Buying family condo as first rental - need structuring advice

[Madelyn G.]

New to real estate and investing — looking for advice on my first potential deal.

A family member is moving into private care and wants to cash out on their fully paid 2/1.5 condo (~900 sq ft) in Kent. As-is value is around $250K, but ARV is ~$310K (estimating 20-30k in renovations). The fam is considering under-market cash offers just to close quickly.

I want to buy it as a rental, live out of state, and give them a fair payout. I have great credit, some savings, and a solid W2, but I’d like to avoid putting down the typical 20% required for an investment property.

How would you structure this to maximize their payout, minimize my upfront cash, and stay lender-compliant? Any pitfalls for a first-time, out-of-state investor? TYIA

[Jeff Copeland]

Condos can be very tricky as investment properties for a few reasons:

1. COA/HOA Fees: How much are the monthly condo owners association / homeowners association fees? For many condos, these are several hundred dollars per month, which can eat into your cash flow to the point the unit simply does not work as a rental. So it's crucial to know this number going in (as well as understanding the HOA's financial position and reserves, because if they are strapped for cash, they can raise the montly fees at the next HOA meeting).

2. The COA/HOA Rules & Leasing Restrictions: Do they even allow rentals? You'd be surprised how many do not. And those that do often have rules such as "You have to own the unit for a year before you can rent it out" or "The HOA must have at least 30 days to perform a background check and review/approve your tenant, and we charge $250 for this privilege" (in addition to your month of lost rent, or longer for all the prospective tenants you lose because they couldn't wait that long to get approved). It's also common for HOA's rules to include things like "one year leases only", which precludes you from doing MTR or offering a great tenant a 6 month lease extension when you otherwise want/need to. And, yet again, these rules can all change at the next HOA meeting.

3. HOA/COA's in general: HOA's/COA's tend to attract and breed nosy neighbors who are members of the HOA/COA (we call them Condo Commandos here in Florida!) who enjoy enforcing the rules. And the rules often include things like what color paint you are allowed to use on your front door, and what you are allowed to store on your balcony. I've had an HOA tell my tenant they could not park on site because her car was too ugly. They literally made her park outside the gate and walk a quarter mile to her front door. To be fair, her car was ugly. But it ran and it was licensed and insured and legal, so where do you draw the line on "ugly" cars, and who makes that call?

4. Financing options can be very limited: Financing options for condos are much more limited that single family homes or even townhomes. This makes many of them "cash only" assets. This can work fine if you have the cash and the rental cash flow is positive. But it can make them much harder to buy and sell. On that note, seller financing could be a good way to structure this deal with your family if everything else checks out.