why not buy a Condo?

Question

So we have two single family houses and a condo with a 100 hoa fee.  I always hear on different podcasts I listen to that they would never buy a condo, but why? because of the hoa cutting 100 bucks of cashflow?  i kinda like the one we have that we don't need to deal with anything outside the front door, it makes my life simple.  Reason i'm asking is I just put another offer in on one and of course its a bit lower than asking price in order to get my numbers to work.    I went to the HOA meeting for my one unit and most all attendees were investors and several of them told me they only  own condos because of how simple they are.

Twana Rasoul · Answer

@Tyler Labelle everyone has a lot of opinions, that’s all they are though, opinions. There’s no rule. Do what works for you.

Steve K. · Answer

For me the reason is simple: only MF properties cashflow well in my area so I only invest in MF. Typical reasons Condos get poo-pooed by investors that I have read and heard are the following:

1. Unexpected special assessments: a poorly managed HOA does not budget and hold sufficient reserves for major Capex such as roof, siding, parking lot, landscaping, exterior painting, swimming pool repair, boiler replacement, common areas, etc. The result is owners get stuck with major assessments every few years. There was a thread on here recently of an owner getting stuck with an assessment that was greater than the value of the condo itself, resulting in letting the condo go to foreclosure with total loss of capital. That is an extreme case of course, as I believe the assessment was several hundred thousand dollars. However a special assessment of $20-70k every few years would not be uncommon for a typical condo. This is why you should still budget for Capex; you do actually need to deal with and pay for the entire property, not just what's inside your door and many HOA fees only cover things like landscaping/snow removal/utilities for common areas, not major Capex. Additionally instead of making things easier, often times dealing with an HOA and neighbors is extremely difficult as everyone has their own ideas of how things should work and what things should cost, creating a situation where nothing gets done meanwhile the roof keeps leaking and the potholes in the parking lot get bigger. If you have a good HOA and good neighbors that can afford repairs this isn't an issue but a bad HOA and lame neighbors can make things extremely hard. Vet your HOA, ask about any recent or expected future special assessments, and make sure they are holding sufficient reserves to cover Capex.

2. Many condo associations do not allow rentals. This is partly due to FHA program compliance which requires a certain percentage of units to be owner occupied (last I checked it was 50%). Those that do allow rentals are within their rights to stop allowing them at any time. There was a thread on here recently where the HOA decided not to allow rentals anymore effective immediately (with threat of a lien on the property and fines if owners refused) and half of the units were going up for sale at the same time because of the new rule (obviously that creates a problem for those selling as it's hard to sell when the market is suddenly flooded with competition). Some HOA's even have bylaws requiring board approval of all of your tenants. Passing control over to the HOA and being at their mercy when it comes to what you can do with your property is enough for many investors to not invest in condos. Read your bylaws carefully.

3. Condos (generally speaking) appreciate less over time than other asset classes, are the first to lose value during a recession, and are the slowest to recover after one.

4. Condos that generate true positive cashflow over time with special assessments factored in are rare.

Those are just the main reasons that I have heard about. I'm sure there are plenty of people making money investing in condos and for many people condos are a great starting point. In an ideal world the best way to do it in my opinion would be to own a controlling share of the complex (more than 50% of the units), and sit on the HOA board, ideally as president so you can make sure the HOA is budgeting properly for Capex and not planning to pass any restrictive rules on rentals or make any other decisions that would negatively effect your investment.

Dan Barli · Answer

@Tyler Labelle condos generally require less maintenance which is attractive. People say not to invest in their opinions because of the HOA fee increases, which are not really in your control. I’ve seen some associations increase their fees by $300/month in one year so just be aware that *may* happen, even if unlikely.

Vlad Zara · Answer

Some people stay away from condos due to the HOA and their rules. Also the HOA fees are not always stable and they can increase over the years which can cut into the cash flow, but each association is different and some can be very investor/rental friendly. I personally am looking to get a condo at the moment because the HOA covers all of the basic exterior maintenance (such as scavenger, landscaping, snow removal and much more) which will make my life easier too. Not to mention the property taxes are much lower for a condo than a SFH. Just my 2 cents.

Frank Wong · Answer

If you are in an area where homes still make sense to buy I would go for a house. If you are in a high priced coastal market condos make a lot of sense. They are very easy to manage and its plug and play.  You don't have to worry about the exterior just the interior.

In my area, I see condos as a good option for investors wanting to invest in the Bay Area and not have a negative cash flow each month.

The rental rules are in the HOA documents and CCRs.  You will know what the rules are prior to making an offer or closing.  The type that I have seen is the building must be 50% owner occupied, leased must be min 180 days, no Air Bnb type rentals.  Special assessments. Hmmm, they happen but not as common as people think.

Overall good solid investments.  I have clients make a killing just buy and hold condos.

Jonathan W. · Answer

@Tyler Labelle a 100 bucks doesn’t seem high but look at it as a percentage that most do and it does.

Why I avoid condos?

Condos are mostly renamed shi**y apartments but mainly because they tend not to appreciate as much.

Rafael Silva · Answer

Very helpful insights from everyone! I personally believe that condos can still work depending on the area or city's background. Another factor is the changing preference of small families to live in rentals instead of planting themselves in one community. I always go back to what I've learned in this site which is follow the math and partner with a good property manager.

Tyler Labelle · Answer

theses are great reply's,  thanks for the insight and I will keep this all in mind with my numbers.  I cut my repair percentages down a little with not having to worry about the outside. I still havent heard back on my offer.  I offered when it was 2 days on market and owner took a higher offer from someone else but just fell thru yesterday because of failed financing.  i submitted a new offer 2k higher but cash with 2k EM and 14 day close since ive seen the place in person and am very confident in the condition and with the remodel ill be doing.

Theresa Harris · Answer

As Twana said, there are many ways to do things, do what works for you.  Yes there are extra fees with condos, but those fees go to upkeep and savings for repairs.  Problems can arise when HOAs are not well run either financially or in terms of upkeep of the common areas.  Same is true for neighbourhoods that aren't part of an HOA when your neighbour lets their house go downhill.

why not buy a Condo?

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