Condos as investments?

50 Replies

I know typically Condos are not the most ideal investment as they don't tend to appreciate. However, we are considering them as a potential rental investment. Given the tend to be cheaper, we could pay most of it in cash and the cash flow would be higher. We would plan on keeping it as a long term income producer. Any advise on this? Thx

@Mehgan Moore Condo's can work just fine! Just be sure account for HOA costs and to be sure you can actually rent the condo out.

As long as it cash flows, and you are happy with it, why not?

Would it cash flow if you leveraged it?

@Mehgan Moore I was also looking at condos as a good investment, however I am a little concerned with the HOA fees going up and then been stuck with still coming out of pocket to pay HOA fees after the tenant has paid the mortgage.

@Melba Chambers . I was including the HOA fee in my rent amount. That way the tenant is paying that as well. I would also include in the lease, something that says that rent could be increased after 30 day notice if the HOA does increase. That way we are covered. ;-)

Hi @Mehgan Moore , I recently purchased a condo in January, and since then there has been ups and downs. 

Cashflow and ROI is better than anything else I've seen since looking for almost 10 months now (I think I'm at 18% CoC not including equity) and I haven't had to worry once about maintaining the property or anything like that.

The downside is the HOA president has complained about tenants being too noisy, and I've had to field a number of calls from her in the past. Too many noise complaints and I can get the HOA board to fine me as they see fit. I'd highly advise looking into condos that are built well with flexicore / concrete with decent soundproofing.

If you're worried about the HOA costs increasing, I'd also advise asking for a 5 year forecast on anticipated expenses and improvements. Sometimes they may not be able to give you that info but some good associations can give you an idea as to what's coming for the next few years.

Hope this helps

-Eric

Hi Meghan, the first property I purchased was a condo. It was a short-sale loft in downtown Chicago. I've owned it for 5 years, and the last time I refinanced it, it was appraised at double the original purchase price. So appreciation is possible. The two things I would advise you to research are 1) HOA fees and 2) whether the HOA allows short-term rentals. My condo is currently rented out on a 16 month lease, but the cash flow would be much greater if I could list it as a STR. Unfortunately, the condo association forbids STRs so this isn't an option. Hopefully this helps!

@Mehgan Moore

Before you make an offer on a condo, make sure you have the lender lined up. Financing a condo is more difficult and more expensive than financing a sfh or a town home.  Many lenders don't touch them. Also, you basically cannot add the hoa fee to the rent. A tenant compares rents of condos to other housing and if you ask for market rent plus hoa fee, a prospective tenant moves on. In your market condos can still make sense, just be truthful to yourself when you do the numbers.

Hi Mehgan,

Condos do appreciate but just not at the same rate as SFRs and have a lower buyer pool. What you want to watch out for are rental restrictions. In the HOA CCRs, there should be a section that talks about that. You want to make sure there isn't a rental cap on the number of units.

Condos can make for great investments because you don't have to worry about exterior maintenance. When you forecast your rental numbers they will be more accurate because there won't be any surprises in large repairs. The perfect investment for an investor that wants something easy to manage.  It works really well in coastal states. 

@Mehgan Moore

Hey Meghan,

I've heard of successful condo investors out there but I'd consider a few things - 1) HOA fees 2) Whether or not they allow short term rentals (airbnb, vrbo, etc) 3) whether or not they are prone to charge special assessments and 4) whether or not the HOA board is strict in regards to rehab.

I used to live in/own a condo in a high-rise building in a very popular area on the north side of Chicago, off of the lake, with trendy restaurants and bars nearby. Assessments were high for various reasons among them being we had a doorman working 24/7 and property management and handymen on premise.

The building was also very old so they were constantly raising the fees and slapping on special assessments. The previous owner before me had to pay a 25k special assessment to redo windows and siding on the building.

Despite all of this, I tried to make it work and decided to rehab the property and live in one room while renting out the other. During the rehab process, it was very difficult to get through it because property management would constantly send their handymen to check up on us and they would always point out something they wanted us to change. Some of the requests were reasonable but some were just ridiculous. It was almost like we were being micromanaged. There were many days where my contractor (aka my dad) would get in shouting matches with property management and the handymen.

Nevertheless, the rehab got done and we eventually rented out one of my rooms on airbnb only to find out 2 months later through a letter from the city that my building was on the short term rental prohibited buildings list. Therefore, I had to delist my room.

So, for all of these reasons, I sold my condo and bought a duplex to househack instead.

I hope this doesn’t discourage you from condo investing. But, just wanted to share my experience with you and encourage you to vet thoroughly the condo in which you invest in.

Hope this helps!

@Mehgan Moore

As like most things in real estate it depends...I started out with duplexes and class C level. I have busy W2 job and it didn’t mix well. I have specific neighborhood where there are only condos and supply is very low. I have purchased 5 condo that cash flow positive....not great cash flows, but appreciation has been very good and believe will continue to be excellent. In my neighborhood it cost min 400 per sq ft to build new condo so none are being built for more than 10yrs as most existing is 280-350 per sq ft. I don’t see what will stop sale prices to going to 400 per sq ft as long as demand continues. These are class A condo and are quite easy to manage, tenants are primarily professional. Unfortunately, (or fortunately, depending how u look) prices are rising faster than rent and I cannot find more properties that fit this model. I found abnormality in the market and was able to exploit it and now it is gone...this is how money is made in real estate.

Originally posted by @Mehgan Moore :

@Randy Bloch thank you for sharing! All really great info to keep in mind.

BTW, I now see you are in Phoenix market. I lived in Tempe for awhile so am familiar with the area. I see Phoenix as very boom/bust market, it seems that people come and go quite quickly depending on the economic cycle. There were definitely times where you could have found condos and market dynamics similar to what I was talking about in old town, Tempe town lake, midtown and maybe downtown. I don’t think they would cash flow now so it is not right time in the cycle, but there will come a time in the future when abnormalities will exist again.    

@Mehgan Moore As others have mentioned, I would do some due diligence on the fiscal state of the association as a whole. From my perspective, the biggest concern with Associations are the risk of special assessments that will kill cash flow. This would be on top of any monthly HOA fees. The other thing that I've noticed, is that you have less control over how the association is run as a whole. There is substantial risk if your perspective of how things are run doesn't align with the perspective of the management company and the board of trustees.

Can someone explain what is covered by the monthly HOA fees? Is it the same always? For instance, is the roof always covered by HOA? Plumbing? AC?

How does that impact insurance?  Can you get less expensive insurance since some things aren’t covered?

@Bruce C. It's my understanding that each HOA is different; however, typically the cover thr exterior maintenance of the building. For example the roof, amenities such as pool and landscaping. As far as AC and Electrical you would need to read through the CC&Rs to determine if they cover them. As far as insurance you could get a lover coverage on just the inside of your given unit. There is a Master policy that would cover the rest of the building/ community.

I am a condo investor. I only buy one bedroom condos. Less expenses and higher ROI. Another plus is not having to evict a family. I limit my units to 2 people maximum. I would check with some of the people who live in the complex to get a gauge of the management. If you have good management it is a great investment.

Also investigate past special assessments by the HOA. The HOA fees are supposed to be large enough to plan for future repairs and replacement of major items, like the roof. If they've had a special assessment in the past of thousands of dollars, that means the monthly fee has not been high enough, and the HOA is not run well.

Originally posted by @Paige Smith :

Hi Meghan, the first property I purchased was a condo. It was a short-sale loft in downtown Chicago. I've owned it for 5 years, and the last time I refinanced it, it was appraised at double the original purchase price. So appreciation is possible. The two things I would advise you to research are 1) HOA fees and 2) whether the HOA allows short-term rentals. My condo is currently rented out on a 16 month lease, but the cash flow would be much greater if I could list it as a STR. Unfortunately, the condo association forbids STRs so this isn't an option. Hopefully this helps!

I'll second Paige. I own 5 LTR condos. The first one doubled in value in the first year. That's about as good as appreciation gets (that was also due to me buying it 30% below market value, but still lots of appreciation). The building has appreciated 20% yearly on average over the last few years. 

Personally I love condos. I pay the HOAs and they handle the roof, plumbing, lawn care, etc. But you need to understand the HOA, condo docs, reserve study, financials, etc. Review the meeting minutes for discussions of HOA increases or assessments, and have a cushion for those things down the road.

All of my condos produce 25% COC returns plus appreciation, so I'm happy. But that is also my insurance against the HOAs going up. My other protection is that I serve on the board since I own 5 units in a single HOA. That way my fate isn't decided by others.

HOAs will generally always go up over time. Theoretically, they should go up about 3-5%/year on average. But if the board is smart they can cut costs and increase revenue then they may be able to avoid increases for a long time. Hopefully rents increase on pace with HOA increases. But again, I need to have a cash flow cushion built in for this anyway.

@Mehgan Moore

Mine has worked out well. It's in the Vail Valley in Colorado. We bought for a ski/summer condo and used it for a few years and then we moved to Crested Butte, CO from Denver and rent it out now and get $800/mo. Cash flow. Plus, it's appreciated 61% since we bought it 4 years ago. Make sure the HOA is in good shape and find out any major upcoming improvements. They put windows in the buildings and the HOA went up $100/mo. for a year. I'm kicking myself for not buying 2 more when I had the chance.

I agree with @Jake Stuttgen that you can have successful condo investments. I have done several that worked out quiet well. Make sure you run your numbers and have the returns align with your investment goals. I sold off my condos because my multifamily investments have a better run and more scale. 

@Mehgan Moore I have several condos and it works out for me just fine. As long as your numbers work, you're good to go. Just be mindful of the HOA's they can be sometimes a deal breaker. Good luck!!