Condos - good for rentals?

Question

I’m looking to get started and get my first property that would eventually be my first rental. I would live in it for a while, make updates, and then rent it out as I move to the next one. Are condos a good investment for this strategy, as long as the HOA is reliable and affordable?

Arman Ahmed · Answer

That can be a solid strategy, as long as you do your homework on the HOA. Make sure there aren't rental restrictions, special assessments, or fees that eat into your cash flow. If the numbers still work after factoring those in, a condo can be a great first step. It's also worth comparing out-of-state markets like the Midwest, where many investors are able to buy single-family homes or small multifamily properties at similar price points without the added uncertainty of HOA rules.

Caleb Brown · Answer

Condos can work but there is downsides. The 2 biggest red flags I see is having to deal with an HOA. HOA can do assessments and you don't have control if they raise the costs or throw an expense on you. The other red flag is the appreciation is less and harder to sell compared to a residential property. Florida has a ton of condos listed and that market is brutal.

Richard F. · Answer

If you want to invest in an HOA/COA or other "common interest ownership" (varies by state), it is critical to have a solid understanding of the HOA/COA finances. This does not mean just looking at a number on a report that looks like they have a large bank balance. You must understand the current Annual Operating Budget, in detail; their most recent Reserve Study, including type of study, and, with the caveat that some/many of the estimated costs for various elements is often provided by the Board, and are not complete or accurate; and, most importantly, the Reserve Funding Plan for the project. The details of this are important to understand, yet they will reveal your actual potential for a large Special Assessment in the coming years.

It is also very important to closely review the Governing documents for the project, to learn about restrictions of all types, including the prohibition of rental units, and what modifications your are allowed to make and the process for accomplishing them. Also you can learn if, and how, these rules can be changed by the Board and/or membership.

Never, ever, compare the "monthly fee" of one project to another, as there simply is no correlation. Every project has different elements, different contractors, different Boards, and different agendas.

Check for a local chapter of the Community Association Institute, and investigate their resources, and attend some key classes/seminars to learn how projects are supposed to be run.

The biggest problem are the Boards. By State Law, and per their own By-laws, their mandate is to maintain, protect, and preserve ALL common elements of a project. Too many Boards believe their responsibility is to "keep the monthly fees low", which always results in deferred maintenance and "unexpected" Special Assessments.

Very few condo owners or RE agents truly understand the complexities of these projects. Most simply assume they understand...

Ecaterina Katerina Morosan · Answer

Hey Cristiano, go with a house/duplex if you can unless you're purchasing in a building/area you personally want to be for the next few years and if you end up renting it you can at least break even considering mortgage, fluctuating monthly HOA/assesments and insurance. Older condos go down in value or just remain steady lately, and HOA is a very unexpected expense that can add up to your mortgage. Unless you're buying all cash, and you know it'll be cash flowing as a rental anyway.

Theresa Harris · Answer

It depends on what they costs vs an entry level single family home.  I have condos and houses and when buying new rentals, single family homes are all I'd get.  Condo fees add up and for the extra price, you can buy a home.  I don't like HOA-too many potential problems.

John Morgan · Answer

I'd stay away from investing in condos. I have one, but it's not an investment we just use as a vacation spot. I'd focus on SFR and never sell them.

Mendy J. · Answer

Condos are generally much more expensive, but if it works, then great

Jacob Camhi · Answer

condos can definitely work for that strategy, but you're right to be focused on the hoa. it's not just the fees, though. some hoas have rental caps, meaning only a certain percentage of units can be rented out at any time. if they're at their cap, you might not be able to rent your unit when you're ready.

always review the hoa's governing documents (cc&rs, bylaws) and recent meeting minutes *before* you buy. look for signs of financial trouble, upcoming special assessments, or any pending rule changes that could affect rentals. i'd also compare the rental demand for condos versus single-family homes in your target area – sometimes, there's a big difference in how quickly they rent out.

Rick Albert · Answer

It is very condo and location specific, no one can give you a straight answer. My first house hack was a condo and then turned rental and worked out well. I have since sold it and did a 1031 exchange out of state.

The challenge right now is the HOA dues are much higher than in the past and if the complex isn't maintained well, the cost will just continue to climb.

Also from a rental perspective, you are competing against apartment buildings that may have more amenities. Therefore all you can compete on is price. It's not a problem as long as you account for it.

But I could make an argument that if it is all you can afford today, then it's a start. No one is saying you have to own it forever. Maybe in a few years you sell instead and house hack multifamily. Your personal residence works in a variety of way other than just a straight cash flowing asset.

Richard F. · Answer

So as a former condo owner, you should obviously be aware that generally, condo/HOA Boards EVERY YEAR review and "adjust" their budget, which absolutely changes the "regular" monthly fee. A portion of that monthly fee goes toward building the Reserve funds, which are allocated, line item by line item, to specific major components of the project. Roofing, parking lot asphalt, lobby updates, "common" plumbing elements, and more.

In most cases, Boards have no restrictions on budget increases, and they are required to maintain ALL common elements. If prior Boards deferred maintenance or repairs on certain elements, such as roof, or exterior paint, by ignoring the predetermined reserve schedule and reallocating funding; or if they do not perform yearly inspections to re-evaluate the actual remaining life of an element,and have an "unexpected" failure, they will not have funding available. All funds come from the owners, so a Special Assessment gets levied, usually with only 30 - 60 days notice prior to the start of the fiscal year.

At this point, as an owner, you are responsible for the full amount of the assessment, until/unless you negotiate with a buyer. Depending on the size of the assessment and number of owners, these can range from thousands to hundreds of thousands of dollars PER OWNER, due during the current fiscal year.

Even a smaller expense, or simply renegotiating contracts for recurring services can increase the monthly fees dramatically, with equally short notice. Neither of these increases are something you can "challenge" or withhold payment on. As an owner, you implicitly agree to them, and failure to pay will get a lien on your property and a rapidly increasing amount of costly late fees and legal fees.

These can be uncovered IF you know how to read and interpret the reports and documents mentioned in my earlier post.

Condos - good for rentals?

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