Buying a Condo to later turn into a rental property
Los Angeles, CA · Member since 2019 · 56 posts · 133 votes
Hi,
I’m currently renting in Los Angeles and I hate having to pay rent because I feel like I’m throwing money out the window. But with the salary that I make and the area I want to live in, I can only afford to buy a 1-2 bedroom condo. I’m looking to stay in the Valley; Burbank, Glendale or Pasadena area. My thought process is to buy a 1-2 bedroom condo in one of these areas and live in it till I’m able to refinance on it and put the refinance amount and anything else I have to add to buy a single family house. I would keep the 1-2 bedroom condo and convert it to a rental property. I will then use this strategy again on the single family house and continue to grow my portfolio. What are your thoughts on this?
@Anthony Holloway
I think you are better off buying a condo and live in it for a few years then sell it. Use the proceeds to put down on a 3-4 family rental property instead. This will be a way better strategy because that’s what I did myself.
Here are the down sides of renting out a condo:
- Condo fees go up every year (eating your profits)
Condo association bosses you around
If your neighbor causes huge damage to the property, you’ll have to write a check too.
If there’s not enough money for reserved and something happens, you’ll have to write a check.
Some condo associations don’t
allow owner to rent to tenants if the majority of the units are owner occupied. There’s like a 20 to 80 percent ratio.
Condos are headaches
Investing in 3-4 family rental properties is the best way to go because you have more control. No condo associations to boss you.
@Anthony Holloway, good morning!
Just some initial thoughts as I get my first cup of coffee in me...
Your eventual refinance will be at 75% LTV tops, so any equity you're able to pull out will have to be beyond that. Have you looked at the numbers? I'd be happy to create some hypotheticals a little later this morning.
I’d say the make-or-break element of this plan is your ability to quickly build up equity in the condo. So you’d have to buy an eyesore of a condo — not on the exterior, but on the interior. You’d have to find a condo that’s dated and ugly and selling for much less than other condos in the building have. So you’d be executing a live-in flip to force the equity build.
Another possible route is to buy a 2-bed and rent out room #2. In this scenario, you’d want to buy at the top end of your budget (with enough set aside for a few months of vacancy if such should happen) so that the principal pay down is bigger. You’d still need to run the numbers on this and see exactly how many principal has been paid down in a few years.
Buying for equity growth isn’t a bad plan in LA, but with a relatively short timeline and a condo, you’ll have to be really exacting in your strategy.
@Anthony Holloway
I think you are better off buying a condo and live in it for a few years then sell it. Use the proceeds to put down on a 3-4 family rental property instead. This will be a way better strategy because that’s what I did myself.
Here are the down sides of renting out a condo:
- Condo fees go up every year (eating your profits)
Condo association bosses you around
If your neighbor causes huge damage to the property, you’ll have to write a check too.
If there’s not enough money for reserved and something happens, you’ll have to write a check.
Some condo associations don’t
allow owner to rent to tenants if the majority of the units are owner occupied. There’s like a 20 to 80 percent ratio.
Condos are headaches
Investing in 3-4 family rental properties is the best way to go because you have more control. No condo associations to boss you.
MAKE SURE YOUR HOA ALLOWS NON-OWNER OCCUPIED UNITS!!!!
The banks get hinky if NOO units start getting >20% of the total. Can screw up sales in the complex. Plus HOAs hate landlords (or maybe it's just my personality).
If they require that, then realize they may say OK today, but might say NO a year from now.
@Jon Schwartz thank you for the advice and valuable information! I have to figure out how to run the numbers to do a condo and see if it works and if it will help me buy a single family house after 2-4 years of living in it.
@Pedro Jean thank you for responding to my post and giving me some good insight! I’m trying to go the condo the route as my first buy in order to stay in these areas and with the budget I have. I need to start making calls and have a on going list of condos that would allow me to have renters live there.
@Steve Morris thank you for giving your opinion of my post! I have to reach out to some condos and see what they allow and I have to talk to my mortgage broker to make sure he is aware of what my plan is to make sure my loan can accommodate that, when I’m ready to buy.
@Anthony Holloway That is exactly what I did. Before finding BP I bought a 1bd 1bath condo in "the valley" in 2017 with 5% down, fixed it up and then appraised out of PMI two years later. I just refinanced it last month, but the cash out didn't seem worth the increased interest rate.
We put 5% down on our new single family that we just closed on.
The numbers aren't that great for running the condo as a rental so I'm probably going to sell the condo while the market is hot and look for something without an HOA (most likely out of state).
Looking back I should've done FHA on the biggest single family or multi family that the bank would've allowed me to buy (instead of buying a condo). It still seems like everything is going to workout ok but I definitely could've done better. But I was being cautious and conservative- I'm trying to take more calculated investment risks going forward. Good luck!
@Anthony Holloway speak to your lender about a duplex approval, you can qualify for a higher amount when they factor in the actual or potential rent from the 2nd unit. FHA loans allow 3.5% down for duplexes. You can buy your duplex using FHA 3.5% down and 12 months later (12 months min, but after that whenever your ready) use 5% down to purchase a condo and 12 months later use 5% to purchase a SFR and 12 months later buy another SFR. If you have equity in the duplex you can use it to possibly add on a garage ADU to the duplex and or your SFR (Im building one now and it cost $65-70k to convert a garage to a 1 bedroom in a mkt that is selling for $300k per unit), and living in the duplex may cut your cost of living enough that you do not need to sell the 1rst property to purchase again. Also, do not buy a 1 bedroom condo, rental and resale demand are not amazing.
@Shawn Spato thank you for responding and sharing some valuable information. You refinanced your rental to take out equity to put as your down payment on your single family and then sold your condo?
@Clarence Johnson thank you for giving your thoughts on my post! I'll talk to my lender about the options to do a duplex, I thought if I wanted to do a duplex my salary would need to be a lot higher. I was looking for single family homes with a garage space to convert into an ADU but I could not find a house in the areas I was looking in. I did find new community homes that are being built but they have an HOA. I wasn't sure if buying a house in one of those new communities is worth to try to make it into a rental or turn the garage space into an ADU. Any thoughts on that?
@Anthony Holloway your lender will use avg mkt rent to increase you approval, however the approval will vary based on actual rents (if the 2nd unit is occupied) or on mkt rents (if the 2nd unit is vacant). SFR's with a garage for an ADU is a good idea, I just picked one up with the same intention. I would not suggest trying to buy in a new community and adding an ADU, you will likely get pushback from the HOA even though I believe the new ADU laws allow you to do so. Also, you would be paying a premium for new construction. When I picked up my SFR I was looking for homes with a 2 car garage in the rear. After some searching and consideration I opted for a SFR with a front facing garage so our backyard space can remain private. Your on the right track with the ADU add on! The duplex will be the best foundation to get you to the SFR where you can build another ADU, I will be starting my second ADU as soon as we finish the SFR rehab.
@Anthony Holloway
I think you are better off buying a condo and live in it for a few years then sell it. Use the proceeds to put down on a 3-4 family rental property instead. This will be a way better strategy because that’s what I did myself.
Here are the down sides of renting out a condo:
- Condo fees go up every year (eating your profits)
Condo association bosses you around
If your neighbor causes huge damage to the property, you’ll have to write a check too.
If there’s not enough money for reserved and something happens, you’ll have to write a check.
Some condo associations don’t
allow owner to rent to tenants if the majority of the units are owner occupied. There’s like a 20 to 80 percent ratio.
Condos are headaches
Investing in 3-4 family rental properties is the best way to go because you have more control. No condo associations to boss you.
I am less concerned about the fee increases. Cap ex and maintenance is costly and goes up every year. It is amazing how much cap ex costs really are for the long term. I personally think that condo HOA fees are very reasonable because of the economy of scale and HOA board is usually all volunteer (no 10% PM fees).
The reason that I am against condos as a potential rental is not the HOA fees, but the power of the HOA. If you have been in RE a while you have heard horror stories. Items such as controlling the flooring on the inside of the unit (premise is noise abatement so some associations do not allow LVP), limiting rentals all together (premise owners take better care of the units), limiting certain bathtubs (premise: Common water heater and large jetted tubs use more water), limiting STRs (premise: they do not want strangers having unabated access), no washer/dryer in unit (premise they may leak resulting in damage to other units), etc. There may be justification for the various rules but what they amount to is less control for the owner as the HOA will set the rules (ideally in the best interest of all owners). I like to have control of my units. In CA, the LLs already have less control than in many other locations. Why would I want to give up more control?
What would you do if the HOA banned rentals?
Good luck
@Anthony Holloway sorry for the late reply, I'm still getting used to the platform. I refinanced the condo last month but didn't take cash out. I refinanced because I wasn't sure if it would sell at the price we wanted. I'm in the process of selling the condo now, it's been on the market for a week and we received one solid offer today. The goal is to use the proceeds to invest in real estate that has better cash flow.
Hi @Anthony Holloway , how is your search going on ? I am in a similar position as you were when you posted this thread, trying to decide if a condo would do good as future rental. Thanks