Would you invest on condominiums

17 Replies

About 75% of my rentals are condos and I love them.  No insurance or outside maintenance worries, and decent to nice shared community resources.  You also have a bit of light property management too.  Generally, condos will have stricter rental requirements, which actually falls into best practice anyway....so for me, they are great!  Just my .02.  

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My philosophy is to create the best offering for the best tenant in the neighborhood. The HOA covers building insurance and external property maintenance. In the end, it just has to make sense and the PP determines that. Here is the last 2/2 I did.

PP - $51K
Rehab - $15K
Investor fee - $3900
All in - $69,900

Rent - $1,100
HOA - $325
Debt Service (70%) - $250
Property Tax - $490
Net Cash flow - $435

What I do is keep a minimum of reserves in the investment account to cover capital expenses or vacancies.  Since I rehab all of the properties and put in new appliances, toilets and clean A/C units...I rarely get a call for anything.  

I hope this helps.  

Condos are generally a bad investment. HOA is your landlord and you are the tenant. HOA fees are unpredictable and special assessments for building upgrades can be in the tens of thousands. Appreciation can not be counted on to add any long term benefit.

If you look at Justin's example above you can see some discrepancies. The taxes are confusing as I think the amount listed is for the year not by the month otherwise he is negative cash flow but he has not included any return on the equity in the property (30% of property value)  or insurance, vacancies, utilities when vacant, general maintenance (appliance replacement, flooring, painting, etc.) advertising etc. etc. etc.

When you consider HOA fees will rise combined with special assessment risks and possible interest rate rises this investment without appreciation is probably not going to cash flow long term.

With that high of a HOA i'd think he's safe from increases. But the point you made about special assessments for upgrades was something i'd never thought about.

HOA fees always keep rising. As do all other costs and often rental markets can not keep up in condos as the building age and become less desirable to renters.

HOAs also have control over your renters and can be an issue when neighbours complain.

Florida can be a problem due to weather issues. I have a friend that owned a condo in Florida (personal residence) that was assessed $20,000 over a 5 year period for roof, parking lot  and elevator work. He sold when they started talking about doing upgrades to the exterior and replace all the windows.

These are items you do not have any control over.

Addionally condos just dont appreciate as well. I can't vouch for all the other markets, but here 10-% guaranteed SFRs will skyrocket compared to condos in a strong market. And since your ROI will be less than multi on both, there needs to be some upside in vale during the good years.

And of course HOAs suck like everyone else said. I have three condos of course after saying all that and manage a bunch more but I am not buying any more unless they are screaming deals.

I think if you chose right area with growing rental demand for condos, and if you buy below market value, then it is a great investment. 

For example in Brickell miami rent has been increasing steadily 4-5% for last 6 years and it will keep going up, as currently it is about 98%-99% occupancy rate. At the same time the tax increase was 1 percent or less ( and somewhat  hoa fees too) , however market value for your property has grown 20-30% for those who bought before the boom, or at the pre-construction price. 

I been watching the market here for last 9 years, I wish I new this would happen back  in 2007!

Typo on the property tax. It is $90 per month. You have to ensure that the HOA is running a good ship which means a good reserve, building and liability insurances and a solid tenant screening process.

Interesting about the appreciation play.  For me, I've never even thought about it since I won't sell until I'm 70.  

IMHO, I don't like to have to worry about the upkeep of the outside structure...or pool, or gate, or garage.  I'll pay the fee and be happy.  Again, for capex, repairs and vacancies, keep a minimum account balance.  For me, it's $15K for 7 units.  But I also have renovated units with new appliances...so, it may need to be more for others or SFHs too.  

Either way, in the end, you need to do something.  If you can have someone pay off a hard asset AND make money each month, it's a no-brainer for me...and should be for you too :-)

Condos can be *great* investments at the right time and in the right market.

I'm the president of a small HOA (24 units) in Studio City, CA. I can tell you we've kept the same HOA rate of $316 month for about 10 years or longer. I bought the condo I'm in 5 years ago for $265k and two units with exact floor plan recently sold at $420K. Great investment.

Some tips: 

  • if you have time, try to become a board member.  You can see first-hand how things run and even change a few things for the better; 
  • better to have solid home owners versus tenants as tenants do not treat the property with the same respect and care as home owners; 
  • look for a condo complex with a solid reserve; 
  • and lastly, if you are going to invest in a condo: READ the CC&Rs (The rules of the HOA community are set forth in what is called the Declaration of Covenants, Conditions, and Restrictions), very carefully. If you see something substantial you disagree with (for instance, homeowners are allowed to keep only one pet, instead of two -- and you have two), don't hope for the best and buy anyway. Chances are it won't work out.

Hello and welcome to BP! I am reluctant a little bit on condos because of the fees. I just feel that you should not leave any stone under turned. I would try to be more wary of what might happen, who is running the HOA, what kind of decisions are they making, etc.. I would tend to over analyze but it might be a good deal. I would probably keep a larger reserve account and Would talk to the people who live there to see what they know. How old are the units?

I am 59 years old and have a bunch of construction experience and some real estate experience.  I had a broker license for about 30 years.  I have closed a few deals for other people.  My father has been involved with real estate sales for about 40 years and he has taught me a little bit.  Good luck!

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One thing we've seen in the MN market is if the condo bldg has to many rentals we can't get a bank to touch it. I had a nice listing in a near downtown location that was very desirable, both price and location, but we couldn't get a single loan closed. 

It ended up selling to a cash buyer for about $30,000 less than what we would have gotten for a buyer with financing.

Originally posted by @Justin Jocewicz :

My philosophy is to create the best offering for the best tenant in the neighborhood. The HOA covers building insurance and external property maintenance. In the end, it just has to make sense and the PP determines that. Here is the last 2/2 I did.

PP - $51K
Rehab - $15K
Investor fee - $3900
All in - $69,900

Rent - $1,100
HOA - $325
Debt Service (70%) - $250
Property Tax - $490
Net Cash flow - $435

What I do is keep a minimum of reserves in the investment account to cover capital expenses or vacancies.  Since I rehab all of the properties and put in new appliances, toilets and clean A/C units...I rarely get a call for anything.  

I hope this helps.  

Not sure I get the numbers. $490 annually for taxes? That's $41/month. I generally calculate in vacancy, 'turn' expense, cap-ex reserves, etc., but that's more for my planning vs. actual cash flow. Saw your update...

One other issue if you get over 50% NOO (Non-Owner Occupied)... government subsidized cheap money isn't available for condo loans. What this does is cripples your OO sellers since they can only sell to cash (or investors via portfolio lender) buyers. Generally this results in price pressure that can linger for years. My opinion... always check investor owner density.

There are a lot of factors. I own three units in a large complex (about 300 units) which is 91% rented. The values have gone up pretty significantly (30%) as of late (last 18 months) like a lot of other parts in the country. The dynamic of the neighborhood is largely based upon the screening process. It is imperative that the HOA have a strict process because there are a lot of landlords who either don't know or don't care who is in a unit. More specifically, PMs who are managing a portfolio for a large investor.

The great thing about the HOA, at least in my experience, is that they will become your PM.  I had a noise complaint issue in a unit.  The CC&R clearly prevents it along with an acknowledgement of the rules when a tenant signs up.  So the PM for the community is out there at 2 AM to hear the noise instead of me.  How awesome is that?

Again, for me, it simply depends on what you relate to the best in order to be the best landlord you can be.  I like 1/1s and 2/2s.  Larger homes come with more people, possibly more drama and more upkeep along with major expenses (roof).  

I have to agree with Justin.
Condos could be a great investment. I live in Miami and that is the only type of investment Im in over in.
I buy condos cash for rent and hold. But the trick is to speak with people living in the building before you buy to ask any questions / concerns you may have.
Also, make sure there are no rental restrictions and your able to rent out the unit.

Some worry about assessments . But they are not that bad . Usually they make the building nicer and fix things that more than likely you would need to fix as well in a SFH .