If buying a condo for rental, how much would you reduce, if at all, capital and maintenance expenditure reserve in you calculations? Anything else to consider when buying a condo to rent out?
You really need to look into the Capital Reserves on the association. If things are being mismanaged or there is deferred maintenance/not enough in the Capital Reserve there could be future special assessments. When I bought my condo the HOA was just ending a 5 yr Assessment. I thought a the time that that would lead to more predictable HOA fees, however, due to the age and condition of the building (partially due to the mismanagement by previous Boards) there was a need to raise our capital contributions. Additionally, the prior Board had signed off on a lobby renovation project. Even when I got on the Board there wasn't much I could do to control costs. The building was in need of repair and our Capital Reserve levels needed to be improved. On top of the special assessments that can pop up at any time, there is usually an increase to the HOA fee each year. We've averaged 4-5% the past two years. I would recommend that you go conservative on your numbers because special assessments and yearly fee increases can eat into your cash flow over time. You may think that capex and maintenance expense would be lower, and for your specific unit that may be true, but you will also be on the hook via HOA fees and special assessments for the maintenance and capex of the rest of the building. These factors are outside of your control. You could get on the Board of the HOA, but still you won't have a lot of control.
I recently walked through a townhouse that somebody wanted to buy, with that prospective buyer seeking my input. In the basement, there were all sorts of signs of water infiltration on the perimeter of the subfloor, and this was a stucco house built in the day when bad practices were used to apply stucco over wood-based sheathing. With the adjoining townhouses also having stucco exterior walls.
My guess is that the stucco was failing and that was the way water got in, and that all of the houses with stucco in that community would at some point need stucco removal and replacement. That HOA would probably have to foot the bill for that, with a special assessment being passed along to all the owners.
That’s the sort of thing that you might get in a condo or townhouse community; if all of the houses were detached, then each owner has to foot their own bill for failed stucco.
@Steve Babiak exactly! Situations like these arise quite often in condos
Water penetration through failing stucco on several units necessitated a larger stucco and facade replacement in my case. My unit was a part of the low-rise buildings and the special assessment hit for $180/month for 11 months. Now the low-rise repair is complete and the work needs to be completed on the high-rise (which my unit is not a part of) we still have to pay the assessment which is a 24 month fee of $180/month. So I am looking at a $180/ month hit to my cash flow until the beginning of 2023. Also, if you wanted to sell, having a special assessment might mean you have to offer a lower price/give concessions to potential buyers. Not saying you can't cash flow a condo rental, but there are a lot of factors outside of your control and you need to be comfortable with that.