Condo as a first investment property?! Thoughts?

33 Replies

Hello Everybody!

As being a beginner investor I wanted to reach out to the bigger pockets community and hear some feedback on my first investment property! So Ive been recently looking at some condos in the north west suburbs of Chicago. From what Ive read and heared in the BP community condos have pros and cons. I understand that condos high HOA fees and also special assessments sometimes. The reason why I am interested in condos because of the price point. Most SFH, Town homes or multi units are above my price point. I recently got approved for a FHA loan for 110k as a side note. I also considered in purchasing a condo in the city of Chicago as well and use Airbnb as additional income. What are your thoughts?

Would you say that a condo would be a good first investment considering of my price point? 

Thanks for your feedback everyone!

Hi @Dillon Dinglasan ,

I'm unfamiliar with your market, so I cannot speak for the quality of those communities. In my market, condos are easier to rent because Tampa is a younger city, and these communities come with amenities, like pools, fitness centers and decent parking. 

The investment should work for your goals, so as long as it does, go for it. But you must be careful buying condos, and I give some pointers below. 

First off, you may be committing mortgage fraud if you buy with an FHA loan and then use it as an investment property. You won't be breaking the law if you live there and rent out a bedroom. Condos make terrible Airbnbs because your HOA, (which protects the integrity of the community and it's owners) will fine you for doing so until you stop. You're better off renting a room to a long term tenant.

FHA loans are not friendly to condos. It costs the community money to renew their FHA designation with the Fair Housing Administration every 3 years. If you find a competent lender who's familiar with condos, they should be able to tell you where to find a list of them. It is in your best interest to get to 680+ credit and get 5% to put down to get a conventional loan.

Fannie Mae, the government sponsored enterprise who sets loan guidelines has set specific guidelines for lending money to condo buyers. You, the buyer, must qualify for the loan and go through underwriting, and so must the condominium. Those guidelines already protect you to make sure that the community is sound. Your lender must collect the financials of the condo documents and submit a condo questionnaire to the HOA. The answers to those questions will determine if you can get a loan there. Example: Does the HOA save at least 10% to the reserves, is there any pending litigation, what is the renter to owner ratio, does any 1 party own more than 10% of the units, what percentage of owners are delinquent on their dues?

You can put it in your contract that requires the owner to send you the last 12 months of board minutes. If there's going to be an assessment, the owners will talk about it. 

Good luck!

Condos can be a good investment, but you have to be careful. Be sure to review their financials to see if they have cash reserves in place, prior board meeting minutes to see what sorts of issues come up, and see how many assessments they've had in last few years. As you stated, you'll be paying monthly HOA fees, which can eat up your cash flow, but also potentially additional assessments from time to time.

Also, the HOA may have rules against short term rental, or change their rules in the future. Some can be restrictive to long term rentals too. As an example, we once purchased a condo in another city with a renter put in place by prior owner - prior owner had permission to rent but HOA had restriction that only 50% of units could be rentals. Once tenant moved out less than a year later, HOA did not allow us to rent it again because of the limitation, as old owner had permission and we did not. We had to go to the back of the waiting list of owners wanting to rent. We ended up selling the unit.

As a general rule, I don't think condos are good investments.  For me, a condo would have to have just absolute slam dunk incredible numbers for me to consider it as an investment property.  Pay close attention to the HOAs, the reserves, potential for large projects approaching.  Those are what can kill the numbers for condos.  

@Tom Parris

Thank you for elaborating on the things to look out for in a condo!

Sorry, I actually meant conventional loan not FHA.

I agree that reviewing over the questionnaire such as reserves, renter to owner ratio etc. would definitely save me money and time in the long run.

Ill make sure to get in contact with the owners and ask for the 12 months of board minutes for my refrence.

Thank you for your help!

@Caroline C. thanks for your feed back!

Thats what I most of afraid of is the HOA fees and the additional assessments eating up my cash flow.

Do most HOA's have restriction on units that can be rented or does that vary on the board?

If you don't mind me asking do you still invest in condos or do you focus on SFH, multi units, etc.?

Thanks again!

@Jeff Burdick thanks for your response!

Would you suggest in obtaining SFH in the Chicago land area then? I can't seem to find properties within my budget. Also would you know if conventional loans have a minimum property standard? I understand that with FHA loans they are strict on whether or not if a property is "livable" or not.

Thanks!

@Dillon Dinglasan the rules are all across the board. You have to read the condo bylaws carefully. And keep in mind that the rules could change in the future if voted by homeowners.

We are not actively making new investments, but in the past we've done SFH, duplex, and condos. Our most recent purchase was a condo in Costa Rica, which we rent on AirBNB, and it's doing great.

@Dillon Dinglasan  International real estate can be pretty risky, but you might be able to make the numbers work better than in the US depending on location. 

You have to visit the place you want to buy and get familiar with it, and you have to have local people there you trust, be careful not too invest too much if the country is not stable, and hire local property managers. Also, it is also hard to get financing unless you are creative with it, or partner up with somebody.

I've found getpaidforyourpad.com to be really useful. I suggest checking out his recent podcast episodes - covers a lot about international investing.

I'll PM you with some more info.

I'd do it if it made sense, but I wouldn't do it because it's what i could afford or "cheap". I'd look to hit 1% or better w/ the HOA included... so if it's a 100k condo, 250 mo HOA, I'd want 1250+ mo rent. I'd also look for something with low maintenance items, no pool, no gym, none that stuff that will eat up funds. I want a parking lot and some basic landscaping that they take care of. Add in some water/trash.... good to go. Then self manage because the HOA basically doing 90% of the work for you.

@Dillon Dinglasan first investment + hot market + condo = regret.

Find something within an hour of your market that is in your price point. It's likely you'll be better off buying a SFH/duplex in this market. Plus you'll likely learn more about RE investing than you would with a condo. I wouldn't discount that aspect of it.

@Matt K.

I agree with you if the numbers work the numbers work. Would you say the 1% is like a rule of thumb in calculating our monthly rent? 

Ive been focusing on properties that won't have pools or any gyms because like you mentioned they'll eat up all my funds. 

@Will Gaston I feel like the market in Chicago is really competitive. Its hard to find good deals on the MLS that work with my price point. Ive been also looking into some properties on craigslist and see if anyone is also willing to do a seller financing but haven't seen anything yet.

Originally posted by @Dillon Dinglasan :

@Matt K.

I agree with you if the numbers work the numbers work. Would you say the 1% is like a rule of thumb in calculating our monthly rent? 

Ive been focusing on properties that won't have pools or any gyms because like you mentioned they'll eat up all my funds. 

 It's a rule of thumb, but it's not for calculating rent, it's for screening "deals". Rents are set by the market/location, plenty areas are not anywhere near 1%.

For example:

https://www.redfin.com/MO/Grandview/6068-E-129-St-...

I've actually called about this property, it's 850 mo section 8. Market rate is probably closer to 1k... to figure that out you'd use craiglist, zillow, rentometer, and local market research to come up w/ that number. It'd "meet" the 1% rule at asking... 

Something like this:

https://www.redfin.com/KS/Overland-Park/8730-Metca...

likely WON'T meet the 1%, it'd have to rent for 1200.... market rate is 8-900 for a 1bd room. So for that to "meet" the 1% it'd need to go for about 70k, doubtful that'd work. 

Now those 2 examples are way different in terms of location/quality of asset... but it was simply to show you 2 random examples of how the 1% rule is applied. Generally speaking... nicer the area the lower chance of getting to 1%, worse the area you have a higher chance of exceeding 1%. This should not be used to pick an area, rather it should be used to QUICKLY eliminate something.... and whittle down your potential targets for more in depth analysis.

Another thing to note, pools/gyms won't always eat up your funds. If there's enough units to spread the cost/risk then it won't be as bad and you might be able to get more rents.

@Dillon Dinglasan Hello. I have done well with Condos. The HOA fees can be high, but the costs of the maintainance they cover, and insurance usually somwhat even out. APOLOGIES FOR UPPER CASE: PHONE PROBLEM ANYWAY, WHAT HAS WORKED FOR ME IS THIS: KNOW YOUR TENANT CONDOS THAT ARE WELL MAINTAINED AND CLOSE TO EMPLOYMENT ARE IN HIGH DEMAND WITH WELL EMPLOYED MILLENIALS KEEP THE INSIDE PAINTED, UPDATED, LIKE NEW USE A PROPERTY MANAGER AND KEEP THE RENT IF YOU DONT OWN PROPERTY YET YOU HAVE A GREAT OPPORTUNITY TO BUY YOUR FIRST PROPERTY OWNER OCCUPIED WITH FAVORABLE FINANCING CRUCIAL: MAKE SURE THE HOA IS WELL MANAGED

My first principal residence was a 2/2 condo. I bought it in Temecula, CA for $168,000 in 2014 and I just sold it for 255k. The HOA fees did increase almost every year. The year I bought it, the HOA fees were 290 and now they are 350. This is what ultimately led me to selling it.

@Dillon Dinglasan A condo can be a nice way to dip your toe into investment without taking on too much risk. I have several clients that started out with a cheap rental condo and it gave them a basis to build up.

Originally posted by @Dillon Dinglasan :

@Jeff Burdick thanks for your response!

Would you suggest in obtaining SFH in the Chicago land area then? I can't seem to find properties within my budget. Also would you know if conventional loans have a minimum property standard? I understand that with FHA loans they are strict on whether or not if a property is "livable" or not.

Thanks!

I am a fan of multi-families. What is your budget and what parts of Chicagoland were you thinking? Yes, conventional loans will also have standards for the property. If you're interested in something that is not "livable," look into the FHA 203K loan. It is a loan that gives you both a loan for the property as well as a rehab budget.

@Matt K. thanks for providing a in depth example of the 1% rule!  Ill take account of that when I'm looking into a property

Jeff Burdick am currently from the north west suburbs of Chicago, so Im trying to look for something local. 

Does interest tend to be high for the FHA 203k loans?