Condo as a first investment property?! Thoughts?
Real Estate Agent · Bartlett, IL · Member since 2018 · 24 posts · 2 votes
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!
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!
I own both SFH and condos. I have done well with condos. I purchase lower end condos around the $30k mark in Columbia, SC that rent for around $750.
The biggest thing to look at in my opinion is the HOA. High HOA fees can kill a deal. I would also ask for the historical HOA rates to see if the rates are flat, rising slightly (say $5 a year for the last 5 years), or are huge jumps seen. Ask when the last special assessment was and get financials on the HOA.
Comps for sale and rent are also easier with a condo as you can look at what identical units sell for and rent for.
I find condos to be more of a cash play. I make good returns and they are not as big a deal to maintain, but I don't expect a lot of equity building. I buy distressed homes more for the equity and ability to BRRR out the cash investment, sacrificing some cash flow in favor of acash out refi.
@Dillon Dinglasan I second what @Bob Floss II posted above. I have had clients use condos as a first investment see great success. As with all investment properties, it is important that you do your due diligence on not just what is under your control but of the HOA.
@Dillon Dinglasan It can be challenging to find a cheap condo with a good rental return in the suburbs. I generally go by CAP when calculating returns. I've found the best small condos with good return are in the city near transportation. You can still find some nice little units around university of Chicago.
My first investment was a condo, because it was all I could afford in my hometown (Boston). While it wasn't a great success, it got me into real estate, and I'd like to think it was a stepping stone for continued investment in real estate, which is working out well for me lately.
Hi there @Dillon Dinglasan , congratulations on taking the first steps towards your first rental! My first investment was a condo ( I still hold it and I bought it in 2016), I am currently living in Connecticut and my condo is in California so I have a property manager who is awesome so I do next to no work to keep the condo going at this point. I have a quick few tid bits that might be helpful to you. The association dues are definitely something that needs to be considered and there is always the possibility of "special assesments" however in my case my hazard insurance policy is only $61 per year.... thats not a typo... $61 per year. Since the HOA is responsible for the actual structure of the complex... so although the HOA fee is another expense to take into account it will offset some of the other expenses involved ( like water and sewer also in the case of my condo). If the numbers work and thats your price point to entry, I would suggest going for it! (as long as the numbers work) ... I currently have 10 doors and it all started for me with the condo 2 years ago... after that I got into SFR and MFR's and i havent bought any more condos but you got to start somewhere and that somewhere is exactly where you are when you decide to start.... good luck!
@Anna Buffkin omg, condos go for $30K and rent for $750. In my LA neighborhood they go for half a million and rent for $2800.
I agree that multi-units are typically a better investment....but that said, I own a few condo investment properties too and they do well. Condos are an easier way to dip your toes as a new investor, and are more of an arm-chair investment. But you do need to make sure you research the HOA and their budget...because you're essentially going into business with them. Balanced budget, sufficient reserves, not too many units with delinquent HOA dues, watch out for a high percentage of units owned by 1 single owner/entity or high rental concentration in general, and see what major projects have been done recently and plan to be done in the next few years.
As others have said, it's about the numbers. Depending on what you're putting down, those numbers might not be fantastic at the onset....but if you buy right, they will improve as each year passes - especially in Chicagoland. Chicago is a steady rental market, and a long-game. You might also look for value-add opportunities.....where if you put some economical work into it, can you raise rent $200?
Lastly, careful with AirBnB. Most HOA's won't allow too short of a rental term.
Hello Dillon! It's location is critical and like you said, the HOA could create a big problem like any capital replacements. If you have not done this yet is discuss with some of those neighbors on their experience have they ever been hit with an extra billing for anything. Is there enough demand there for condo's? Is the access easy to get there during all hours. What are the parking arrangements? You will get more prospects if your entry is on the first floor.
The Airbnb is too risky for me. If you look at any SFH's, the more units, the better. The more units, the less the pain when you get a dis-occupancy, especially an unplanned one. Things like good amenities, school districts, first impression, any public transportation stop, parking, and security are all positive indications.
Good luck to you!