Condos Buy and Hold : Why the resentment?
So I have been listening to several podcasts, which are all awesome and super-informative. Can't think of a higher yield source. (See www.biggerpockets.com/show75 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.
@Mark Cohen I would agree that (at least in my area), condos have a huge demographic of renters in spite of all the things I heard about 3/2 SFHs as casting the widest net. A single condo showing has been almost universally yielded multiple qualified tenants (and sometimes good entertainment).
@Chai Sag Do you know anything about the Fort Lee/Edgewater area for condos? Feel free to comment on here or PM me. My parents have a condo in Fort Lee and were urging me to invest there and are always looking for new deals there.
@Andrey Y., yes, I self-manage our condos in FL, although I have a contractor that does the repairs and showings/walkthroughs with the tenants. The condos we bought were mostly renovated during the recent boom years, and we were able to buy great condos at the bottom of the market.
That was not the bottom of the market for the SFRs we bought, and prices dropped nearly 40% from what we paid, but they cash flow well. We didn't expect any equity value from them, however, we didn't expect that much of a drop.
I've watched the show Buying Hawaii, and often the buyers go for condos. They can get a lot more for their money in great locations.
Obviously both sides of this argument hold weight. A big part of what we each invest in is dictated by our local area. For instance - in my town if I want an A rated (or even B rated) property I have very slim choices outside of HOA communities and that's whether it is a condo, townhome or SFR.
Now, I'm not a fan of HOA eating into my cashflow, but if I can still cashflow with it then I'm game. I did my research - asking folks in the community what HOA fees have been like, when's the last time they went up etc. and liked what I heard. They said the fees are steady, only big increase was from the last big hurricane in 2005.
Lawn maintenance, building insurance, roof maintenance, cable and common area RE taxes are included in the fee so it atleast adds some value.
Plus, the free cable is always a nice perk for potential renters.
In the end, if the numbers work, then I'm happy.
For me, HOA = loss of control, unless I own a controlling vote. I recently passed on a deal (about 50 units) because the building is in an HOA and I would, as the owner of rentals, be a second-class citizen within the HOA. Thanks, but no thanks
I see that you are from Bethesda. I went to school over at USU and lived there for 4 years, so very familiar with the area. Is that also where you invest? I would be interested in talking about the cash-flowing rentals you found there, if any.
Originally posted by @Andrey Y.:
I see that you are from Bethesda. I went to school over at USU and lived there for 4 years, so very familiar with the area. Is that also where you invest? I would be interested in talking about the cash-flowing rentals you found there, if any.
USU is literally about 4 blocks from where I live. Small world. I haven't started investing yet, I'm still in the info gathering stage. Though I have spent the last 10 years managing portfolios of commercial assets and, most recently, community associations. I plan on working out of PG County, Frederick County and Baltimore once I get started, there's barely anything in Bethesda or DC that will make any kind of money.
The one thing I dislike about condo associations is their tenant approval process. All our complexes require tenant approval. I do a thorough background check on our tenants, but they must also go through the condo association approval process. This costs the tenant about $100 for the application, not a big deal, but the process itself can take up to 2 weeks. This can delay the move-in date if the tenant is ready to move immediately (as relos often are) and cost us half a month's rent.
@Aly Did you guys find out such a thing before purchasing the property? Sounds like something someone would have told you, because its quite unusual.
Yes, we knew. One of the complexes didn't have an approval process when we first bought there, but a few years later implemented it.
Originally posted by @Andrey Y.:
In Hawaii, I have talked to many investors at REI meetings, and the consensus is that SFH here don't cash flow. Period. With prices of homes even in low-end areas in the $500-800k area; try and cash flow that one.
Andrey, that's interesting. I live in a condo in Kaneohe, and I don't see how it cash flows, but that's for the owner to figure out. We were thinking about buying but we knew we would only be here two years before returning to the East Coast, so we decided to rent. To buy into our complex we were looking at about $475k and up, plus $650 in maintenance and HOA fees. Rents were in the $2500-$3000 ballpark, and but I think this complex can support $3300 if the unit has a good view and is in great shape. If you need a PM, good luck cashflowing.
Either way, the HOA is oppressive. They used a telephoto lens to take pictures of our balcony because our railing wasn't in compliance. Creepy. I've got stories from our neighbors, some of which have been driven out of their houses in part because of the HOA. We've had members of the HOA board attempt to barge into our house, uninvited, to do impromptu inspections, without notice.
These days, condo financials, upcoming assesmnets, and how they run things are pretty transparent. If you have a decent broker, you would know all of these things before purchasing a property.
If you look statistically, condo fees double roughly every 10 years, at the worst. My experience has been: 0% vacancy, $100/month increase in rent every year, and none to few expenses on repairs outside of the maintenance fee.
In other words, if condo fees were $250 10 years ago and they are $500 now, you can still kill it with cash flow.
What one should keep in mind is that probably well north of 90% of Condos will be terrible investments.
However you can say the same thing about a Single Family House as well.
Probably not to far off on Duplexes as well.
I'd guess that it is a little better but probably still in that pushing 90% being crap for triplexes as well.
As you get into places that start to get less and less likely to have owner occupants this will get better but note I'm not even saying GOOD investments, just not flat out terrible.
Not to digress too much but a condo where the numbers work will not be any better or any worse than any other type of property. A condo with bad numbers and bad fundamentals will be a bad investment.
I own a lot of singles and a duplex and several condos. The crap I have to deal with on the SFRs and that Duplex far outstrip any issues I have had with the HOAs (and one I would rate as a huge PITA that has to have a police detail at the annual meeting because the board is hated that much they fear for their safety).
However I have this fat check I have to write out every month on them, even on the ones that are "Free and Clear" that DO cut into the cashflow. However it is fairly easy to account for that so you only buy when the numbers work with that in there.
Originally posted by @Andrey Y.:
These days, condo financials, upcoming assesmnets, and how they run things are pretty transparent. If you have a decent broker, you would know all of these things before purchasing a property.
If you look statistically, condo fees double roughly every 10 years, at the worst. My experience has been: 0% vacancy, $100/month increase in rent every year, and none to few expenses on repairs outside of the maintenance fee.
In other words, if condo fees were $250 10 years ago and they are $500 now, you can still kill it with cash flow.
Exactly. I've owned my condo for 18 years, and I have been on the board only a few years, but our maintenance fee increases have been historically small. Our board has been nearly the same the whole time, and we all live here. We are very aware of the budget and what we pay for services. Each year we review all the vendor contracts and push for better/lower pricing.
I can only say that for our condo investments, I make sure I vote in every election and talk to the board and/or maintenance company. Our fees in the rental complexes have not gone up much in 5 years, yet capital improvements are continually made. For the most part, they are well managed. One board is definitely sketchy, but overall we are happy with these investments. Rents go up significantly every time there is a vacancy.
I agree. I have SFH, duplexes, apts, and condos, and a good numbers deal is a good numbers deal no matter the type of building. I've even done a condo development myself as a developer. But I dislike the special assessments, nothing special about them, and I dislike the increase in the assoc. fees. One place increased about 50% in one year another place about 33% in one year. I do like them taking care of outdoor maintenance, building maintenance, outside insurance, some utilities and some amenities. The places look good and I don't have to worry about how they look or getting somebody to make sure they stay looking good.
Our fees have gone up 33% to 50% in some cases.
Yes, sometimes the increases are extreme, if there isn't enough in reserves or if there is an unexpected incident. Our last winter here in the northeast was extreme, with far more snow than we could have budgeted for, plus the damage in previous years from hurricanes Sandy and Irene. We've had more problems here in NJ than our condos in FL!
My experience is in Hawaii where there is minimal utilities (only electric) and no weather issues (70-85 temp range all year), so maybe thats why my rentals have been maintenance free.
As we speak my parents are staying with me, and my dad is dealing with his SFH home tenant and repair issues. I want to try SFHs, I really do. I am just looking for a justifiable enough reason to do so.
I have 2 Condos's in Park Ridge Il. Both get $1500 a month and the assoc. fee's are $388.00 per unit. That includes everything maintenance related and heat, Air, and water. Not a bad deal. In 5 years i had 1 tenant call me with a problem and that was a leak in the tub that i fixed for $75.00. Plus the taxes are 1 quarter of what a SFH in the same town would be. I just don't get what is wrong with condo investing. Sure i may get a special assesment for a water heater or furnace problem but its no different than a major problem happening at a SFH. I probably would have to pay more. I dont have to worry if the grass is being cut, the sidewalk is being shoveled, the weeds are being pulled, the furnace is being maintained, the gutters are being cleaned ect....
Originally posted by @David Krulac:
I even developed a condo in a building built in 1902, which is well before condos became popular.
You've aged well my friend!
I didn't do it in 1902. The building was built in 1902. I condo-ed it a century later.