Condos Buy and Hold : Why the resentment?

69 Replies

So I have been listening to several podcasts, which are all awesome and super-informative. Can't think of a higher yield source. (See specifically) and there seems to be a mistrust or no interest in the buy and hold strategy with condominiums. The issue also occasionally comes up on the forums.

The biggest argument against it is the evil associations, with people that are power hungry, and may raise the maintenance fees without you having any control over it. And I get that. I will address all this in the coming text. 

If you are investing in single family homes, people glady accept that they will have to pay roughly 50% of the rent on expenses sans debt service. For multifamilies, the number is closer to 60-62%. I wanted to get your guys input on all this. For multis @Ben Leybovich  

Now I look at these numbers, and how are people okay with this?

Hear me out some more. 

1. If you buy a condo that has association fees, at least 50-75% of tenant phone calls for ANY reason (repairs, grounds, etc.) can be eliminated.

2. We all value our time. Why should we be tasked to find handymen, contractors, and coordinate how they get payed? Not only that, make sure the appropriate work gets done and the tenant is happy, and the contractor gets payed. I think this is a huge time saver in condos because a lot of these phone calls are effectively eliminated.

3. I think its an art to find a well-maintained condo with low maintenance fees relative to rental income. Just like anything else in RE, we need to do our due diligence.

4. Also, let me address this concept of 'whoa they can raise the maintenance fees at their whim, and you have no control over it.' Listen, I have never heard of maintenance fees DOUBLING in 5 years or less. Even 10 years or less would be rare.

5. Things like HVAC, roofs, grounds, windows, siding, etc. are just things that you don't have to worry about when investing in condos.

6. About power-hungry association members.. so what?? You can lay on the beach, travel abroad, spend time with friends/family, and let them hash it out. Rest assured that even if the maintenance fees get raised, you will never have the expenses (and your time spent, this is HUGE) of a single/multi unit. This is assuming the appropriate due diligence, as we do with every investment.

So why are single/multifamily investors OKAY with paying 50-60% of rent in expenses? I am early in the investing game and I am still trying to wrap my head around that. I think with condos, $400-600/month cash-flow is all day everyday. With SFH/MFH, mostly people are happy with $100-200/door, and the $500/month are those rarer instances where the market is down and a fantastic deal has been found by the investor.

@Andrey Y.    I agree with you, and I think that the numbers can work and it could be a good investment... however... I can only speak for myself, and I know I am a bit of a control freak. I have a bit of an issue when there is a group that tells me what I can and can't do with my own property. 

Currently, my primary home is a townhouse with a $400 HOA fee every month. I have no amenities (pool, yard, common area) except for an underground gated garage, and they just denied to fix my porch that leaked into my guest room. Also, this year there was a "special assessment" of $1,500 because they wanted to fix the railings on people's porch because a couple had termite damage. The railings of the porch were considered "structure", but my leaking porch is my problem. The logic doesn't make sense. I am not complaining because I love my home, I am just saying that I wouldn't have an HOA again... whether primary or investing.

I can see how the loss of freedom can be an issue for a personal residence. But I would argue that time saved is a great counteradvantage still.

But for an investment property, who cares? Aren't we in this for cash flow.. for financial freedom? I think rental income is rental income. Do we really care about house additions etc. for a strictly investment assest.

HOA's don't run like you discussed. Well that would be great in a "dream" world. My hoe's and the one I run for my parents don't do anything except charge a fee (well one offerings yearly sprayings) and send notices when there are cars parked wrong, ruts in your driveways,etc. Oersonally I will never invest again because they are pain in my the landlords "tush" and like you mentioned my time is worth something :)

Originally posted by @Elizabeth Colegrove:

HOA's don't run like you discussed. Well that would be great in a "dream" world. My hoe's and the one I run for my parents don't do anything except charge a fee (well one offerings yearly sprayings) and send notices when there are cars parked wrong, ruts in your driveways,etc. Oersonally I will never invest again because they are pain in my the landlords "tush" and like you mentioned my time is worth something :)

Who cares how the HOAs run, honestly. This is a numbers game, by and large. And our time is money. And from your perspective Elizabeth, as an out of state imvestor, would you rather spend the time arranging for 40-60% of your rent in expenses, while taking comfort in knowing there is no HOA? Its an honest question; I'm not trying to be condescending at all. Looking to weigh the pros and cons of each method.

Originally posted by @Andrey Y. :
Originally posted by @Elizabeth Colegrove:

HOA's don't run like you discussed. Well that would be great in a "dream" world. My hoe's and the one I run for my parents don't do anything except charge a fee (well one offerings yearly sprayings) and send notices when there are cars parked wrong, ruts in your driveways,etc. Oersonally I will never invest again because they are pain in my the landlords "tush" and like you mentioned my time is worth something :)

 Who cares how the HOAs run, honestly. This is a numbers game, by and large. And our time is money. And from your perspective Elizabeth, as an out of state imvestor, would you rather spend the time arranging for 40-60% of your rent in expenses, while taking comfort in knowing there is no HOA? Its an honest question; I'm not trying to be condescending at all. Looking to weigh the pros and cons of each method.

 NONE ! of my condo's cover 40-60% of my expenses. If anything they come up with MORE expenses. Because of the condo I have to redo my driveways because complete driveways weren't installed. They were just 2 concrete lines with the middle nothing. Guess what that creates "ruts" which is against condo's rules. So now I have to pay $1,000 per house to get that fixed. They cover no expenses except yard work which my tenants typically pay themselves and adds no additional income. Plus it prevents me from being able to fence the yard a negative to many tenants!

I have another condo that covers nothing except the gated entrance and park for $125 a month :) and send a letter to my parents every time the tenant leaves their trashcan out side after garbage comes. If the grass is more than x long.

While what you say is great when it happens. I can tell you in MY experience what you describe is fantasy land :) Not trying to be condescending, just telling you from a tired landlord who HATES HOA"s with a PASSION! I invest in them because I HAVE too at the time but I would never recommend a landlord do it because of what you described.

The funny thing is 3 years ago I would have agreed with you. We though HOA;s would make them easier for long distance landlords. On the other hand I find it harder!

@Andrey Y.  I couldn't agree with @Elizabeth Colegrove more! My condo increases the fee for no apparent reason. I would be on cloud 9 if my condo came close to making a reasonable cash flow. From how I see it, condo fees and HOAs such any hope of a decent return out of condos. The lack of control is just icing on the cake. 

1. Simple fix Elizabeth. Just look for condos where the maintenance fee is SFH.

2. Many multifamily investors mentioned on various podcasts that we should be happy if expenses are 60% of rental income. Really?? I know 25% is achievable with the right condo. And its more "hands-off".

I think it all comes down to niche. A lot of people may say mobile homes for example are risky, not a good investment, etc. but I bet there are people just CRUSHING it with them.

@Andrey Y.  

I totally agree that with the absolute right HOA's you might be able to put together a "very" specific isolated portfolio that works for you. I don't think that's easy to repeat and personally I would rather single family homes and use my systems to keep expenses low and have control over it.

I think control is a huge issue for a lot of folks psychologically. One thing though, the folks with 50-100+ units who track their expenses to the 't', all report right around 50% of income (higher for multis). I am just thinking.. (like they say on infomercials) THERE'S GOTTA BE A BETTER WAY!.. ;)

Anecdotely, my friend has condos, plexes and sfrs. He mentioned this the other day how his condos are so much easier. One had only a faucet replaced in 8 years of renting. Meantime his plexes and sfh are consistant with maintenance and tenant conflict issues. He was thinking about selling to get more condos now. I looked at a condo a couple days ago and the building looked like no one did a thing for 30 years. I passed but it still sold in 48 hours.

@Andrey Y.  

Some of the things you state, don't apply to all condos:

1. Most of the condos that I either owned or have owned, the HVAC, plumbing and all electrical and all interior maintenance is NOT covered by the condo fee.  What the condo fee does cover is grounds maintenance, snow removal, exterior siding and roof as well as amenities if any which could be swimming pool, tennis courts, club house, etc.  For the things covered by the condo, I get very few tenant calls.  Most tenant calls are not covered by the items of the condo.  So its never eliminated 50-75% of my calls.  Maybe 5%, but the tenants still call me for condo issues, so it really doesn't eliminate any calls.

2.  Since the condos association don't cover heating, cooling, plumbing, and electrical among other things, I still get calls for those things and still have to arrange for trades people. 

3.  Due Diligence is required.  Future Special assessments though are a hidden cost.  I've had to pay special assessments for siding, roofs, paving and excessive snow removal, costing thousands of dollars.  Low monthly fees often hide the fact that there will be future special assessments, which of course are not that special, at least to me.

4.  I did have several condos where the fee increase about 35% in one year.  There was a change in administration and some deferred expenditures, which kept the fees lower, but kicked the can down the street as they say.

5.  I've still had to worry and be responsible for HVAC, windows, sliding glass doors, etc. which most condos here don't cover.

6. For my SFH, I don't pay for snow removal, lawn mowing, and most or all utilities, reason being the tenants are responsible for those items. At my condos I still don't do those items but I do pay for those items through the condo fees, like snow, lawn and utilities.

7. The highest condo fee I pay is 35% of the income, wasn't nearly that high when I bought. And that doesn't include taxes, insurance (partially), sewer bills, and of course debt service. My SFH expenses are much lower.

8. If I had a SFH where the expenses, less debt service were 50% I'd sell the property. I have had years where the expenses on a SFH have been as low as 11%. Tenants paying all utilities, and doing the snow and lawn also. Some years the only expenses were taxes and insurance. I wish I could do 11% on every property every year, but that's never going to happen. I also have apt buildings and imho, SFH are easier to have and have lower expenses than condos or apts, and even some commercial.

@Matt R.  Thanks for the thorough reply. I really appreciate your wisdom due to your extensive experience in this arena. Maybe you are referring to townhomes and not condos? Because as far as I know, with CONDOS, at least here (7+ stories=high rise), the roof would be included in the maintenance fee. And things like windows, it is true, if the external windows need to be replaced, it would either be an assessment which would increase the maintenance fee, or just bill the owners (no different than any repairs on any investment property).

David, I would be interested in knowing how much TIME did you spend on managing your condos vs. SFH vs. multis?

For arguments sake, lets say we value our time somewhere around $300-400/hour. This means that if you show up to a W-2 income job, we would expect at least $300/hour pretax for it to be a valuable use of your time. If you spend a total of 150 hours on a flip (I've never done a flip for the record), we would expect a $50,000 pretax profit to be a valuable use of your time. Your time with your family, I would argue, is invaluable.

Right on Audrey. And David knows way more than my friend so keep that in mind.

@Andrey Y. A condo can be a great investment, but I think people don't like them because they are OFTEN more trouble then they are worth. The HOA is such a wildcard that you can't really plan for how it's going to affect your investment.

They can decide to limit the number of rentals allowed.  

Beware of low condo fees because that is often indicative of high special assessments.

They can spend those HOA fees on any maintenance they see fit. So, maybe you wouldn't have painted the building in year 7. You would have waited til year 10. Too bad...they are doing it in year 7.

If too many condos are rented, it can be hard for owner occupants to find loans for the complex because they won't be FHA approved. That limits your selling ability to only other people who can pay cash or find some sort of creative financing.

Anyway, I could go on, but the gist is that you lose a lot of control over your property when you own a condo. There are the additional issues of flooding from other units into yours, etc that just come with the nature of close proximity. All things being equal, a SFH is much better.

A bad HOA Board or management company can be a real headache. However, these problems have been temporary for me (one year at most) since management companies and boards change frequently. If you piss off enough homeowners, reasonable people eventually step in and take over. All of a sudden the headaches go away. I realize it's possible for a board or management company to last a lot longer than a year and cause more damage but, for me, the best thing has been not to get too worked up about situations and wait it out.

In California, historically, another aspect of condo investing is appreciation. In a downturn, bank financing tends to go away for lower end condos, depressing prices even further than SFR's since only cash buyers are buying. Once things get better and we enter a boom, banks start lending on low end condos again, expanding the pool of buyers and boosting prices.

My business partner and I bought a bunch of condos in 2012 for about 20% of what they sold for at the peak of the last cycle. For some we even paid about the same amount that they went for back in the '80s! They cash flow great. I don't know if they'll get back to where they were at the last peak but we'll hold onto them until the next peak, whether that's 2-3 years or 10 years away.

@Dawn Brenengen  

Around here, condos sell just as fast as SFHs. I wonder if there is any real data we can dig up regarding this. And the corollary to what you said, sometimes the association lets certain things sit later than a SFH owner would have, effectively saving you $. :)

The thing is, as someone mentioned earlier, once your expenses hit a certain threshold that you aren't comfortable with, you can sell a condo just as a SFH. I would think the less time spent on the phone coordinating repairs and tenant issues is a small price to pay for less 'control', maybe not.

If you read the restrictions on HOAs on what you can do as a owner regarding renting or lease to own or owner financing you'll find many HOAs restrict the number of rentals or restrict owner financing.

There's a lot of petty arguing amongst the owners on a lot of the details of the amenities.

I like inexpensive SFRs , call me crazy.

@Andrey Y. I notice you are in Hawaii, and I'm sure condos there sell very fast. That's not the case in Raleigh, NC. I actually find myself dealing with properties more often when they have an association. They have regular sprinkler checks, and someone has to be there to let them in. In one, they wanted to do a leak search because the water bill was particularly high in that building. So, we had to make arrangements for them to get inside our unit. I don't find myself dealing with that many tenant calls on exterior issues, so I don't see having a condo HOA as any kind of time saver when it comes to maintenance. I find that I have to conform to their schedule at times, and it's annoying.

An HOA sometimes does let things sit longer than a single owner would. I don't like that either, even if it is saving money. It's the loss of control of your property again. If I feel like the gutters need to be cleaned, I get them cleaned. But, I decide.

There are very few condos/HOAs that I'd invest in for all the reasons stated above. You're definitely reaching with some of your conclusions, particularly about finding buildings with low fees. That screams of a large special assessment down the road as others have mentioned. In addition, the hot thing in my area now is limiting rentals so that the associations don't turn into apartment buildings.

You certainly can find condos where the association is responsible for almost everything- roof, heating, AC, landscaping, etc. Generally speaking and without splitting hairs, you're going to pay for these things one way or another, either through your monthly assessment or out of pocket if it's a unit owner responsibility. 

It's possible to make money owning condos but it's a gamble. It's completely dependent on the individual association, the board, and the association's financial situation. That resale package will be your best friend and if there isn't a balance sheet or income statement within the last month if two, demand it. Now's a good time to brush up on reading financial statements by the way. 

@Marc M.   @Dawn Brenengen  

All fair points. Although I think anyone can rent their rooms in a condo, and no one would be the wiser. Sometimes its better to ask for forgiveness, instead of permission. Although I would think stipulations about rentals would be rare, or if they are there, transparent before you would purchase the place.

Maybe my risk tolerance is higher than the average. I think the typical $100-150/month cash flow isn't high to justify time spent and headaches. That's like 100 SFH units to get a livable cash flow. That. is. A. LOT.

I like this discussion. It is bringing about some important points from both sides.

@Andrey Y. I don't know what the market is like in Hawaii. What is the fair market rent of a SFR vs a condo in your area? Also, what is the difference in price between the two.

There might be a large enough spread in the price and a small enough spread in rents that it makes more sense in your area. Just a thought. I think there is a potential for condo's as long as you do your research.

I looked into tax foreclosures on condos when I lived in Houston.

First of all, just run the numbers already.  Calculate the income / cost from a condo you see on the market.  

Second, call the association. They aren't going to hide from you what the expectations are. They may hide future 'special assessments', but they aren't going to hide what services your HOA payment gives you. If the HOA pays for the roof, then you can show how much you save in repairs by taking the cost of a new roof and dividing it by the number of months between replacing a roof. Then you can take your HOA payment and subtract the two numbers. Maybe you're overpaying for your free roof, maybe not. Who knows? Run the numbers. (Just an idea off the top of my head, feel free to beat me up on it : )

Third, think about your exit strategy. What are you going to do with a condo to make it sell? What if you are one of the people above who said their HOA rates went up 35% in a year, do you think that might make your condo harder to sell?

I also think you're kind of at the mercy of the condo association.  Oh, the new owners don't care if they the tenant quality goes to crap?  Too bad.  They don't care if the grounds aren't kept up?  Too bad.  I could be wrong on this, but this seemed logical to me when I was looking into them.  The BP experts could verify.

The ones I looked at were similar to apartment complexes and weren't all that special.  I guess you could look into vacation rentals thru a condo.  

As a side note, someone just posted that they quit their job after acquiring 28 properties and, a summary of his own words, stopped working when he made somewhere between 10k and 15k a month in cashflow. That's not 100 properties. I think those were SFR's but we'd have to check.

28 units at $12,500 cashflow is ~$446/unit. From my research, that is NOT the typical net net cashflow at all. The rule of thumb on here is $100-150/door especially with most deals having a financed component.

@Audrey Y. It seems from your comments that you are imagining the HOA fees as equivalent to what one might pay a property manager - which is often money well spent to save the landlord's time. However, as many posters have already pointed out, I think you are greatly exaggerating the imagined time-savings. As the HOA does not cover anything other than "common" areas, you will still have to deal with anything that goes wrong inside your unit. The people in charge of the HOA are not like managers who simply execute your decisions, but rather are making decisions for you that could affect the outcome of your investment that you might not agree with.  There are good reasons to want to be in control of your property...from what I can tell, being a "control freak" is generally a good trait in a successful landlord.  

I own a condo that I am in the process of selling and I can say that I would never buy another investment or even residential property in an association again - trying to reach a consensus among all the owners as to how the property should be kept up is a never-ending battle!

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