Would a condo be a good start for a real estate portfolio?

Starting Out
3yFollow

Would a condo be a good start for a real estate portfolio?

CJ Moulton
Investor · NJ · Member since 2023 · 20 posts · 8 votes

Hello Everyone,

I am a 25 y/o looking to invest in their first property. I just recently graduated college with a whopping $170k in student debt. Now that I am done with school and have a solid job, I wanted to focus on side hustles I was interested in to increase income and eliminate my debt.

I've been doing my best to monitor today's market and house prices in my area. (South Jersey) However, things are pretty expensive in my area, I wanted to start out with duplex/triplex however any one that I find needs a ton of work or is just way too expensive for my budget. While browsing, I found some condos that are within my budget, however, others around me have always said "Don't ever buy a condo, they are bad investments and are hard to sell".

My question is...

Would it be a good idea to start out a Real Estate portfolio with a condo using the House Hacking strategy? 

Let's say I buy a condo, and rent a room out to pay for some of the mortgage. Then after a year or so, I buy another property and fully rent out the condo. Would this be a good starting point? Are there any points that I am missing when it comes to this plan?

Any insight would be greatly appreciated!

0Reply
27 views

Most Popular Reply

Richard F.
Honolulu, HI · Member since 2008 · 3k+ posts · 2k+ votes
3y
Aloha,

With Condo/HOA properties, it is critical to thoroughly understand the Association financial conditions and the rules that apply to all Owners within a specific project. By-Laws, Declaration, House Rules, and other Governing Documents will provide a lot of pertinent details, while the actual Operating Budget, Reserve Study, and Reserve Funding Plan will reveal the actual financial condition IF you understand how these actually affect individual Owners. Assume that any HOA that has a recent or current "Special Assessment" or sudden, significant increases in monthly fees, has failed to properly plan and manage the project for at least the past ten years.

The problems stem from Boards that are not fulfilling their responsibilities. They focus on "managing" the monthly fees, rather than proper planning to make statistically predictable expenditures as they arise over the long period.
2Reply
See this reply in the discussion

7 Replies

Jump to latestLatest
  • Richard F.
    Honolulu, HI · Member since 2008 · 3k+ posts · 2k+ votes
    3y
    Aloha,

    With Condo/HOA properties, it is critical to thoroughly understand the Association financial conditions and the rules that apply to all Owners within a specific project. By-Laws, Declaration, House Rules, and other Governing Documents will provide a lot of pertinent details, while the actual Operating Budget, Reserve Study, and Reserve Funding Plan will reveal the actual financial condition IF you understand how these actually affect individual Owners. Assume that any HOA that has a recent or current "Special Assessment" or sudden, significant increases in monthly fees, has failed to properly plan and manage the project for at least the past ten years.

    The problems stem from Boards that are not fulfilling their responsibilities. They focus on "managing" the monthly fees, rather than proper planning to make statistically predictable expenditures as they arise over the long period.
    2Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    3y

    With condos, don't forget to add in the fees.  They have a lower entry point, but often rent for less and once you factor in the condo fees, the expenses are not that different than a single family house.

    As Richard said, you also have to carefully go over the financials to see how the board runs things. What are the reserves like and have they has special assessments/levys?  Do the condos allow for rentals?

    0Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    3y
    Quote from @Richard F.:
    Aloha,

    With Condo/HOA properties, it is critical to thoroughly understand the Association financial conditions and the rules that apply to all Owners within a specific project. By-Laws, Declaration, House Rules, and other Governing Documents will provide a lot of pertinent details, while the actual Operating Budget, Reserve Study, and Reserve Funding Plan will reveal the actual financial condition IF you understand how these actually affect individual Owners. Assume that any HOA that has a recent or current "Special Assessment" or sudden, significant increases in monthly fees, has failed to properly plan and manage the project for at least the past ten years.

    The problems stem from Boards that are not fulfilling their responsibilities. They focus on "managing" the monthly fees, rather than proper planning to make statistically predictable expenditures as they arise over the long period.

    I don't like or recommend condos for beginners for precisely this reason. A big part of your success is going to depend on how well the complex is being managed. As a newbie you're probably not going to understand what to look at on HOA financials and that can be certain death for investments.

    Podcast Guest on Show #243
    Skyline Properties
    View Page
    0Reply
  • Julien J.
    Investor · CO · Member since 2016 · 757 posts · 1k+ votes
    3y

    I can work, but I don't recommend it. There is a lot of downside that can derail you our of your control

    - The experience and competency or the board and the management company

    - HOA fee increases YOY, unexpected assessments

    - Can have limitations on STR, LTR, ect.

    - The HOA fee which acts as a partial reserve for future CapEx is not something you take back with you when sell if unspent.

    - HOA finances: how well funded & managed.

    - The larger and longer established the HOA, the more stable it likely is.

    1Reply
  • Jay ThomasPro Member
    Real Estate Agent · Houston, TX · Member since 2021 · 1k+ posts · 715 votes
    3y

    Congratulations on graduating and considering real estate investment! House hacking with a condo is a good start. Just be aware of condo association rules, rental demand, and long-term goals.

    [email protected]832-889-5607
    0Reply
  • Scott E.
    Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes
    3y

    The other posters in this thread have covered pretty much every reason why it's a good plan to avoid buying a condo as an investment if you can.

    I'll just add one more that I didn't see mentioned - Condo appreciation rates are way lower than single family homes.

    Browse around Zillow and look at some condos for sale in your area, then scroll down to the price history. You're bound to find some people who bought 5-10 years ago for a price not far from the asking price of the condo today.

    Then do the same exercise with single family homes in your neighborhood. You'll see what I mean. Single family homes are probably going for nearly twice what they sold for 10 years ago.

    All that being said, it's my opinion that owning a condo is still better than not owning anything. So if your options are continue to be a tenant or buy a condo, I'd say buy the condo.

    0Reply
  • Richard F.
    Honolulu, HI · Member since 2008 · 3k+ posts · 2k+ votes
    3y
    Quote from @Scott E.:

    I'll just add one more that I didn't see mentioned - Condo appreciation rates are way lower than single family homes.

    Browse around Zillow and look at some condos for sale in your area, then scroll down to the price history. You're bound to find some people who bought 5-10 years ago for a price not far from the asking price of the condo today.

    Then do the same exercise with single family homes in your neighborhood.


     
    Of course markets vary, but in many cases, the very reason they are not appreciating is because they have deferred maintenance and have severely underfunded reserves. If, for example, there is a million dollar funding shortage in a project with 100 units, that is $10,000 of "lost" value per unit that WILL need to be repaid once repairs can no longer be deferred and a Special Assessment is issued.

    To be fair, it is also common for some projects to be built with the most economical materials available at the time. Failure to implement a solid Preventative Maintenance Program will greatly reduce the life of many of these materials.

    However, a properly operated HOA, with an active, responsible, and interested Board can meet or exceed appreciation vs. non-HOA's in many markets as well.
    1Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free