How to win with Condos?

23 Replies

Hello!! First and foremost, I want to say thank you for allowing me to be part of the BP community. This is my first post here and it’s centered around using condos as investment property. I just wanted to pick the community brain and figure out is there any successful strategies to owning condos. The reason I am asking because I purchased my first one as investment property. Also, everything I read about condos the information is negative. To me, I know that someone has to be doing well when it comes using condos as rental properties as an investor. I just want some insight and perspectives. Thanks for the help!
@Gregory L Hobbs I'm in a similar situation. Since my area is expensive, I'm planning to start with 1 bedroom apartments then scale. We don't hear much about this sort of investment but we need something to start. I would love to see what more experienced investors has to say about this.

You don't hear much because appreciation on a condo sucks compared to SFR, or multi-family. It's said a thousand times "you make your money when you purchase" and with condo's is really important. Don't over pay for property. Compare condo's in the same neighborhood and check out the quality of rehab being done.

Condos can be great for winter time projects, as you aren't responsible for maintaining the outside. So fix up the inside and not be slowed down having to wait for it to warm up for outdoor work.

Also, to the contrary, condos around here have appreciated quite a bit! All depends on your area, but a friend's condo has gone up from $240k to almost $350 in the last 5 years. That may or may not be as much as other properties, but that's almost 50% more than when they purchased it.

As far as rentals, they can be difficult depending on your HOA, location, and market. It can be an attractive thing though, if you can pass on the HOA fee to the renter (obviously this depends on how much that fee is). I've heard both good and bad, but people who have bad experiences generally get really up in arms about it!

HOA can be corrupt, depends on who manages it. Never buy a condo in a complex where 1 owner controls more than 50% of the units (thus the HOA). I know people made a killing by passing cost to other owners through HOA (sign contract with higher than normal cost to fix HOA related items, but have side deal to remodel their own units at below market price). Also, avoid condo with high HOA fees.

I'm in the beginning research stages of purchasing a rental property as well. I'm on the seacoast where everything is very expressive. Condos seemed like a attractive choice to me. I too have been seeing a good amount of negative reactions when it comes to investing in a condo, making me a little hesitant on pulling the trigger. 

I know i want to start investing, but that 20% down can be a killer on MFH in my area. 

If you come across any info regarding condo investing, I would love to collaborate more on the topic.

KG

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@Gregory L Hobbs I have been through enough real estate cycles to see that condos are the first to lose value and the last to recover in value. Dealing with condo boards can be difficult, because they usually dislike landlords and have too much control over what you do. Some condos prohibit renting, so verify that before buying a unit for a rental. Most successful condo landlords sit on the condo board to control the direction. The other factor is expenses on condos are very high due to the association fee. Yes "they take care of all the exterior maintenance",  but at a steep cost that cuts into cash flow.

A condos is very much like an apartment from the tenants perspective. It is just multifamily at the end of the day. From a landlords perspective it is totally different. You only own one unit, so you lose all economies of scale. On top of that with the association, you have no control.

I know people view it as the low cost way to get started, but there are other (better) ways to start with less money in my opinion.

There was a BP podcast that had a very successful condo investor, but they purchased dirt cheap at the bottom of the crash and had a bunch of units. Buying condos at the top of the market is dangerous. 

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@Jaron Walling Thanks for the insight! That's what I have been reading but I'm not sure how much does it sucks when you compare to SFRs or Multi-Families. 

@Account Closed Yeah that's true too but it's hard to figure out the top. Also, thanks for providing the caveat and it makes sense that why some investors might not prefer condos. 

@Gregory L Hobbs The Condo versus Single family is a never ending debate on BP. At the end of the day they both have advantages and disadvantages depending on your investment criteria and the type of portfolio you have, some people even have both products in their portfolio.

I invest in Condos as a main part of my portfolio, It started with my first purchase after college I bought condo to live in and rented it and continued to acquire additional properties. 

Location is one of the main must haves in Condo investing, those that discuss Condos not appreciating or talking about Condos being a bad investment may be buying in bad areas, small towns, or the wrong type of product. I only buy in major metropolitan cities, Los Angeles, Orange County, CA, Washington, DC, and Arlington/Alexandria, VA. I also Do Not buy the typical C- and D class properties chasing higher cash flow, those properties will not appreciate at a good rate, I'm getting cash flow between $200-$300 per door on Class A and Class B condos, this has worked well for me and I get great appreciation.

Some of the other thinks I look for beside being in large major metropolitan cities are:

1) Choose condo buildings that are low-rise or mid-size, Since the HOA dues contain cost to maintain the common areas, the less common area the less the dues.

2) Make sure the HOA Board reflects a minimum of 12 month leases in the bylaws, this means they've already addressed renters and have agreed on the line in the sand.

3) make sure you're on the Board or at the very least attend every meeting to vote on this that may change your investment.

4) Only do major metropolitan cities to increase your applicant pool, I've been doing this since 2003 and I've never had an empty unit more than 1 month.

5) Don't try to compete with the large apartment buildings with large pools and gyms. If you follow the aforementioned metrics of staying with small buildings to minimize cost, a small building with a pool is a waste of your money, you want the tenant that doesn't use the pool and doesn't want to pay the extra $100 a month at the complex down the street from you that has a pool.

6) If you can purchase and move-in as an Owner Occupant for the first 1-2 years that works out great as you can get OO financing and rate which helps with your long-term cash flow.

There are many more, these are the basics that I go by as a starting point.   

@Joe Splitrock Thanks! that makes sense. I guess the best way is to be involved with the board in some way, shape and or form? Yeah, I know my HOA is a whopping $200. I'm trying to include that fee into my rent.

If you don't mind sharing, what other low-cost ways to get started? 

ok, I will look through the Podcast and see if I can find that episode. 

@Account Closed ok that makes sense.  That's great news that some people actually have had success with the appreciation side of condos.  I wish a lot more information like this was passed around to show the upside to condos. 

Originally posted by @Gregory L Hobbs :

@Joe Splitrock Thanks! that makes sense. I guess the best way is to be involved with the board in some way, shape and or form? Yeah, I know my HOA is a whopping $200. I'm trying to include that fee into my rent.

If you don't mind sharing, what other low-cost ways to get started? 

ok, I will look through the Podcast and see if I can find that episode. 

You can buy in a different market or buy with a partner. I would rather have a 50/50 partnership on a duplex than 100% of a condo. In the duplex deal, there is only one person to work through differences on. A condo has a whole building!

@Ray Johnson has some great tips there on condo investing.  A couple more I might add are

If the property is in the suburbs, focus on at least 2 bedroom units, in the city 1 bedrooms and studios are acceptable.

Make sure to look into the buildings history of special assessments and make sure that the cash reserves seem like a logical amount for the size of the building.

If the condo is in the suburbs, be well aware of competition from near bye apartment buildings, particularly ones with dynamic pricing. What that means is when they have a lot of vacant units, they drop their rents to get them filled, which can kill your rent if you are vacant at the same time.

@Russell Brazil is spot on @Gregory L Hobbs He definitely pointed out something that I missed and it's a great point to consider, that's the concept of being able to use a 1 Bedroom in your portfolio if the SFR and 2/3 bedroom competition is too strong where you're looking. I have three 1 Bedroom Condos in my portfolio, all are in areas like the Adams Morgan neighborhood of Washington DC, or the Irvine Business District, The Adams Morgan neighborhood is sought out by young up and coming professionals in DC who don't see paying $2,150 a month for a 1 bedroom condo as an issue. While it's not my favorite product mix, following Russel's advice can make a difference in "How to win with condos".

@Gregory L Hobbs There are some good points made by folks here. I think in general, people would prefer to live in a house. 

People will live in a condo when they get priced out of houses, or there is something special about the location of the condo.

So in general I think condos are better purchases in populated areas, like @Ray Johnson mentioned. 

You have to be careful of the type of condo and the location. You probably don't want a studio condo in a rural area, but it might do very well at the beach or an urban job center or college area.  

My experience in renting them in an urban area near the beach is you can get good tenants and the maintenance costs are low. The HOA costs are there, but they are at least predictable, except for sometime they have special assessments.

Just make sure the HOA is renter friendly.

Ditto Ray Johnson,  and I'd add:  If you have a W-2 job that keeps you pretty busy,  condos are a bit less work,  because as stated,  exterior maintenance is done for you.  Dealing with houses is for people with managers or people with some time to spare.

We own 5 2 BR and 3 1 BR condos, in a Chicago suburb with excellent schools. We also own 2 3-BR duplexes. On paper the 1 BR do the best ROI, we rent for $975 two TINY (525 sf) condos, nicely remodeled, and people jump at the chance to live in Naperville for under $1000. There's a couple other complexes you can get in that cheap, but they are sketchy and ours are not. I will say turnover is pretty high, especially couples realize it's pretty close quarters. They're the size of a 2 car garage. But I will get 20 people or more in a one hour open house and 10 will apply. They've never gone even a week without being re-rented.

As far as who allows rentals and who doesn't,  that is subject to constant change,  always confirm with management before making an offer.  Listing may say rentals allowed but in reality  it's capped and you're not going to be able to rent anytime soon,  or you have to live there for two years first, or whatever.

Ask around about the board/management company.  Some of them are freaking nightmares!  I could tell some stories,  mostly from a vacation condo we owned in Park City, Utah.   Go to meetings, try to get on the board,  at least make your voice heard.  I have successfully fought some nonsense like some board member's "friend' getting paid to clean the common areas and she simply didn't do ANYTHING, except collect the checks.  Overall, we are happy with our decision to mainly be invested in condos.

Back in the days when I started investing in real estate, I practically invested in condos exclusively. A significant portion of my rental portfolio is still condos.  @Ray Johnson and others have some great points. Yes there are some drawbacks for condos, but overall it is something that can work out really well. Don't be afraid.

Condos are fine to buy but we aware of how the association fees impact it when a market crashes.  High association fees can be devastating to values if the association is in default with the banks or in a market crash. 

my first purchase was a Condo as a personal residence 13 years ago, converted to an investment property 7 years ago. Although I wasn't in the investor mindset at the time, I quickly learned the importance of knowing how the HOA and the financials are managed. Within weeks, I found myself on the board and 13 years later, still serving as President.

For my unit, there were 2 major challenges.

1. Previous board had no business sense and had a terrible property manager. The reserves had been depleted and were not being funded. The roof had been leaking for years and instead of replacement, board was paying (a lot) for repairs. The HOA was considering a hefty special assessment for a new roof. Additionally, several units were YEARS behind on assessments.

2. The association shared common property with a larger association. The larger association was corrupt and was bullying my association into bad contracts with vendors that were friends.

It took about 18 months for me to turn the place around. We had to write off a lot of the old debt but now we are 98% current with assessments and have fully funded reserves. I don’t know what will happen when I sell. Dealing with the neighboring association is a huge headache. It has been an invaluable learning experience but the cash flows are too low to keep this as investment property. Owners that are not on the board are extremely vulnerable financially to fraud and general mismanagement.

It has taught me to remove emotion from decisions. I’ve been contacted by residents who have yelled, cried, begged, etc for all sorts of things (my car got towed, why did the pretty tree in front of my window get removed?, why won’t you cut down the tree that is blocking my view?, someone left a couch outside of the dumpster, why won’t you buy new pool furniture? I didn’t know we were 6 month behind on payments so please take my word that we are good for it and waive fees.....). If you have the time to be on the board of every condo, you can manage the margins. Otherwise, too much risk

Condo investor here also, and a newb so please don't take my comments as gospel. We have a 3/2 at the beach in DE. It's a few miles back from the water itself and 2018 is our first year with it as an STR Vacation rental. We have cash-flowed $610 per month for the calendar year, obviously giant leaps in the summer and thinner through the spring and fall with rental income, but we love it so far and plan on adding a few more in the coming years. We did NOT buy it for, nor do we expect it to, appreciate even a slight amount in the coming decade that we plan on owning it (Them). HOA is very responsive and good at their responsibilities...the have been the HOA from day 1 (Complex is 13 years old) and their reserves are adequate and there has been no special assessment in 7 years. Our fee includes water and trash along with the other obvious items (Landscaping, maintenance, repairs, security, etc.) There is an "STVR" owner on the board and they are very renter-friendly as a community. We would like to buy another 3/2 in the same community in 2019 if everything works out, that's how much we like the place!

I think condos can work well as an investment in a high cost city where there isn't much new construction. I got my start in Boston, where single family homes are expensive, but a condo is more affordable. I am not sure I would buy one here in Dallas. I just don't think it would hold its value as well, because they are always competing with newer construction which is nicer and has more amenities. 

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