch]

Hey Danielle, it's super exciting that you're looking to get started house hacking! I grew up in OC and it can certainly seem daunting. I think your outlook is solid. Generally, it's better to buy a SFH or MFH over a condo/townhome. However, this means you need a higher pre approval and that's not always attainable. Rather than waiting, your viewpoint on getting started with a condo/townhome/something more affordable is sound reasoning. Waiting is expensive! As others have stated, make sure you watch out for HOA rules against house hacking or renting in general. This is the biggest gotcha in this category. Sounds like you have a good head on your shoulders, good luck out there Danielle!

[Ramandeep Sidhu]

Thank you for your question and welcome to the BiggerPockets community! It sounds like you are considering investing in a property in Orange County, California and are weighing the pros and cons of purchasing a condo/townhouse with an HOA versus saving for a single family home without an HOA.

There are a few factors to consider when making this decision. First, it's important to understand the local real estate market and what types of properties are available in your price range. In a high-demand market like Orange County, it may be difficult to find a single family home that fits your budget, especially if you are looking to avoid asking family or friends for financial help. In this case, a condo or townhouse with an HOA may be a more realistic option.

On the other hand, it's also important to consider the potential risks and costs associated with owning a property with an HOA. HOAs can be a good thing if they are well-managed and provide valuable amenities and services, but they can also be a source of additional fees and restrictions that may not be present in a single family home. It's important to carefully review the HOA rules and regulations before making a purchase, and to understand the potential costs and benefits of owning a property with an HOA.

Ultimately, the decision to invest in a property with an HOA or not will depend on your individual circumstances and priorities. If you are looking to get started in real estate investing and have limited funds, a condo or townhouse with an HOA may be a good option, especially if you plan to house hack or live in the property for a year before renting it out. However, if you have the means to save for a single family home and are willing to wait for the right opportunity, that may also be a good option.

I hope this helps, and I wish you the best of luck with your real estate investing journey!

[Danielle Tran]

@Theresa Harris I am not sure why the HOA is lower in this community compared to others. I am not sure if it would allow me to rent rooms while I live there however in their FAQs, it specifically says "No Airbnbs allowed." What do you mean by "special assessments?"

[Danielle Tran]

@Josh Alexander The only reason why I am considering OC is because I would like to use the benefits of a primary residence rather than a vacation/second home. Whenever I run my numbers, it always isn't the best in terms of cash flow. The only reason why I would still consider purchasing a place in OC that doesn't have good cash flow is because I hope appreciation later on will suffice. I also know I would want to live here for many years.

I have considered purchasing a property in Las Vegas instead as the same amount of money I use to purchase a 2 bedroom condo can be used to purchase a full two story house with 3-4 bedrooms. However when researching the market and speaking to other investors, they say the rentals do not increase as much as price of homes. I have been in limbo of where I would like to purchase my first property. 

[Danielle Tran]

@Bradley Dosch Hi Bradley, I'm curious did you purchase a condo/townhouse and then do a 1031 exchange for a SFR when you were here in CA? That was the other option I was considering to pursue.

[Danielle Tran]

@Ramandeep Sidhu Appreciate your response! That is what I have been weighing. I know that with an HOA even if they allow renting now, they are also able to change that rule anytime. In addition, they can also increase the fee of the HOA to be equivocal to the other communities surrounding it.

[Theresa Harris]

Quote from @Danielle Tran:

@Theresa Harris I am not sure why the HOA is lower in this community compared to others. I am not sure if it would allow me to rent rooms while I live there however in their FAQs, it specifically says "No Airbnbs allowed." What do you mean by "special assessments?"

 Special assessments or levies are extra fees. Often associated with unplanned repairs (or poor management) when there aren't enough funds in the reserves or the reserves would drop below a critical amount to pay for it.

[Josh Alexander]

Quote from @Danielle Tran:

@Josh Alexander The only reason why I am considering OC is because I would like to use the benefits of a primary residence rather than a vacation/second home. Whenever I run my numbers, it always isn't the best in terms of cash flow. The only reason why I would still consider purchasing a place in OC that doesn't have good cash flow is because I hope appreciation later on will suffice. I also know I would want to live here for many years.

I have considered purchasing a property in Las Vegas instead as the same amount of money I use to purchase a 2 bedroom condo can be used to purchase a full two story house with 3-4 bedrooms. However when researching the market and speaking to other investors, they say the rentals do not increase as much as price of homes. I have been in limbo of where I would like to purchase my first property. 

 Makes sense, is Riverside an option or is that too far away? Also, something else to consider is getting that SRF and renting out a room or two to compensate for the higher rental costs, but you would still need to qualify to purchase it based on your income so might be a little more difficult. Sounds like a condo in an area that is still relatively affordable might be a good starting point for a home. Maybe the Anaheim/Orange area, La Habra is also another one that is growing and homes are still "affordable" compared to most of OC. 

[Dave Villa]

@Danielle Tran

Hey Danielle, this is a great idea! I did the same thing in Nashville with a townhouse. I think the most important thing is to calculate HOA cost vs what you would be saving in payment every month.

If you buy a place and rent the rooms and pay $1,000 less than you are now, than that’s a big win. Mine saved me about $1,000 a month and after a year in a half I have an extra $20k to put towards another property just by changing my living situation.

One thing I would suggest what is the goal - do you want to save X amount? Do you want to have less stress of payment for a few years? Do you want to position yourself in 2 years to buy another property/do a 1031 into another property? Hope this helps!

[Bradley Dosch]

Quote from @Danielle Tran:

@Bradley Dosch Hi Bradley, I'm curious did you purchase a condo/townhouse and then do a 1031 exchange for a SFR when you were here in CA? That was the other option I was considering to pursue.

Hey Danielle, no I've never bought any property in CA - just grew up there. Sorry for the confusion

[Alex Larcheveque]

I would caution an HOA that is half amount than the others in the area. You and your agent should be diligent on what the HOA covers, audit if the HOA is in good financial standing to cover any emergencies that may arise, and ensure maintenance has been adequate and of high quality in the past years. If everything checks out, you may have found yourself a decent property.

For seeing whether to buy a condo/townhouse vs. a SFH, ultimately SFH's have more appreciation. If you could make the numbers work by house/room hacking to cover your mortgage, a SFH is probably the better choice. The only downfall I see of having a SFH is that if you run into major expenses (structural damage), you can definitely be "house poor" for a while. Ensure you have a wonderful inspector in your due diligence period.

[Account Closed]

Hey Danielle, I think you're spot on with starting with house hacking. I would do as follows:

-Search for a 3/3 or a 4/4 house (bed/bath)

-Make sure you have a decent team behind you (a realtor and a CPA should be fine if you're just starting out)

-Furnish your property like it's an AIR B.N.B. so you have more attention on your unit

-Utilize a mid-term rental structure and list the house on a site like furnished finder

-When it is time to purchase a new property, repeat

If you have a property that is a 3/3 you can rent out one bedroom to a long-term tenant after you move out as well so this scenario would be perfect for a college kid who is looking to move out. I am in LA county but I feel it's a similar market. Gotta love LA! If you have any questions feel free to reach out as well

Kindest regards,

Agent K

[Nicholas Coulter]

@Danielle Tran are you planning on house hacking your property? 

[Danielle Tran]

@Nicholas Coulter Yes i am planning to house hack this property as this is my first property and would love to take advantage of the first home buyer loan programs

[Michael L.]

@Danielle Tran, if you are willing to house hack, why not go the multifamily route where you also have the income from those other units? Whatever decision you choose, I wish all the best for you an that all will work out in your favor💯.

[Nicholas Coulter]

Quote from @Danielle Tran:

@Nicholas Coulter Yes i am planning to house hack this property as this is my first property and would love to take advantage of the first home buyer loan programs

Go after as many bedrooms as possible then! Let me know if I can help answer any questions. I’m a multi time house hacker in the IE and SD

[Ashley Undercuffler]

Quote from @Danielle Tran:

Hello Bigger Pockets Community,

I would really love to get the advice from those who understand the Orange County, California market. I am just starting out and would love to invest in a property here in Orange County, CA. I have saved up enough to qualify for a condo/townhouse. I would love to invest in a single family home or multifamily property however I am unable to afford that at this time in this location. Since this will be my first property, I would prefer not to ask family or friends for help financially. I would start off with either house hacking or use an FHA/conventional loan where I live in it for one year and then rent it out after. I know it has been mentioned many times to not invest in a property that has an HOA however if I purchased a condo/townhouse, all of them comes with HOAs. I found a townhouse that has an HOA half the amount as all the other townhouses around the area. I am debating if I should jump on this opportunity to finally get started in investing in real estate or wait and save money for a single family home without an HOA. I keep hearing in my head "Time in the market is better than timing the market." I also don't want to become "house poor" if I choose to invest in a single family home. Would love to hear your opinions. Thanks!

 Hi Danielle!

These are all great concerns. California is one of the most expensive places to invest in and yes, it can be very hard to make money. I think you're on the right path, trying to avoid HOA's to save yourself money. My recommendation would be to find an agent who is well-versed in investments. They can help guide you much more than a forum. But since we are here, I will throw in my two cents. I'd recommend trying to find a duplex or a single-family home with an ADU (additional dwelling unit) to start off with. This will give you the opportunity to purchase a primary residence, with a lower down payment, and also make money on rental income. If you're able to move a little bit further away to live in your investment, you can find yourself a great deal! It is a good time for buyers right now to negotiate. As we get closer to spring and summer, the competition will get higher. But don't let that pressure you into a bad deal. Make sure you have someone who can run numbers for you to make you confident you're making the right choice.

If you have any more questions, feel free to reach out! Happy hunting!

[Dan Heuschele]

Some comments: 1) I believe most condo associations are good stewards of the fees and can often get discounts due to volume. So, the HOA fee is not why I do not invest in condos, it is the rules they can create. They can ban renting or set rent quotas. Looks like the one you are considering has already banned STRs. They can dictate flooring. They can vote for special assessmennts. Basically, they can make rules as the board decides. Make sure you read the rules carefully before buying and take into acocunt the board can change the rules. 2) I have some concerns about low HOA fees. do they have the reserves to cover cap expenses or will they constantly be doing special assessments to pay for all cap expense items? Are the common areas/items well maintained or are they undermaintained to keep expenses low? Are the perks standard for the market? For example, do they have a pool and gym if those are common in the market? If they do not, this has to be considered in determining market rent. 3) it is a myth that condos do not appreciate as fast as SFH. There are markets in CA where this is true and markets where the condos have appreciated faster than the SFH. Overall, condos and SFH have appreciated virtually the same.

I see multiple recommendations for house hacking a duplex which is also my recommendtion. With FHA loan you can use a real high LTV so that not much cash is required and can use a percentage of the non-owner occupied unit's rent for qualifying for the loan. Due to FHA sustainability rules, this typically cannot be done for a triplex or quad (no sustainability requirement for duplex).

Good luck

[Drew Sygit]

with HOA's you need to make sure they are not underfunded, which means huge assessments in the near future.

Why can't you buy a house and get roommates to help cover the mortgage?

[Danielle Tran]

@Michael L. I would love to pursue the multifamily route however the multifamilies around the area I am at is expensive and I am unable to get a loan that is high enough to cover a multifamily property.