Condo that cashflows GREAT-but aren't condos scary investments?

13 Replies

Hey All, I'm currently wholesaling in CT so I can save to get a down payment for some rental properties. I got a call on a mailing I did from a guy with a condo that is cashflowing close to the 2% rule ($50K and renting at $950) I started looking at comps and see there are plenty that realtors are promoting as "Investor Heaven!". If you know CT then you know it's really difficult to find anything at the 1% rule much less the 2% rule. This would kill 2 birds with one stone - 1 - I can afford it and 2 - it cashflows well! The man that called me from my mailing has been renting this one for 9 years. So it's safe to say at first glance.

MY QUESTION IS: Am I crazy to buy a condo for an investment? I've heard so many horror stories about HOAs (Josh Dorkin would not approve!) Any advice?

I don't like condos, but have a handful of awesome townhouse rentals. No exterior maintenance, no landscaping, just a monthly HOA payment. I have one with a bunch of men hating old bags on the HOA. they hate my tenant and send me nasty letters every other month. I also find a way around their nonsense. Other than that property, all the others are excellent and I would love to own more.

I don't like condos because you only own a box of air. There will be someone above or below, or both. Townhouses have neighbors, but nobody above or below because you own the land.

@Kim Handelman

Condos 100% depend on if they have financing available on them. If there are too many investors (over 50%) you can't get a Fannie/Freddie/HUD loan. Therefore it would only lead to purchases with cash or a portfolio lender. This drives prices way down. Sounds like that's whats happening in this community.

@Aaron Mazzrillo

That's not true regarding condos. Condos are a type of ownership, not a type of property. About 1 mile from where I'm sitting right now there is a development of 20 condos, $1M/ea, all single detached and beautiful. They're set up as condos so that the exterior is extremely well maintained therefore ensuring the community stays beautiful for essentially forever. Even if one unit become vacant, you'd never even know it since the condo association is going to continue to take care of it. It's very hard to have a rundown condo community unless the condo association doesn't know what it's doing or the ownership stops paying dues. 

The first of many "millionaires from real estate investing" clients I worked with,  owns nothing but condominiums.  They range in value from 35,000 to 7,000,000 dollars.  He and his wife live in a "condo" worth 5,250,000.  They have no other property types in their holdings. 

This sounds like it meets your present investing capacities AND it appears to be a decent investment based on the fundamentals as well.  I would buy it based on those particulars. 

Thank you all for your input. @Mark Gallagher the financing thing could be a deal breaker. I currently have about $20K available. I was hoping to put $10K down and get regular bank financing and then the other 10K in a slush fund. I'll have to look into private lending but that'll cut into cashflow. Ahhh, I learn something new every day! Thanks again.

@Kim Handelman

It's still possible to get a loan, but you have to be careful about your exit strategy. I've seen a lot of these complexes just collapse in values, and it will take a very long time for them to rebound. 

I own a condo like this as a second home, so I'm not overly concerned with the value as I plan on holding it "forever" - but if you want to cash out refi, or sell it, it is something to be concerned with.

I was just thinking that. I'd be buying with no equity. CT has still not recovered but you never know, it could go down even further. Thanks for pointing this out. I would have to get it pretty low to feel like I could cash out if I needed to and not lose my shirt.

I like condos. I own one now. Hoa does cut into cash flow but depending how the numbers work, it could still be a deal. Crunch your numbers and see if this would be a worth-it investments.

Condos are still popular due to exterior up keep not being on the owner. Hopefully you're in a great rental market in your part of the state and it seems like you'd have a great long term tenant in place.

I have condo, my general opinion is that SFR are better.

Things to consider:

Some HOA are good, some are bad.

It's hard to tell which yours will be until you get moved in.

Can be more restrictions on renting than other units

You could be at the mercy of how the HOA is run

HOA fee is a non-equity building fee that WILL vary over time

@Kim Handelman My only experience with condos was a condo i owned in Hawaii for a number of years. This was during the downturn 2007-2010, year after year my HOA fee went up by $100/month and the rent went down until I was losing money every month. When I sold that place the HOA fee was $450/month and set to continue to increase.

This being my only experience, I know it isn't an indication of how all condo deals go, there are plenty of people doing well with them. I won't purchase another condo myself because of this, HOA fee's are an expense I can't control and there are already enough uncertainties in owning rental properties.

I own three condos in Poughkeepsie, bought cash before I knew of strategy. They cash flow great, $1500 month and I did rehabs to all of them when I first bought them, so I haven't had any problems since. Problem is id like to cash out, banks by me don't have condo investor option on cash out refi. Unfortunately they bring in money but it's hard to leverage. I probably will be forced to sell one or all to continue to grow.  

Condo fees and special assessments usually cause condos to be negative cash flow in the long term. In addition there is very little up side in appreciation. The market is flooded and will remain that way long term in most areas.

Check the real numbers and you will probably see negative cash flow long term.

I currently own 2 condos, and Ive owned 2 others in the past. They certainly come with risks particular to the asset class, but doesnt every property? Sure you may have the risk of a special assessment say...but a SFH has the risk of needing the roof replaced. So as long as you understand the risks/rewards of condo investing, I do not think there is anything to be scared of.

I would like to point out though that the market place can have an impact on the risks/rewards. For instance here in the DC area condos are very desirable...thus less risk. However if you move just slightly north to Baltimore,  condos are less desirable thus have increased risks. So the actual culture of the city and how it's residents perceive condos is something to consider.