Investing in condos

10 Replies

I've heard a few people here mention their preferences for SFH's over condos as investments. And I believe some folks have justified this preference as a matter of control over their property--i.e., while the condo-owner is in full control of the unit, an association controls the building, etc. I imagine it is troubling to some investors when there is a special assessment, or when they simply do not like the building management.

I'm wondering about any other reasons for avoiding condos (perhaps issues with neighbors?). Also, I'd be interested to hear from folks who prefer to have condos in their portfolios.

Thanks!

What I am seeing in doing some investigating is that even though the unit prices are cheap, the HOA fees are 1/3 to 1/2 of the current rental income for the units I have seen that are already rentals. I am not finding ones that will cash flow even on a 30 year note when you factor in taxes, insurance, vacancy, maintenance, property management, and CapEx.

@Damien Christian I like condos despite the HOAs. I buy condos with low HOA fees (less than $150), and I always budget double the fee in the event there's an increase or special assessment. Condos in my area are usually convenient to major highways and/or businesses so they're easy to rent. The HOAs I bought into include water in the dues, and it always helps to offer tenants a free utility. The HOAs also hold a master insurance policy, so my individual policy is usually pretty inexpensive. I like having little to no exterior responsibility like a SFH, and the taxes on the two that I own are relatively inexpensive. I plan to add more to my portfolio in the future - the biggest obstacle for me is diversifying projects in my area. I'd love to own every unit in the association I just bought into because of the cash flow, but I know better than to own more than two units in any association.

Good luck to you!

We bought our first and only condo a few years ago, and felt comfortable doing so as the owners had all been assessed $16,500 per unit 3 years previously for siding and roof and they were building up reserves since the assessment so it would not happen again.  Our unit was recently rehabbed and it was a short sale at a great price, so we took the risk.  The reason we will not be buying another condo is that we've learned the Board cannot be trusted to actually care the same way you do about finances.  They want to take out loans for upgrading the pool house, make questionable decisions regarding repairs, like paying someone thousands to remove one downed tree after a storm when it likely could have been roped off and removed the next week for hundreds instead, but left a huge hole in the ground right by the sidewalk for weeks, even after being reported, that could have easily led to a huge lawsuit, and they tend to have pet projects they want done that don't make sense for a condo that needs to concentrate on building reserves, and they raise fees each year I've been there.       

I've got a bunch of condo's.  You really need to study the reserves before you buy and actually talk to the management company and/or a Board member about any upcoming assessments.  Also, find out the investor ratio.  Too many investors limits financing options and will result in problems selling.  I also ask how many units are behind in paying their fee's.  Walk around.  Is it nicely maintained?  What type of cars are parked there?  Are people "hanging around" during work hours? I like not having to worry about any exterior issues.   Many here don't like condo's and they probably have good reason.  I like them b/c they are easy to manage.  If you buy "right" and do your homework, condo's are fine - may not have the same return as SFD or Multi, but don't have some of the headaches either.

@Ursula B.  

Two questions since you are doing condos.

1) What do you figure for maintenance and CapEx (special assessments mostly I guess in Condos).

2) Why no more than two units in a community? Is it to reduce the exposure to special assessments or some other reason? I am thinking owning several units in a complex may make it easier to get along with the HOA board. Do you get into the HOA politics at all or just ride under the radar?

@Paul Ewing I rehab and repair upfront, and buy a home warranty the first year. After that, I budget $1/sq ft for maintenance. I've been lucky in that the only special assessment I've seen is one that was already pending when I bought the place, so the seller paid it. I budget double the HOA dues in the event of an increase and/or special assessment. One association has gone up on the dues 5 times in the 8 years I've owned the unit.

Two reasons why I limit myself to two units per association: Potential for special assessments, and the potential for a self-managed HOA. One impacts cash flow, the other impacts appreciation/equity (IMHO).

@Paul Ewing That's interesting that you mentioned not being able to find cash flowing condos. The reason I started this thread is that I am "seeing" some condos that cash flow...and in some cases, they cashflow better than SFH's. I say "seeing," in quotes, because I ran the numbers based on listings only, and I have not actually seen the properties yet. Therefore, my assumptions might be wrong.

@Ursula B.  Sounds like a good strategy. And I agree that the small amount of responsibility, with respect to the exterior, is appealing. I don't own condos as investment properties; but I own the one I live in. And I suspect that the aspects of condo living that I enjoy as a homeowner might also be ones that would work as an investor.

@Lynn M.  That sounds frustrating regarding the board! Point noted.

@Cheryl C.  Interesting. About the reserves: are you analyzing reserves after making an offer, as part of due diligence? Or do you acquire information about the reserves and management prior to the offer? I'm just wondering about the actual availability of that type of financial information before a bid is on the table.

Besides the financial solvency of the HOA, you show also review...

1.  Rules of the condos that may restrict renting, pets, outside changes to the unit including dish tv antennas, propane tanks, trash cans, etc.

2.  Financing rules restrict the percentage of renters in a complex, number of units owned by one person, etc.  These financing rules could make re-selling difficult.

3. All condos had to be re-certified by FHA, make sure that was done to facilitate FHA buyers. For many condos this is the entry point into home buying and many of the entry buyers need FHA to purchase because of the 3.5% down payment.

4.  Check out the maintenance at the complex.  Some, particularly with a lot of absentee owners try to operate on the cheap, and defer maintenance 

@Damien Christian  

In Virginia, buyers have to be given the condo/hoa docs post contract. Buyers then have a 3(?) day kick-out period if their review of the docs is unacceptable for any reason whatsoever. The clock starts running when the docs are received by the buyer. The document package contains financials as well as covenants and restrictions, rules, minutes of Board meetings, etc. Finding whether a particular development is FHA approved is easy to do online through HUD.com

I go a little further in contacting management with additional questions; ex. upcoming potential assessments that have not been formally proposed, etc.

Some condos have a restriction as to the number of non-owner occupied units. This is to protect financing options and maintain HUD approval - a plus in my mind.

I learned this stuff years ago the hard way - maybe some here can avoid my mistakes.  There are some developments where I have as many as 4 units.  I make an effort to have a good relationship with management. 

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