I'm curious what other buy and hold investors think about condo rentals in good areas vs. 2-4 units in worse areas of San Diego CA. What would you rather have? Cash flow would probably be slightly better on the units in the worse areas. But tenants likely better in the condos in the better areas.
You've really gotta get over that perception of tenants being better.
Condos scare the hell out of me for numerous reasons. What if the building reaches it's limit on owner occupy and you can't rent it any more? What if HOA fees go up 100% because people aren't paying? What if you can't sell the unit long term because the occupancy is too low for conventional funding to the buyer?
Condos just have a ton of risk, risk you can do very little to control or mitigate. I'll stick to my nice C class areas with quality blue collar tenants.
Thanks. Those are good points about condos. Although I have never seen a condo project where they restrict renting and I have looked at hundreds of CC&R's. That is more of a myth than reality IMO, 99% of CC&R's don't restrict renting of units & you'll know that by reading them before you buy.
Hoa due rises are a risk. But you can also run your numbers going into it and see if it would still be good cash flow if hoa dues went up $100-$200/mo. Most will not rise more than that much over a 10 year period. I have also known lots of condo projects to not have had a special assessment in over 20 yrs.
Condos prices are also more depressed in price right now than SFR's or units b/c of the financing issues associated with them. As the housing market stabilizes the lenders will get more aggressive with condo financing IMO.
That is true. Condo renters are not better people. They don't care about you're property anymore. The bad area units may come up in the world. I'd vote against condo and for a tangible return (cashflow)
Also I see you are Utah. I think the condo dynamics are different in places like Utah vs. say Coastal CA, Seattle, Boston, etc... In expensive areas, condos become the defacto first time home buyer home of choice because SFR's are so out of reach price wise. I would never buy condos in a place like Utah or in the Midwest because SFR's are so comparably affordable, first time home buyers in those areas still will always buy SFR's. SFR's are not comparably affordable in Coastal CA or say Boston.
Condo renter may not be better people, but they have better credit scores and there will likely not be gang activity in a good part of town where the condo is. You can also rent them in a second because they are in such desirable, safe parts of town & likely turnover less. Lots of money lost in turnover with rentals. Less of a "headache" in terms of management IMO.
But I do hear you about units not having the hoa...that is certainly a plus.
I've started buying more condos. Nathan's comments cover my reasons for concern. I ultimately decided that the return on my condos is worth the risk. I am in the DC market so that may make a difference. First, I am able to buy at less than 30% of tax assessed value. Second, my rehab is generally painting and cleaning. In my area there are no condo communities that meet the FHA requirements (unfortunate but true). Regarding owner occupancy limits, I am going in as an investor. If there is a limit on investors in the bylaws, I don't buy. If a subsequent owner occupancy bylaw is proposed, I make it clear that I want to be grandfathered in. Regarding tenants, I have class A, B, and C properties. I've had great tenants in my class C and not so great in my class A and vice versa. I think that success with tenants is careful screening and clearly defined expectations. I've learned the hard way, but . . . I have learned.
Thanks T Ferrante...DC is more of a good comparison to San Diego in terms of market dynamics. You make a good point about rehab too. The condos generally do not need much rehab.
In my condos, the first person who walks in fills out an application and generally becomes the new tenant. The second person who comes in, usually fills out an application as a back up.
My apartments also rent quickly (the best school in the city is across the street) but have more turnover than the condos. My single family houses have the greatest maintenance expense but the least turnover.
My comments about condos are always going to be the same – run the other direction! I've owned a couple out of the many many properties I've owned and I will not own another. There are so many problems that can develop that you are not prepared for. Your answers to many of your responses sounds like you are already leaning towards the condos so it may be hard to change your mind. I have been around a lot of condo projects and I've never seen one that has run efficiently and not had special assessments eventually come up. These are not inexpensive assessments. They would be for roofs, new carports, or the asphalt/concrete driveways and parking areas.
Many condos are now owned by renters and the landlords are notorious for not paying their maintenance fee. Someone has to make up this fee or the swimming pool turns into a beautiful flower garden.
In all the rentals that I've had, I would have a hard time in advance determining who are the better people and who are not. Good luck on your decision, especially if you select condos. Rich
Thanks Rich for your excellent comments. But one thing to point out... you do have hoa dues on condos and you may or may not have a special assessment every 5-10 yrs. But condos you will never have to pay out of your pocket to:
-replace the roof
-paint the exterior
-keep up the landscaping
....units you will have to pay for all this.
Also, water/garbage bill is included in the hoa with condos where you have to pay that with units. And the hoa polices the area (doesn't allow large dogs, or people to park a ton of cars & keep junk around like they will on units).
I do myself personally live in a condo right now.
But I hear you on units, I do like them better all things being equal. But in my area they are in so much worse areas of town than condos for similar price per door. I would personally live where I invest in condos, I would not personally live where I would buy units. So guess there is just a safety factor for me because I know what the tenant will be like since I have rented in these areas myself.
Some of the worst nightmare stories I've heard form long term investors I know (that favor SFR's now) are from 4-plex's they owned in bad parts of San Bernardino CA on blocks with mostly apartments. They all said it was a nightmare management situation with endless turnover, drug activity, etc... And they sucked up so much of their time and energy that they vowed to never buy anything but single families homes again.
You weren't comparing SFRs. I agree that they are by far the best, imo. I owned a 13 unit in Montclair at one time. Close to San Bernardino. You have to stay on top of those properties. I was in FL until past June. Every condo I looked at had problems with the HOA that were NOT fixable imo. I rented one when I first moved there. Nice 2-2 fully furnished and rented for $800 while we found a home. Because some units were never finished before Bust, and so many walked away the poor owner had $500 monthly fee! He didn't do anything wrong, but caught in an unfixable market. Other owners in complex were so far underwater they refused to pay fee. Assn didn' want to foreclose because the pmt was so much higher than condo was worth. Lots of bad things.
My viewpoint is VERY scewed due to experience. Your view may be the opposite because you live in one. Good luck. Rich.
Rich...Florida is also ground zero for a massive over supply of condos. San Diego doesn't have near the over supply problem of FL & it's harder to add more supply here. In fact supply is very tight here right now and I'm starting to kick myself for not buying a condo a could of had for $100k last year that is now $130k!
And it isn't simple to just invest in SFR rentals in San Diego as the cheapest houses in the ghetto here are $250k and get $1,650 in rent. Not very good numbers. Where a condo can be had in a better area for $90k and get $1,100 in rent.
Rob – I have a saying I'm going to use quite a bit in my presentation at the BP seminar in Denver: "widen your horizons and expand your vision". In your case, it might mean to look outside of your area to areas that are more median price type areas. I can see you are sold on condos so I will bow out of this thread now. Good luck. Rich
Hi Rich... Just playing devils advocate for condos for debate. I'm definitely willing to look out of state. I have 1 SFR rental out of state right now. What areas do you recommend? I'm thinking of checking out Phoenix and Vegas because they are pretty close to San Diego & have prices below construction cost. Thanks for your responses:)!
Rob, here are some blog entries by Jeff Brown on investing in San Diego vs. other places. I know he also likes duplexes better than condos.
Jeff is speaking at the summit in Denver. Are you coming?
I spoke with a lender a couple weeks ago about purchasing a condo in Vegas and he said that I would have a very hard time finding a lender to loan on a condo in Vegas.
Jesse...I would NOT be buying condos in Vegas or Phoenix...ONLY SFR's out of state for sure. The only condos I would buy would be good areas of San Diego.
Jon...just ready Jeff's post on buying out of state.... Texas. I can't say I agree with him. I would go Vegas/Phoenix/Orlando before Texas any day. I think BECAUSE the prices have been hit harder in those places makes it a reason to go there. Prices are way below construction costs and those are still cities people will still keep moving to for the foreseeable future. Texas has a terribly high cash flow killing property tax rate and has never had any pop in appreciation and never will. And Texas hasn't been hit as hard in price so your not buying into a distressed market. If I was going to buy out of state, I would rather go to the FORMER bubble markets that have crashed (AZ, FL NV), get in below construction costs, get cash flow with low property taxes (NV/AZ have low property taxes...FL does not), and take a chance that they recover at least back to a little ABOVE construction costs.
A good healthy debate and contrast among markets.
Rob, I agree with you in prime MSA's in California condo's are attractive as they represent a lower barrier of entry into ownership and typically allows for potential positive cash flow. For the record, that is sort of how condo's are suppose to work in most markets. Florida got a little egregious with this concept and over built and over charged.
I think some of the statements you are making have a very wide stroke. No two condo projects will be the same. Certainly as long as you read the bi-laws and it does not have preventive language for owning the unit for rental purposes is one check mark on the list. Reviewing the operating budget will give you an idea of risk for special assessments and potential fee hikes. Certainly, if you plan for it you will be OK. Throw unit occupancy in there for budget and understanding purposes which also will lead to indications of the stability of the purchase price and ownership type ratios.
Ethan points out some less controllable events. Such as the ratio of investors in the complex now and into the future. This would affect the available finance. You can ask if the complex is warranted and approved with Fannie/Freddie for finance, typically the management knows. Lenders will typically limit their exposure in contiguous complexes to less than 15%, something to also be mindful of. Again, you don't have a crystal-ball to determine what it looks like 5 years from now. Perhaps having a back up finance plan via seller fiance of some kind is not a bad idea.
In terms of condo finance coming back. There is still some finance available today but in limited restricted supply. It will not return to the levels as it once was. Lenders and insurers have learned the lessens over the last several years from their losses and their problems. Fannie/Freddie and FHA all have increased their underwriting guidelines on purpose to tighten the flow of condo's into their mortgage pools. Again while California and some other states may have some better functioning condo markets, the lessens learned stem from the broad picture of the whole nation. There might be potential for a portfolio investor such as a local bank or alike which will be a little more forgiving to the specific geography oppose to the big boys. Further and even more simply, there is more inherent risk in condo finance than in other types of residential real estate due to the CC&R's. But as I stated, having an potential backup plan or working with or knowing a good lender in your area may help further filter potential complex's to own in your portfolio.
I agree with your logic on the depressed areas to own in. Places such as Maricopa county in AZ and Vegas along with some other MSA's have potential to take advantage of the depressed sale prices while presenting very nice cash flow opportunities. Cities are always big places and as such, there is always good and bad. There is a butt for every seat, you just have to have planned right and executed better.
My apologies to the above reference to "Ethan"; I meant
Nathan. Sorry Nathan.
If I could've voted more than once for Dion's post, I certainly would've. Many of the concerns for owning condos were explained very eloquently and in my opinion 100% correct. I would not leave Texas out of any investment discussion for so many reasons. Rich
I own 1 rental SFR and 3 rental condos in different complexes. I will not buy another rental condo. I absolutely HATE going to those damn HOA meetings and finding out how many homeowners aren't paying their dues so we have to either increase the dues for everyone else or postpone maintenance.
Deed restrictions on rentals are very common and a real double-edged sword...no restrictions are great for investors until nobody can get a loan in the complex thus driving down values. I don't care to much about this since I plan to own mine for a long time but the HOA delinquencies are very problematic.
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