Is investing in condos always a bad idea?

36 Replies

Is investing in condos always a bad idea? For example, I have heard of people having lots of problems in condos with 100+ units, and very high HOA fees. But what about a condo in a 12 unit building? Is this still, generally, a bad idea?
Thanks in advance!

A lot of people don't like investing in condos, but others do. I really like condos. they tend to be cheaper per sq. ft. than houses. And the rent tends to be a higher % of purchase prices than houses.

One issue that people have with condos is HOA fees, and they are frequently steep. But think about what HOA fees really are. They're primarily maintenance. House buyers pay them also, but they're called different things. They're called 'lawn maintenance'. They're called 'setting aside cash to put on a new roof someday'. They're called 'building insurance'. The economies of scale present in a condo investment reduce the cost of maintenance considerably.

The thing that I'm always interested in is how well run is the HOA. You have a partner when you invest in the condo, and that partner is the HOA. If it's well run then you have people to watch over your investment at little or no cost. If the HOA is poorly run you may have unending issues.

Before I invest in a condo complex I always try to meet at least 1 HOA board member. They're almost always retired guys that love to meet new people, and think having breakfast with an investor is a great thing. For the price of an Egg McMuffin and coffee you can usually get a lot of good information on what's going on in a HOA. It's money well spent.

Just make sure if you invest in condos you read the bylaws before you buy unit. Look through the bylaws with a fine tooth comb!
Some of the condos out there dont even allow you to use it as a rental. That alone would mess me up as far as exit strategy goes.
I like realestate I can rent for income if things dont go as planned for my flip or what ever you have in mind.

@Josh M.

as I previously posted here at BP....

I've bought SFH, MF, and condos. I have mixed feelings about condos.

I like that the exterior maintenance and exterior building repairs are taken care of by the condo. I like thta the grass is being cut, the snow shoveled and the exterior looks in great shape. The down side is the costs. Around here a low condo fee is $100 and high fee is $400 per month.

I had a new roof put on one condo and new siding put on a condo, and the parking lot repaved, but the condo didn't have enough money so there was aspecial assessment to pay for these improvements. Jus this year one of our condo projects got a brand new roof. Thankfully without a special assessment.

Besides the costs of owning the condos, which we own for income, the other downside is the rules and restrictions. In one condo we have you can't have your trash cans outside, you can only have one pet 40 lbs or less, no sat dish on building.

Some condos limit or prohibit renters. If you buy a condo as an owner occupant and later decide to move on and rent out the condo, you may be restricted or limited on renting. The condos think renters are substandard occupants and cause problems. In addition there are limits for owner financing in the complex if there are too many non-owner occupants.

So be careful and consider both the upside and the downside of condo ownership. I have several beautiful units for sale right now.

Edited: 01/17/2013 at 01:28PM by David Krulac

I think condos are a good investment for longer term buy and hold investments. You have to look at each condo complex and see the positive and negatives. Also factor in the market.

It is just like any other investment. People are going to like them and others won't touch them.

I can't think of any particular type of real estate I would say is always a bad investment (or always a good investment for that matter). It is all going to depend on the numbers and the goals, experience, exit strategy and personal preferences of the particular investor. As for condos, I am not generally a fan of condos for several reasons, but I recently considered bidding on some at auction. There are in an area of downtown that was recently renovated and will be a great area for years to come. It is close to the university, and close to the booming section of downtown. Recently, 19 condos were auctioned off because the company that renovated the units (they were old Victorian style properties that needed full renovation) went under. I would have loved to own one of those condos and would have if they would have sold at the right price...but they didn't.

A couple of my concerns with this particular condo were:

1) High condo fees that would have eaten into my cash flow

2) Difficulty reselling due to financing problems for many buyers

3) I was not at all impressed with the renovation quality

Condos are affordable in that they are often priced lower than single-family homes. A condo can be a great first step for new entrants with limited financing.

While the rental income might be a bit higher than a house, Condos often appreciate in value much slower than single-family homes. This is because you don’t own any land, which is the biggest driver for appreciation. Instead, you only own the living space.Besides the challenges of reselling.

Originally posted by Ryan Moses:
While the rental income might be a bit higher than a house, Condos often appreciate in value much slower than single-family homes. This is because you don’t own any land, which is the biggest driver for appreciation. Instead, you only own the living space.Besides the challenges of reselling.

Here's a look at the median price of San Francisco SFH vs Condo over the last 10 years. Note that condos have actually appreciated better than SFH's in the last 10 years which included both boom and bust times.

But all areas are different. Real estate is a business about local factors.

My impression is that condo prices are slightly more volatile than SFH prices, meaning that they rise slightly faster in good times and fall slightly faster in bad. That makes for a different investment environment than the SFH. Not necessarily better or worse, just different.

I think modern condos in desirable locations will appreciate more than SFR. But the rental income of these condos are currently low.

Many of the modern condo developments were done on the peak of the housing bubble and have been selling way below the cost. This means unless they appreciate to a much higher price level, new ones of the same class will not be built in the same areas, and therefore they will remain the newest. If the economy is on track, eventually there will be many buyers for this market and the price will go up a lot. We are already seeing very strong demand for oceanfront modern condos. As the inventory is dropping rapidly, some large realtor groups have begin to call or email current owners to get listing aggressively.

I've had several occassions to be involved with condos, I do like commercial office, but not residential.

If you're interested in them I'd suggest you know the market, who owns the developments and the operations.

Construction is usually on the low end, some are built for future maintenance, just like that coffee pot designed to burn out after the warranty ends. The finish work may justify a higher price, you still may hear people upstairs walking across the floor, just like an apt.

They are not as marketable as a SFD. Lack of sales means appriasals are harder to get. Financing can be difficullt and units may not qualify due to the ownership/rent levels, maintenance contracts, or lack of HUD guidelines. Some projects may have high turn over, that can kill financing as well. Less marketable due to financing.

HOA Boards usually lack RE knowledge, many I have seen will have those willing to serve stay on for years and they end up with a sence of ownership as if they own the place and make demands to control on a whim. I've helped replaced two Boards. I've seen "acceptance approval required" in violation of law, they just had no clue.

Doesn't matter how big the project is, you can have these issues, petty restrictions and uneven application of the rules, it may depend who is breaking what rule.

Yes, there can be contract kickbacks for maintenance and repairs, the Board my contract for years of services and the by-laws mat require all owners to agree to some manner, making it impossible to change something under that group of officers.

As William mentioned a review of the by-laws, unless you are aware of the stunts that can be pulled in a corporate board, I suggest you have your attorney review the by-laws. You need to ensure that 3 of 4 officers can't swing a contract or that one officer isn't vested with contracting authority and that the owners can't require a majority vote on any issue. Any significant job, like a roof should be set by bid, etc.

Bottom line, an owner lacks ownership authority and relies on a majority of owners. That puts owners in a political posture as neighbors which can cause friction. 8 or 80, doesn't matter how big a project is, residential condos have issues.

Depends largely on local acceptance and market, some are well run and professional, most in my area are not.

What Michael and James said -
1) condos have far less surprises entailed in them
2) do the numbers
3) research the HOA
We and our clients invest almost exclusively in condos, following the three rules above (and a few others), constantly providing 9-15% pre-tax, RELIABLE returns. Never looked back.

I don't have anything earth shattering to offer to this thread other than to say that at least in my market, yes, condos are always a bad investment for the simple reason that they are impossible to get rid of. There is so much space and so many affordable sfrs that it's difficult to understand why a retail buyer would want one.

(214) 707-2185

@John Chapman

I've owned many condos, as rentals and I even developed a small condo project. They are appealing to people because at least around here are fairly newer products. We have many older properties, just settled on a property that is over 160 years old. There are no or few condo that old except for redevelopment of existing buildings.

There is a market for condos, people like the no exterior maintenance, though i'd have to admit that snow shoveling and grass cutting can be easily contracted out. In December I sold a large 3 bedroom condo with first floor master and garage to an 80 year old buyer who was looking for no steps and no maintenance. I had the unit as a rental and was the only rental in a development with 88 units.

There is a market for condos here, though i realize that some areas are over built with condos and they flood the market. Some people like the carefree condo living and the amenities like swimming pool, tennis courts, fitness center and clubhouse that a single family house may not have.

@David Krulac Sorry, I didn't mean to suggest there is absolutely no market for condos in my area. There is a market. It's just tiny relative to how many are available. There are, of course, exceptions to every generalization but for the most part I perceive them as lousy investments in my local area compared to sfrs or multifamilies. Most wholesalers I know won't touch them. Again, this is a pretty local issue.

(214) 707-2185

@John Chapman I understand what you are saying. I am originally from Dallas (assuming that is your market based on your profile), and can understand why condos would not be an ideal investment. For a beginning investor such as myself, I could easily buy a SFR in the Dallas market. However, in Chicago, that would be near impossible, especially in the city. Thanks for the help!

@John Chapman

yea, I agree, even within markets there are good pockets for condos and not so good. Factors include:

1. Age of the condos, old worn out units are still old and worn out whether they are condos, SFH, or MU.

2. %age of rentals versus o/o in complex. More o/o usually raises all boats. Just like the one I sold in December, only 1 out of 88 was a rental, guess who owned that one.

3. Amount of condo fees, nothing drives the desirability down like high condo fees, whether you're look to o/o or rent out.

4. Amenities at the complex like swimming pool, tennis courts, golf courses, fitness center and club house all add value to SOME people, whether renters or o/o. Key word is SOME.

5. Effectiveness of management and curb appeal go together a place that looks good gives the impression of being well managed and vice versa.

6. There's a condo project that I'm familiar with that sold 1 unit for over $1mill. Obvious a deluxe unit and high end. Movie stars have stayed there and the place has a high appeal. Some rentals there are $5,000 month. Is in a whole different category from your average condo.

7. Another place that I'm familiar with was built originally as an apartment complex and later converted to condos. Most of the units are owned by LL and as such don't qualify for certain financign for o/o because of the majority of non o/o. But there is on site management M-F 8 AM to 6 PM. The tenant complains come to the PM, the PM shows all the units, answers phone calls and emails, makes recommendations to the owner and does all the PM type stuff and is on site most times. And the PM has an emergency off hours number and maintenance staff for off core calls. For the non o/o owners this is about as hands off as you can get. certain things are the condo responsibility lke the roofs, and all the tenant contacts go through the PM. The owners like the set up and have no dealings with their own tenants. Most of those owners own multiple units but could not afford to buy an entire 186 unit complex themselves. They get to play in the 100+ unit field without having to buy 100+ units. It appears to work for them, the owners, the PM and the tenants. Occupancy is 99%.

I think there is some really good advice and i am glad to hear from @Ziv Magen because of his success in condos. Ziv, are you investing in condos here in the states or in Canada & Asia? It is extremely difficult to create predictable income models with any piece of real estate, but can be even more difficult with condos because of shifting need and demand. In my experience (limited to the areas I have invested in Memphis, Dallas, Denver, south Florida, Salt Lake City) the demand for condos goes up during economic booms times, but is absolutely the first market segment to disappear during crisis. As well, they are often built quickly and in excess during booms and include covenants meant to protect value by not allowing rentals (mostly on new construction). I was being heavily pitched two years ago on the virtues of buying condos in Toronto, one of the worlds largest and most diverse cities and I chose not to. I recently read where condo values are tanking fast in the city because of waning demand and an excess of inventory while owners are left without the ability to sell and they cannot rent. Just an example of what can happen I would imagine to any classification of real estate, but IMO condos are more susceptible to the ebb and flow of demand.

Hi, Chris - we invest primarily in Japan, where condos are the norm for rentals in the vast majority of cases - I think the comments regarding the capital gain being diminished in comparison with more landed properties is quite correct - we focus on monthly cashflow as a main goal, however, with growth being the icing on the cake, if any - and for reliable, high return, we found condos to be the best investment possible for our environment - as long as the appropriate DD is performed, of course.

I like condos only because the cost of entry is lower so I can own more of them compared to single family homes. For example, in my area, I can buy two condos that rent for $1300 per month compared to one SFR that rents for $1800-2000. Check out the association, like others have said. Also, just because an association has low dues doesn't mean it's better; it could mean you will have a special assessment in the future because they don't have enough money. Look at the HOA financials carefully.

I think it might depend on where you are investing. Where I am, apartments and condos are very common near the beach and downtown, and single family homes are more suburban.

@Shari Posey What exactly do you look for when investigating the HOA? Is their a particular level of reserves I should expect or anything else?

Look at the number of delinquencies. If many of the owners aren't paying #1 it will be hard to get a loan and #2 the owners who are paying will end up paying more to cover the loses.

Look at expenses vs. income. Sometimes there's no money left for reserves. And check what the expenses are? I've seen some really out of wack expenses for salaries of staff, earthquake insurance, etc.

Look at the reserves. I have never seen any HOAs that have enough reserves but you want a fair amount. It really depends on the complex (age, amenities like pools, elevators, gym, condition of building, etc.) I would be prepared to have a few thousand set aside for assessments just in case--like an emergency fund. (One seller of mine had a $20k assessment and it had to be paid in full in 6 months! Everyone was pissed but the dues had been below average for 2 decades so really no one should have been surprised.)

Read the minutes and see what the owners and board members have been talking about. Sometimes they mention assessments months before they vote on them. They also talk about major problems like roof leaks, plumbing, etc. so you can get a feel for what is wrong.

I own some condos in California and they've been good investments so far. But, I bought them a few years ago, when the market was tanked out.

Now, though, with the upswing in home prices and rents around here, getting a cashflowing SFH is much harder so condos have been flying off the shelves, often at over-asking to all-cash investors. The prices went way up and I backed off.

I felt that the "spread" that a low market gave me has helped cover the extra costs of HOA, special assesments, etc. but without that advantage, I didn't want in. So, in areas that aren't as volatile, price-wise, I don't see them as that good of an investment.

Maybe condo investing should be viewed more like investing in the stock market? That's not a good thing in my book.

Also, around here, there are many condos that have no-renter policies and, with the investor frenzy around here, there have been newbie investors getting stuck with an unrentable unit.

our condo is only making us money b/c it was a gift from my parents as a wedding present. so we own it free and clear!
in the 12 yrs we have owned it, the Management company had and emblezzement (losing majority of the fund), Forgot to pay parking revenue to rightful owner (apparently it didn't belong to them for the 30 yrs), and HUGE 30 yr assessement to upgrade HAVC for the 500+ units......

we were only able to absorb all the cost b/c it was in a great location, highly desirable and high rent area of a major city!!!!

I have owned a number of condos in the Austin area and while they haven't been huge cash cows they have never lost money. I always try to be involved with the HOA when I can, so I can have some kind of an assurance that my investment is being protected.

Biggest issue is when selling them financing for buyers can be a bit tricky, but saying that I have never had a bad deal with a condo!

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