investing in condos vs single family - repairs cost

15 Replies

hey

not sure if this is the right subforum, excuse me if it's the wrong one.

i'm thinking about investing in a rental property, long term rentals. i'm having troubles deciding what is the best option, a condo or a single family house. 

a few relevant details 

- i will be buying the property 100%

- i will hire a property management company. worth mentioning also that i am not living in the us.

- just to give a sense of what kind of property i'm talking about, let's say the current plan is a 100k property in orlando fl.

 from what i understand, to pros of owning a condo is that most of the outside repairs are being taken care by the hoa, which means less troubles, downside is of course it will cost me 200-300$ a month (rough estimate, looking at the properties i checked so far) and from what i understand condos appreciation tend to go up less in time.

so my questions boils down to the difference in repairs cost:

- usually the rule i hear about allocating money to repairs is 1% of the house values. is that value the same for both condos and single family? shouldn't it be lower for condos because some repairs are being done by the hoa? 

- what kind of repairs are not being done by the hoa?

I'd like to meet the guy who came up with these % rules....

Your capex ("major improvements") budget is a function of the age, the condition and the replacement value of them home. It has nothing to do with rent.

The only correct way to estimate monthly reserves for capex is exactly what any professionally managed HOA does. They have a schedule for all expenses and then break it down to a monthly budget. Simple example: if you need a new roof in 10 years and you know it will be 10k, you know you need to set aside 1,000 per year. Same for kitchen, HVAC, front door, etc..

What I have learned from doing many remodels is that a house needs a complete makeover every 30-40 years. In Wisconsin you can use about $35-$45 per sqft. as a rough estimate.

Now, before you give up, remember: this does not all have to come out of your cash flow!

As you know, you have three sources of income/wealth: cash flow, appreciation and mortgage pay down. Of course appreciation is never guranteed and at times it can go backwards, but if you look at a 30 year timeframe it becomes a bit more predictable.

Think of it this way: when you buy a new house, you should have 30-40 years before you have to start spending (capex) money on it. By the time you have to, your tenant has paid off your mortgage and you own the house free and clear. (Even if it's still worth the same as when you bought it; 0% appreciation.) Now you can take out a small mortgage to pay for the remodelling.

If you buy a "used home" you have to ad the cost of improvements to your purchase price to compensate for the used condition. Most people on BP have forgotten about that investing is about finding a good balance between all three sources of wealth, not just the cash flow one trick pony. Once you understand this, you start to understand why it is important to buy a quality asset.

Condo's generally don't make the best investments; sometimes financially, but also because you are at the mercy of your neighbors. The HOA has control over your destiny in many ways. They can decide for example that they don't want to allow tenants any more. They may decide to buy $60k worth of ugly carpet for the entire building, or they may decide that it's okay to leave the old carpet and it stinks from dog pee. You get the point. For that reason alone I would choose a SFH always over a condo.

thanks you very much for the detailed and quick response.

regarding hoa control - not allowing tenants anymore, how realistic is that? i thought if i choose a condo that allows renting, that should not be changed in the futue.

as for repairs - how much of these repairs are the hoa responsibilty and not coming from own pocket. if a new a roof is needed do i need to pay for that or is that something that's included in my fees?

@Albert Jones

Condo HOA is an unknown - fee can jump at any time and eat up profits as can assessments.

Condos are harder to get loans for which means harder to sell.

Condos are everywhere and so they don't appreciate like single family.

Families typically prefer houses so condos have a smaller pool of potential renters.

And why pay 100%? Spread out your funds and get loans for 5. In 10 years, you'll be glad you did.

Regarding Condo Exterior repairs, it is also common for a major repair to require additional funds over the HOA dues, so a Special Assessment is often levied. Also Condos Tend to be the last to rise and first to fall when markets change, FL is highly volatile, especially condos, so unless you buy WAY under market, your risk is pretty high especially if you want to get out at a low point in the market. Also, the association controls finances, insurance and many other things, a friend of mine has a condo in a unit mainly controlled by Canadians that are seasonal, in their infinite wisdom they decided to not maintain flood insurance for the development (they are in a flood zone) now the units are unfinanceable , so the values are lower because only cash buyers can buy in the building. Many times these decisions are made against your best judgement, and the democracy of the HOA over rules. I wont touch condos, way too much I cant control.

Originally posted by @Karen Rittenhouse:

@Albert Jones

Condo HOA is an unknown - fee can jump at any time and eat up profits as can assessments.

Condos are harder to get loans for which means harder to sell.

Condos are everywhere and so they don't appreciate like single family.

Families typically prefer houses so condos have a smaller pool of potential renters.

And why pay 100%? Spread out your funds and get loans for 5. In 10 years, you'll be glad you did.

thank you karen. interesting, the more i dig the more reasons i find for single family house to be a better option. starting to understand why they are cheaper when compared to an equivalent sfh..

regarding financing , i would love not to put 100%, but i'm not a from the us and from what i understand i can't get any mortgage in the us yet (don't have a credit score, nothing). my plan is to buy the first property now cash only and start working on getting my credit score going so in 18-24 months i can buy my next one with a mortgage.

Originally posted by @Scott Schultz:

Regarding Condo Exterior repairs, it is also common for a major repair to require additional funds over the HOA dues, so a Special Assessment is often levied. Also Condos Tend to be the last to rise and first to fall when markets change, FL is highly volatile, especially condos, so unless you buy WAY under market, your risk is pretty high especially if you want to get out at a low point in the market. Also, the association controls finances, insurance and many other things, a friend of mine has a condo in a unit mainly controlled by Canadians that are seasonal, in their infinite wisdom they decided to not maintain flood insurance for the development (they are in a flood zone) now the units are unfinanceable , so the values are lower because only cash buyers can buy in the building. Many times these decisions are made against your best judgement, and the democracy of the HOA over rules. I wont touch condos, way too much I cant control.

thank you scott. i must say i'm pretty impressed with the level of responses i'm getting here. as a starting investor (at least in the us, i own a rental property in my country) getting into this business can seem daunting at times and such help sure helps a lot :) 

I think this depends on a few factors.

- Where you are investing

- Type of investor you are

- long term strategy

I live in Toronto and own properties in and around Canada.  Interestingly, I've found my condos in downtown Toronto have done the best in terms of appreciation, rents etc.  I did not feel this way at the beginning.  I initially hated our condo investments as for the first few years they barely cash-flowed with maintenance, condo fees etc.  But in a rapidly growing city like Toronto, rents are skyrocketing and appreciation is also going up much more than my other investments.  And now, I reflect on all our property holdings and see myself keeping our condos over and above anything else.  They cash-flow nicely are continuing to appreciate strongly and have far less to worry about in terms of tenants than my other properties.  If you're thinking long term buy and hold, buying a condo in a great city is not a bad option.  Just my 2 cents.

Originally posted by @Albert Jones:
Theban, what do you mean what kind of investor am i? 

Hey Albert - primarily, I mean how much time you have to invest in your properties. Do you want something more turnkey or something that has more headache/hands-on work but potentially higher ROI etc. Or another way to look at it is do you care about your time or ROI on your property? I personally am more of a turnkey, long term buy & hold kind of investor.

if i was living in the us i would for sure be more hands on, its something i did with my the property i currently own where i live (did a complete renovation using an external contractor) but that's not that case.  i would say that turnkey, long term buy and hold is also the type of investor i am. 

Albert condos in FL can be difficult to cash flow in today's market at least. Although the repair fees as you mentioned may be less, there can be variable costs and more than anything the HOA and or Condo association fees eat at any chance of good cash flow. Just as in anything there are always exceptions to the rule, but by in large there are not a ton of opportunities for investors targeting condos to make great returns.

There are two possible scenarios regarding condo: 1 special assessment, Hoa can decide every owner contribute 2k one time to fix something. 2 Hoa can control percentage of unit can be rented. 

I own a town house for over 10 years . Neither happened to me through.

Big pocket has a HOA forum, check it out.

Originally posted by @Albert Jones:

hey

not sure if this is the right subforum, excuse me if it's the wrong one.

i'm thinking about investing in a rental property, long term rentals. i'm having troubles deciding what is the best option, a condo or a single family house. 

a few relevant details 

- i will be buying the property 100%

- i will hire a property management company. worth mentioning also that i am not living in the us.

- just to give a sense of what kind of property i'm talking about, let's say the current plan is a 100k property in orlando fl.

 from what i understand, to pros of owning a condo is that most of the outside repairs are being taken care by the hoa, which means less troubles, downside is of course it will cost me 200-300$ a month (rough estimate, looking at the properties i checked so far) and from what i understand condos appreciation tend to go up less in time.

so my questions boils down to the difference in repairs cost:

- usually the rule i hear about allocating money to repairs is 1% of the house values. is that value the same for both condos and single family? shouldn't it be lower for condos because some repairs are being done by the hoa? 

- what kind of repairs are not being done by the hoa?

 Stop looking at it as a %. Like condo repairs are this % & house repairs are this %. That is all voodo dawg. Look at it pragmatically. 

A house has a roof that you've got to replace. A condo does not. A condo has an HOA fee that covers it. The cost to replace a roof on a 1,200 sq ft bungalow is going to run you around $5,000 in most parts of the county. You'll need to replace your roof every 30 years. Some condo HOA's cover the cost of the furnace and hot water tank. The furnace is going to run you around $3,000 & need to be replaced every 30-40 years. Hot water tank is going to be around $1,000 & need to be done every 15 years or so. From there do the math and see what works out.