I'm debating where to make my first investment for a rental property. I have always considered a single family but I'm now thinking a condo might be safer way to go since I'm still new.
Any words of wisdom from experienced landlords??
I'm not very experienced but I do know you need to watch out for HOA with condos. Any little income you can make can quickly be eaten up by HOA fees if you're not careful. Due diligence is a must
Condos, depending on rules and fees, can be scary. We bought our first condo recently, and it will be our last. The condo fees have gone up each year, the condo board does not seem particularly fiscally responsible with owners' money, and you never know what special assessments or rules are coming down the pike. If a certain majority of owners decides to ban rentals from the complex, there is nothing you can do to stop it. There are FHA rules for how many owner-occupied units are needed for the complex to qualify for FHA financing, and that can affect unit owners' decisions. We felt relatively safe buying ours as they had just gone through an over $16K per unit special assessment several years earlier for new roof and siding and had raised the condo fees to build the reserves up so it doesn't happen again. They did not mention, however, in any of the documents we received before closing that the pool house needs major work and the sewer system is old and breaking, likely both expensive repairs coming up shortly, draining the reserves. Apparently, they don't have to disclose things like that if they are just in the evaluation stage.
I do not like condos. HOA fees reduces your cash flow and your pocket in case of vacancy. You need to deal with HOA for any repairs on the exterior. Sometimes they are not quick to respond.
Some associations have requirements and a tenant approval process that reduces your chances to find a tenant. Some HOAs take up to 30 days to approve or deny a prospect.
If there is more than 15% vacancy/delinquency, you are limited on who can purchase your condo based on mortgage availability if you decide to sell.
@Dan Chandler I wouldn't take condos off your list but there are some due diligence items you should consider that are not necessarily part of a SFR due diligence list
1. HOA fees as mentioned by others
2. Rules & regulations of the HOA board- Some may not allow rentals or they have rules regarding rentals.
3. Strength of the HOA board- This is a subjective call but a poorly run board could result in fees skyrocketing
4. High vacancy rate- The bldg may still be recovering from the real estate melt down & vacancy is high. The problem w/ high vacancy is those who may be considering buying a condo to live may not be able to get financing because vacancy is too high.
Our rule of thumb for condos- If the bldg has little to no vacancy (its thus desirable) & the HOA rules don't prevent rentals & the HOA fees support the cash flow numbers then hit the offer button. Fail any of the criteria then pass.
Condos are rarely a good investment. Fees go up they don't go down. Your safety is in reading the HOA docs, newsletters and especially the financial docs they are required to provide to you as a disclosure. If you can read them they can tell you the reserve levels and whether they are funding reserves at an appropriate level. If they keep monthly dues arbitrarily low and not building reserves it usually signals that the HOA is going to special assess every needed repair to common area i.e. siding, roofs, paint etc.
Also determine whether they pay water as that can get extremely expensive if hot water is included as many HOA's in large buildings. What is included in your monthly dues? Some utilities? When people pay their own they are much more frugal then when the Association is paying as a whole.
Another concern is how old is the complex. Have they filed a suit against the developer for any reason? If there is a pending lawsuit your monthly dues can easily double to pay for it. In most states their is a statute of limitations in CA 10 years against defects in construction.
Read any newsletters you can get. The management company should provide them if you ask as well as meeting minutes for at least the last 6 months. This gives you an idea if there are pending lawsuits.
If it is managed solely by the Board of Directors it is a definite pass. A professional manager can protect the board and yourself should you require help. A board that is self managed frequently displays errors in judgement that a management company will catch.
One other thing, know what you are buying, the term condo is misused. You may be buying a condo, another type of common interest development or a PUD. They are all different with different rights and responsibilities. Read the CC&R's cover to cover or pay the consequences. Most real estate agents will not know the difference and will call a PUD a condo and they definitely have very different responsibilities. Also do NOT believe an agent that claims everything on the outside is taken care of...it just may not be true as people buying that condo that is actually a PUD will find out. One you own land and structure, one you own air space. Do you know which?
I bought a couple condos in the same complex in 2004. Although the condos are nice and in a great area, the condo tenants tend to be more transient than the tenants that rent my duplex. There is a cost to finding new tenants and a risk of having a vacant unit for a while.
Wow, thanks for all of the great advice everyone!!
My first purchase was a condo back in 2007, after everything crashed we had to sell at an extreme loss and just finished licking our wounds. I remember the fees always going up and seemed like a total waste but there were tons of renters in our development. I thought maybe the landlords knew something I didn't.
Thanks everyone, I think I'll learn my lesson and stay clear of condos.
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