These seem to be an OK investment for those that just want cash flow. Granted, they don't typically appreciate as well as a SFH but they look like a lot of good. Professionally managed, exterior done by the assoc, etc...
What 'bad' am I missing?
Check out this detailed discussion on love / hate for condo. I am also looking at condo as one of the cash flow option.
Ugly HOA fees, competition from other investors within the same building limits your ability to control your rent rate. Your money can go a lot farther with multi family properties of three or more units.
I'm not opposed to multi-family. It's just that in my area, rents are pretty stable. Nice condos in good areas bring a little premium. I can see where other investors, if plagued with vacancies, could drop the rent as they are in their condos much cheaper than I can purchase for now.
I'm mid-50s and not as interested in doing a lot of maintenance and long-term appreciation is not a high priority. I was under the impression that if it flows cash, it flows cash and the lower maintenance the better.
I have mostly invested in condos, over other types of properties, but I must disclose that I bought the bulk of my portfolio in 2009, at bargain basement prices. I still invest in condos, currently one under contract, but I have strict criteria. Feel free to PM me and I can send over a copy of my evaluation criteria, in Word format. It is easier for me to invest in condos at this point of my career because as a real estate agent, contractor, I have full control of expenses as well as multiple exit strategies. My costs are lower because I get commission on the buy and sell side of the transaction. I own a contracting business, so I control the rehab expenses. I have also built up a network of passive investors that I can sell as a turnkey condo, if I do not get a retail buyer. My first option is a flip, keep cash coming in, but I can also sell to investors, or last resort, keep as a rental for passive income. Long story short, by having multiple exit strategies, I have found success in condo investing. Each association is different, so reading over the condo docs, and financials, is the first and most important step, before diving into numbers. I have a lot more to add, so feel free to ask.
It seems like most people say the HOA fees are what the biggest deterrent is but even if they are 600-700 a month its almost the same as paying taxes on a house.
Understand that your investment may be subject to the whims of the members of the HOA, next July they can vote saying no rentals, when your lease is up, you can't rent it! Now, if you own 51%+ of the units, you have the vote to do what you wish, but then you'd have serious financing issues that effect marketability of the other units (and yours). Read the by-laws carefully, the owners can vote anything dang near that they want to. Check local laws as to owner's rights, most HOA operations and concentrations are left up to the owners. :)
There are certain markets where condos make sense,but I'd be very aware of the warnings above. Real estate markets always are moving targets; what is good advice one year can be bad advice the next. I could see certain condos in my area as a good play right now for a short term hold (3-4 years). Unfortunately my capital is tied up- but if I can get some $ freed up I might start shopping, lol!
Hmmmm. Hadn't considered that they could vote 'no rentals'. These don't sell quickly so that would be a concern.
How could I tell if the HOA has that power or authority? By-laws? Do they hand those out freely?
Originally posted by @Jayson Greenblatt :
It seems like most people say the HOA fees are what the biggest deterrent is but even if they are 600-700 a month its almost the same as paying taxes on a house.
But you still have to pay the same taxes on a condo. Condos just seem like a hassle to me, and the fees can really hurt when the property is vacant.
you would of course be entitled to a copy of the HOA agreement . The listing agent should be able to answer your questions and you can probably just ask the listing agent to send the bylaws for your review. If they are lazy or disorganized, you might have to put the property under contract, but with a contingency on the HOA terms being acceptable. Yes you'll pay taxes as well, but they'll probably be quite a bit less than on a SFR.
I moved out of a condo and decided to rent it, found myself having issues that discourage me from looking at this as an investment in the future, primarily lack of control with a condo association:
1. other units were owner occupied and they strongly discouraged me renting out my unit and I am concerned they may add new rules to prevent it outright.
2. We've had large special assessments for work done to the building that I felt were not cost competitive.
I actually don't have much of an issue with HOA's, ultimately you need to budget for maintenance and building insurance, its the lack of control that is my big issue.
HOAs most certainly can and will put a cap on the amount of units that can be rented, or in some cases not allow rentals at all.
Condos I believe only make sense in certain markets where land is at a super premium (beachfront, islands, very large metros (NYC/SF) which are landlocked). Florida beachfront condos have made people a bundle, but also cost others a bundle when market collapsed.
Also, certain developments, it can be very difficult for buyers to get financing. Just something to be aware of.
Lots of really good points above, all correct. I started with condos in Manhattan and then went the other way in Los Angeles with a SFH partitioned into a duplex. Frankly, grass isn't greener on either side
I think if you have your game plan down like Brian (awesome offer on the evaluation criteria), then it doesn't matter much which you choose. Yes, condo boards can be insane, but frankly having to deal with gardeners, roof leaks and a bunch of other things that are part of the house experience are just as bad.
Best advice on condos - be friends with the board, act like a resident not an investor even if you don't live there, and invest in buildings that are more stable and have been around a while - new construction condos are the worst because it's a group of people all wanting to make their mark - those are the worst boards I've seen. Also agree condos make better sense in NYC and other dense markets.
@Kelley Brown....I actually prefer condos and townhouses to reduce my expenses. I also find that if I like a property...it makes searching for my next property all the more easier since I just have to wait for another unit in the complex to come up for sale.
You do want to make sure that the HOA though is being run by a good property management company, and not one that will have random assessments on your property. Having predictable HOA dues is very important.
Also you want to look at complexes that have either a low investor ratio, or a very high. You dont want to invest in one that is on the verge of losing it's FHA approval. Once a complex loses the ability to attract FHA buyers, the price will drop considerably. It is fine if that has already happened and you are getting a deal.
@Kelley B. my wife and I own 2 condos and 2 SFH. In summary the condos are in auto pilot. Rent comes in and expenses are low. The SFH require a bit of more work and we have higher reserves for them. One of the condos was recently acquired (last month). Yes, I had to order the by laws and the financial books. All together was $250 and it looks like a phone book. All stipulations, rules and financial health of the condo were included. It took 5-6 hours to review the whole thing. At the end, we pull the trigger as: 1. Appetite for condo housing is very high where we live in Miami (people love the clubhouse and amenities). 2. I'm licensed so I have better control of the acquisition and disposition of the units. 3. Contracting and rehabbing is done in-house. 4. We are diversified (not all properties are condos). 5. We are allowed to rent.
Due diligence is require for these puppies to work. We are closing on another condo unit this month.
Thanks everybody for the valuable input. Most of the condos around here are Apt. conversions so FHA condos are few and far between.
I believe that with some due diligence and good negotiating, we can make these things cash flow.
Condo fees. Cash flow killer all day long.
@Ali Boone Really.. have you read this thread? What about this one: http://www.biggerpockets.com/forums/311/topics/164031-condos-buy-and-hold-why-the-resentment.
If you can show me a condo for sale that cash flows in the positive after association fees, I certainly won't rule it out. Send one over anytime.
@Kelley B. and other's made some great points about by-laws, special assessments, rental restrictions... etc. Due diligence is key, and finding a good investor/agent in your area will be invaluable.
I was looking at a few condo's in South Florida yesterday, and my agent pointed out a clause that wouldn't allow me to rent one of them for the first year. Bullet. Dodged!
Best of luck sir, Happy New Year!
It may cash flow today, 6 months later could be a different story.
I know that condos can be a good business, in the right location, where you have a good management company, where owners are not anti-rental, where most units are owner occupied keeping within financing compliance, probably where the complex isn't full of amenities, tennis courts, pool, clubhouse, BBQ shelters, boat docks-ramps and gardens as such is simply more maintenance later on.
If condos are common for the area, financing should be available, if sales are thin, you may have problems getting comps, that means few financing alternatives.
I have immediate family that bought a condo down at the lake (like why??? when you can use my cabin????) anyway, they loved it, the cabin doesn't have a pool or tennis courts, LOL. Then they started getting assessments and maintenance bills. They tried selling it, the company they bought it from offered 70 cents on the dollar! No, I didn't ever say "I told you so".
Question was asked concerning where the HOA has a POA.....there may be a POA for some issue, but I've never seen one.
The By-Laws govern the corporation, they may be a profit or non-profit incorporated in the state.
You need to know state law concerning the operations of a corporate entity. Each entity will elect officers of the corporation and they will have a Board of Directors. Certain powers are granted by statute to officers as well as by the By-Laws,
First thing I ask about board members is what is/was their profession? That clues you into their level of education, their social status (I know that isn't politically correct, but face it) their economic/financial position. This can tell you a lot, if they really understand liability issues, legal concepts, their ability to communicate with others, interact with others and if they may be prone to be financially prudent.
The corporation has "share holders" or "owners" who have voting rights, they vote in the board members to conduct the day to day business and elect officers, in some cases the board may elect officers. The owners have the power under state law to remove officers or directors.
HOAs are political animals, often you'll find the same persons have been on the Board for years, often others don't want the job and say let Joe do it again. Joe can be horrible at what he does or very efficient. Being human, Joe likes some more than others. Joe can also act as if he owns the whole place, setting rules within his powers or getting the Board to act as he desires. So, you need to meet Joe and figure out his views and personality toward his duties, IMO.
The Board has limitations, or should, major expenses should be voted on by the owners, but this can be left up to the Board (dangerous) or a management company (more dangerous).
Contracts can be let (given) to related parties, subsidiaries or just the good ole boys who can stick it to the HOA. You can find issues of self dealing, it may take the majority of the owners to object. So, if Joe's brother is a contractor, watch out.
You'll find that the developer of the complex will often sell and retain management rights. The money isn't in selling the condos, it's in the ongoing management forever. These management companies may have other companies or other arrangements where whatever got fixed has a "fee" back to the management company. Just be aware.
Look too at expenses of the Board members or officers. Some take convention trips to "learn the ropes" or they may have other expenses covered, dinners at meetings and such, this will tell you if they receive compensations and how financially prudent they may be.
Look at maintenance assessments over a few years and you can see who usually gets the jobs, if the amounts are reasonable, fine, if they are higher than they should be, might ask why.
Anyway, back to the By-Laws. You won't see a POA, you need to look at the powers granted to each officer and the Board and the voting rights of the owners. Look to the powers granted to any management company and its management contract. Notice what acts must be voted on by the owners, if there is any "cut-off" financial amount the Board is under, where they can only spend so much without a vote of owners. If there is a cut-off, might look at maintenance jobs near the same time that were broken down into separate contracts that exceeded the limitations, that's how they cheat on the owner's voting.
Corporate owned units: If they rent units, you'll be in competition with them.
Look for listing requirements, if you are to sell, do they get the listing? And, do they hold units for sale? If so, you're in competition again and you might be holding that unit for some time!
There are too many tricks to touch on, this is long enough already.
Good advice above about making friends with the PM and directors! Act like an owner, not a landlord!
Same advice goes for smaller developments, you may find none of the owners have any legal or RE experience, hiring such out as needed.
Non-profit HOAs, doesn't always mean that officers may not be paid or have expenses covered or that they don't "make" money, it's simply under different accounting rules and amounts retained being set aside for operations. Not sure if you can tell if they are holding excess funds, but that is another issue as to their compliance and perhaps over charging owners.
I assisted an HOA (not saying how the wrangled me into that) but we removed an old Joe and the Board at a special meeting called for their removal, state law will set out the procedures, but each considered for removal was barred from voting on that matter, so one at a time they were removed, a nasty affair!
BTW, the By-Laws, the Minutes of Meetings and the Books of the corporation are open to all owners with reasonable notice, by law, any reluctance to give or allow you and the owner to examine the records should be a red flag that something is cooking!
So, I'm a little anti-condo, it's due to the scads of them at the lake where it's more common for poor management and tricks pulled. There are some decent developments that are well managed, few and far in between, but there are some.
Good luck! :)
@Bill Gulley Thanks for the download. Valuable info there.
Condos are good in the sense that maintenance is very straightforward.
I have flipped a few condos and currently have a few as rentals that are cash cows.
Every HOA is different, do your due diligence.
Another perk about HOAs is that many will ask to screen your tenants for you before allowing you to rent to them. Generally, this comes at a cost of about $100-$200 and includes credit check, background check, employment verification, etc (find out your HOA's screening and approval procedure). This can be a HUGE plus, as it makes screening your own tenants a little easier, and it is usually the tenant who pays this fee.
I have had a roof leak that resulted in completely destroying new wood floor in a condo that I flipped and was under contract at the time. The HOA payed for all the repairs, including new drywall. This would simply never happen with a SFR. With a condo, you are only responsible for maintaining what is between your 4 walls. Exterior insurance is usually included. This makes maintenance A LOT simpler, and I think justifies the HOA fee. Also, a lot of HOAs have maintenance personnel that do routine maintenance for the condo. Befriend these guys, they farm condos like investors farm zip codes, and will likely welcome any opportunity to perform repairs on your unit. Because their reputation around the condo is important to them, they will guarantee their work.
Kelley, given your age, there is a niche you might want to consider. 55+ retirement condos are a great niche market (here in South Florida, anyway). I purchase these in my dad's name all the time to flip. They are a lot less competitive, as you need to be 55+ to purchase, and generally are not well maintained. They also tend to have lower taxes, as they are exempt from paying school-associated taxes. You can perform a simple rehab and easily be the nicest unit in the building (again, my market). Older tenants seem to cause less damage and stay longer as well, in my experience. A well executed condo rental could be a great low-maintenance asset.
Best of luck
Tons of great advice on this thread! My business partner and I went the low pricepoint route and bought 21 condos in the San Bernardino, CA area between 2011 and 2013. We picked them up between $12k-$55k (yes, even in California) and they rent out from $625-$1025. These purchase prices represented about 20% of what they sold for at the peak of the market. Already, most are worth 2-3 times what we paid for them. The game plan is to cash flow them until we hit the peak of the next upswing.
The lower end condos tend to take a huge price hit in a down swing because the banks stop financing them and the only buyers are cash buyers. Once the market recovers, the banks start lending again, financed buyers come back in, and prices see a jump. Overall, we're getting a cap rate around 8-9%. Some of the condos perform better than others. Some HOA's are more of a hassle to deal with than others. Usually, problems with HOA's sort themselves out over time because the board members change or the management company changes. This usually happens when enough owners get angry enough at an unreasonable board to take the necessary steps to oust the offensive board members.
Most of the condos are very passive (especially the 55+ ones) and we just collect our checks and get the occasional request for small repairs. Others have inherited tenants that are the issue and require more time. Several board members at one of our condo associations are ant-tenant and have harrassed our tenants to the point that we had two break their leases and leave early. We're taking them to Small Claims Court for lost rent so we'll see if that helps our problem. I expect that the problem will go away when the other owners out the board, hopefully this next year.
Yes, HOA's can be a huge problem but I think the cash flow play and the appreciation make up for it. (We haven't acquired any more condos since the prices went up.)
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