Do the 50% and 2% rules apply to condos?

Question

Since many condos have outside and structural maintenance built in to the HOA fees - do the rules still apply? I realize that some maintenance always will be necessary, but it seems some of the bigger ticket items can be avoided? Obviously, you still need to count the HOA fees on the expense side...

Thanks,

\ Henrik

Thanks,

\ Henrik

Henrik Frank · Answer

Thank you all for your answers. I know first hand about special assessments and HOA fee increases (I have had $10K in assessments and my HOA has gone up by 50% in the years I've been in my current place). 
However, I still can't seem to rid myself of the thought of getting a "nice" condo for a starter rental. It seems there are so many things to learn and fewer things to go wrong with a condo. In addition to that, the Palm Springs / Palm Desert area seems to have a much larger proportion of condos than most other areas.

So - I'm still thinking about it. I have one under contract, but I'm having second thoughts about that unit. I had a low offer on a similar unit, but lost it to higher bids. I have a 3rd unit at around the same price, but it would be a better buy (slightly larger and with an additional bathroom), but the REO has never returned any of my agent's calls...

It seems I'm learning as I go and learning by the hour.

Thanks again!

Will Barnard · Answer

I agree. I do not invest in codnos either and I try to stay away from HOA's whenever possible.
We both were giving the same points in two differnt manners.

Michael Rossi · Answer

Will,

I'm not trying to nitpick over words, I just want to make sure that Henrick understands that the expenses won't be lower with a condo.  Personally, I wouldn't buy a condo for a rental, because I don't want someone else to have control/partial control over my property.

Mike

Will Barnard · Answer

Mike, 
Again you are being to critical of each and every word someone says. When I listed some of the expenses, I did not include them all. Next time, I will write Etc. so it will be clear to you.

As far as insurance being lower, that is correct. The insurance will be lower than a full policy. Of course you are correct that the HOA fees include insurance costs, so you are getting hit twice, technically. I did not think it was necessary to type this specifically.

I think you are arguing over words, rather than agreeing with the general scheme. I really thiink we are on the same page here.

Michael Rossi · Answer

Henrik,

Condos are a little different than normal rentals because you don't have complete control of your investment.  The Condo Board (which may change over time) can dictate how much money YOU spend and can therefore alter (increase) your operating expenses without your permission.

Yes, YOU are still paying for the outside and structural maintenance through your HOA fees.  The only problem here is that you have no control over the expenses and they could certainly be higher than necessary.

Wrong!  YOU are still paying for all of the bigger ticket items, through HOA fees, assessments, etc.  Again, the risk is that you have given control of your expenses over to someone else and your expenses may be abnormally high.

Also wrong.  You will be paying for insurance twice with a condo.  Once for the exterior insurance covered in the HOA fees and then again in a landlord policy that covers all the normal interior insurance as well as liability insurance.  It will cost more to have two companies covering your insurance.

Unfortunately, that is not anywhere close to all the operating expenses.  You still have management, maintenance, advertising, office supplies, legal fees, eviction expenses, utility expenses (at least during vacancies), damage done by tenants in excess of the security deposit, lawsuits, etc, etc, etc, in addition to the expenses Will listed.  Unfortunately, it is virtually impossible to predict accurate numbers for many of these expenses for a given rental unit in a given year.  That is why I use the 50% rule.  However, for the reasons discussed above, if I was buying a condo as a rental, I might use 55% instead.

Good Luck,

Mike

Will Barnard · Answer

Henrik,

You are going to get two different answers on this question. I would say that you really need to calculate what works for you and in your area, as well as the type of investment. Condos will still have the interior repairs and other OE, but you will not have the large capital expenses like roof replacements/repairs. Your insurance will be much less as well, as the exterior is covered under the HOA. You will have the HOA dues to input into your OE.

Others will say that over time all across the country, all units "average" 50% OE.
Do they? Do they not? It doesnt matter.
Take the income, reduce vacancy factor, reduce fixed OE costs, plug in a cap. expense average, if you wish, and see where it falls.

Condos are a tough investment as HOA dues can instantly skyrocket. Rents can decrease dramatically if the NOO units overtake the OO units causing rent wars. Appreciation is usually lower than a SFR as well. I would do suggest you do some complete due dilligence before moving forward with this type of investment.

Will Barnard · Answer

The 2% rule simply states that your gross rental income should be no less than 2% of the purchase price, regardless of what investment vehicle.
1,000 gross rent = max purchase price of $50,000