New Investor Questions: Condo vs. House

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New Investor Questions: Condo vs. House

Haley Powell
New to Real Estate · Dallas, TX · Member since 2019 · 86 posts · 41 votes

I am 24 years old and have recently graduated with my master’s degree (read: not rich). I have a job secured in Dallas that pays $50k pre-tax, and I’ve been pre-approved for up to $211,000. I’ve been listening to BP podcasts (mainly the Money podcast, more recently the Rookie podcast) for a while and I really want to buy a place that I can eventually convert into a long term rental. I think of it as a partial househack as I’m not sure I can live completely for free with the real estate rates in DFW. What complicates this is that I will be working in downtown Dallas, which makes anything nearby rather pricey.

I’ve found a real estate agent that is well versed in real estate investing (which is a relief) and I’m now in the early stages of looking for a property.

She's sent me a list of properties within my price range ($150k at max) but they are all houses. Her take on this is that HOA's eat into profit margins and make it hard to make money renting, which is a fair point. My parents' concern (and I share some of these) is that any house I get in Dallas for $150k will likely be either in poor shape or in a poor location, either of which I will ultimately pay for (either in lower rent, poor tenant choices, or in renovations). They think that if I can find a cheaper condo in a nicer/safer, more centrally located area, I can command the rent to cover HOA's.

I don't mind buying in South Dallas or some other areas if I feel safe (I'll be a single woman, living alone, I've had run ins before) and I think my investment will at least hold its value. I worry that I won't be able to meet the 1% rule in that area at $150k, but if I lower my price range I may get into a rehab I can't handle yet (and I'd be competing w flippers). A condo would be closer to everything and would have built in location value but the negative of monthly HOA dues.

I see both points of view and I’m struggling to narrow my focus onto one or the other, which is in turn making things more complicated for my agent. What are your experiences with condos and houses in Dallas? What might you recommend as a starting point for a new investor? I’m open to learn and I’m eager to hear different perspectives.

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Layne T.
Investor · Ft. Lauderdale, FL · Member since 2019 · 71 posts · 50 votes
6y

@Haley Powell
Congrats on being so investment minded at an early stage post-College. 

I've been exploring the Dallas market and here's some advice I can offer:
- Don't go into the red areas above
- Take a year. Seriously, find a great roommate situation and live in someone ELSE's place for a year.

You will get a year to learn the areas, look at properties slowly, take advantage of a market that may dip over next 6-12 months, and save some capital/make sure your job is right for you.

You don't want to overextend, have heavy repairs, and end up having job issues at a new employer.

Breathe, and enjoy the next year, get to know areas, get to know people and in one year you'll be so much well prepared.

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  • Harrison Sharp
    Real Estate Broker · DFW · Member since 2015 · 350 posts · 270 votes
    6y

    @Haley Powell

    Currently house hacking in Dallas.

    Your parents points are very valid, at 150k you're going to be living in a pretty rough part of town especially if you want to be close to downtown. Your realtors concerns are also valid on the HOA of a condo as those can get jacked up and you don't really have any control.

    If I’m in your shoes I’m probably going the condo route, the biggest targets for you right now should be subsidizing your housing costs as much as you can and safety. You should be able to find a 2/2 condo in a safer area and closer to where you work.

    You still want to make sure the numbers would work as a LTR once you move out, just know the HOA is a big variable. If you end up not liking managing the house hack worst case you've lived much cheaper than renting, built some equity, and could sell.

    The alternative would be getting a house in the burbs at a little bit higher of a price point in a good neighborhood.

    If you want to send over some of the places you’re looking at feel free to email me as a second set of eyes!

    1Reply
  • Layne T.
    Investor · Ft. Lauderdale, FL · Member since 2019 · 71 posts · 50 votes
    6y

    @Haley Powell
    Congrats on being so investment minded at an early stage post-College. 

    I've been exploring the Dallas market and here's some advice I can offer:
    - Don't go into the red areas above
    - Take a year. Seriously, find a great roommate situation and live in someone ELSE's place for a year.

    You will get a year to learn the areas, look at properties slowly, take advantage of a market that may dip over next 6-12 months, and save some capital/make sure your job is right for you.

    You don't want to overextend, have heavy repairs, and end up having job issues at a new employer.

    Breathe, and enjoy the next year, get to know areas, get to know people and in one year you'll be so much well prepared.

    4Reply
  • Haley Powell
    OP
    New to Real Estate · Dallas, TX · Member since 2019 · 86 posts · 41 votes
    6y

    @Harrison Sharp

    Hey Harrison!

    Thank you so much for your reply!

    I am inclined towards your perspective, though my realtor really wants to get me out to lay eyes on properties in person. Maybe I will feel differently when I experience them in person, I’m willing to trust her and at least go look.

    I think I could pony up and tough it out in a less desirable area if I had a feeling the neighborhood was “coming up”, but I’m not sure South Dallas is or how long of a game it is, so I think that’s why it feels like gambling.

    I lived in Oak Lawn for 6 months while I interned in Dallas, and I liked the neighborhood and it feels like a much safer (and pricier) bet bc it’s already proved itself and established. With that said, there are few “bargains” to be found bc it’s a well known and high demand area😂

    0Reply
  • Haley Powell
    OP
    New to Real Estate · Dallas, TX · Member since 2019 · 86 posts · 41 votes
    6y

    @Layne T.

    Hi Layne! Thank you for your insight!

    I failed to mention this in the original post, but I interned with this firm for 6 months and lived in Dallas all the while. I got to know Dallas a bit while there, though I do take your point about doing further investigation. My original plan was to stay w the woman I originally rented from and continue looking for properties, her rent was a great deal, she required no lease, and she was close to my work. Sadly, she may be selling her condo (not at the price I’m willing to pay) and moving, so she’s no longer an option. Maybe I can find a new one!

    I do also feel a bit of pressure to try and find something while the market is somewhat dampened by Coronavirus, it seems to have thinned the competition a bit. I’m also somewhat worried that renting (potentially alone as I don’t know many people in Dallas) will drain my pay check and make it hard to save money. I know these exact sentiments may drive me into an impulsive purchase, so I’m really trying to fight a sense of urgency.

    Thank you again for your advice and your map! I will definitely keep it in mind!

    1Reply
  • Account Closed
    San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes
    6y

    HOAs completely suck.  Run the other way.  

    A HOA is a co-op of property owners. Let's say the condo you buy has 100 condos. By buying into that HOA, you have now invited 100 complete strangers into your investment, whether they know anything about property management or money management or are fiscally responsible.

    Now, any one of them can attempt to get onto the board of the HOA. And since hardly anyone actually wants to be on the board, then you can be sure that pretty much anyone who wants to be on the board will get on the board.

    Now, who wants to or has time to be on the board?  When meetings often go until 1am? People who don't work and/or people with an agenda, usually control freaks or people who want to feel important.  None of them has to meet any qualification to be on the board - other than simply be an owner of one of the condos.

    So, can you trust them to make good decisions regarding how your investment will appreciate in value? Do the people on the board care more about someone having tomato plants in a container on their balcony than fixing the roads in the complex? Or making sure there is enough money to repair the roofs? And are they capable of making sure the management company the HOA has hired isn't ripping the association off royally or giving their friends sweet contracts to fix the roads and getting kickbacks and over-charging the HOA?

    And, they can simply vote to change the rules.  What if they decide they don't want any more rentals in the complex?  

    And, did you know they can foreclose on you if you don't pay your dues?  And they can vote to increase the dues, too?

    If you buy a house free and clear, you will be the only one in charge of that investment.  I don't know anyone who has ever done well with a condo as an investment.  It's like leasing a car.  That works for some people, but it's never a wise investment, if you understand my meaning.  A condo might work well as a place to live for someone who needs to be in a desirable zip code, regardless of whether or not it's a good investment as far as a profit goes.  

    But, like the leased car, all it got you was a vehicle that you felt cool in.  Whereas, if you had bought a used Toyota, you could drive it and still sell it and get some money out of it.  So, who's the cool one?  The guy in the fancy leased car?  Or the used Toyota owner who had a trouble-free vehicle and also got to sell it when they were ready?

    If you don't want to buy a fee simple house where you can afford to buy now, just wait and buy later.  Prices should come down in a year, anyway, because of our Covid recession coming up, in my opinion.

    4Reply
  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    6y

    @Haley Powell

    I think it depends on the numbers, what sort of rental management you want to be doing, and of course the location...

    @Sue k. seems to be describing more of a NYC co-op where the development is co-owned by the habitants vs a condominum/townhouse arrangement.  It really matters on how well the management company runs the development.  Get a copy of their financials if you are really interested.

    In some parts of my area, the HOA + taxes is actually about the same as just the taxes for a single family. Then, its as trade-off of if any special assessments may come up and having to take care of the outside of a single family. You can have the tenants take care of the yard, but just what if they don't. I've hated single families because of that, just like I hate letting tenants do something as simple as painting since apparently, most people can't seem to paint.

    I realize that your finances are tight so your choices are limited.  Let me give you another piece of advice, although not really to your question.  Try to find something that is "respectable" and able to garner a relatively high rent.  You generally will get better quality tenants, i.e. higher paying and stable jobs.  Little "secret" about my rental income during this pandemic ---I'm only afraid that my tenants who are RN's are going to get sick and die from having to treat the COVID19 patients (one already was serious ill for a week, but recovered).  Otherwise, I'm getting my rent...  Its a big game changer (i.e. less stress) when you have higher quality tenants.  So, unless you like having to deal with tenant/rental issues, make a good deal and don't jump into a bad deal just because you want to get into real estate investment.

    Good luck.

    1Reply
  • Haley Powell
    OP
    New to Real Estate · Dallas, TX · Member since 2019 · 86 posts · 41 votes
    6y

    @Sue K.

    Wow Sue! You've made some excellent points! That all makes so much sense, I've never drawn the parallel between leading cars and HOA's, but I think it's an apt one. The recurring fee definitely reads suspiciously like rent.

    Thank you for weighing in! You’ve given me a lot to think about!

    0Reply
  • Haley Powell
    OP
    New to Real Estate · Dallas, TX · Member since 2019 · 86 posts · 41 votes
    6y

    @David M.

    Hi David! Thank you for sharing, you have a nice counter perspective to Sue!

    I will definitely do some research on how HOA's operate for condos in Dallas. I'm currently staying in OKC with my parents and their HOA (SFH subdivision) is pretty much as Sue described. They tried to make a homeowner spend $30,000 to change the color of his roof but have blatantly ignored other violations of the "covenant". Hopefully they operate differently in Dallas, definitely worth checking out.

    And I take your point on that! I’m really torn about maintenance of the exterior of a property. My master’s is in landscape architecture, so I innately CARE about how it looks, probably a bit more than the average joe. However, I recognize I can’t spiff up an exterior too much bc it will likely be trashed and not worth the money in the end. Seeing how the yards of rentals are routinely destroyed makes me lean towards a condo set up, but I guess that comes back to your point about tenant quality.

    I am completely with you on finding a "respectable" place, I think that's part of my issue. I think most condos I find in my price range are nicer than the houses, but come with the handicap of the HOA. However, the flippers have been busy in south and west Dallas, so there's some opportunity there. My hang up with that is my concern that most desirable tenants may not be looking to live in south or west Dallas. But you never know what the future holds!

    Thanks again for your help!

    0Reply
  • Account Closed
    San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes
    6y
    Originally posted by @David M.:

    @Haley Powell

    I think it depends on the numbers, what sort of rental management you want to be doing, and of course the location...

    @Sue k. seems to be describing more of a NYC co-op where the development is co-owned by the habitants vs a condominum/townhouse arrangement.  It really matters on how well the management company runs the development.  Get a copy of their financials if you are really interested.

    In some parts of my area, the HOA + taxes is actually about the same as just the taxes for a single family. Then, its as trade-off of if any special assessments may come up and having to take care of the outside of a single family. You can have the tenants take care of the yard, but just what if they don't. I've hated single families because of that, just like I hate letting tenants do something as simple as painting since apparently, most people can't seem to paint.

    I realize that your finances are tight so your choices are limited.  Let me give you another piece of advice, although not really to your question.  Try to find something that is "respectable" and able to garner a relatively high rent.  You generally will get better quality tenants, i.e. higher paying and stable jobs.  Little "secret" about my rental income during this pandemic ---I'm only afraid that my tenants who are RN's are going to get sick and die from having to treat the COVID19 patients (one already was serious ill for a week, but recovered).  Otherwise, I'm getting my rent...  Its a big game changer (i.e. less stress) when you have higher quality tenants.  So, unless you like having to deal with tenant/rental issues, make a good deal and don't jump into a bad deal just because you want to get into real estate investment.

    Good luck.

    Sorry, I wasn't clear. No, I wasn't referring to an actual co-op where a group owns a development. I was making the point that when you buy into a property that has a HOA, it's like being part of a co-operative venture, because all of the owners in that HOA property have a say in what you can do with your property and they can affect your ability to make or lose money on it, etc.

    1Reply
  • Fred Cannon
    Rental Property Investor · St Augustine, FL · Member since 2019 · 264 posts · 279 votes
    6y

    @Haley Powell, I think condos are great investments, especially on you live there first and then rent out later. Just do your homework and make sure the HOA is funded well to cover any big maintenance issues that may come up and the condo is in a desirable location. I have six condos as investment properties. My niche is 1 bedroom one bath for several reasons.

    1. Less HOA fees usually based on square ft

    2. Less wear and tear equals less maintenance cost. When I buy I rehab kitchen, bath, and floors to bring up to date. Increases rent plus increase value and minimizes future repairs. Once I buy and rehab I am good for 10 years with maybe a few appliance upgrades. One bedroom usually means one person.

    3. One bedrooms give a higher rate of return on investment.

    4. HOA fees are offset by less exterior maintenance and insurance fees. I have rental homes as well and they can and do require a lot of upkeep Lawn care $150 a month, insurance 3 times what a condo is, painting of exterior, Roof issues or replacement. Just a long list of things. Families rent homes more people more problems. Single people like yourself rent condos

    5. For me I have a higher ROI with a condo when all things are factored in. I only have experience with one-bedrooms and don't really expect to ever invest in anything else but one bedrooms in the future.

    My only other advice is to not overspend. Remember the mortgage goes on for a long time Save until you have a minimum 20% down. Rehab with cash, short term credit is too expensive, and don’t go cheap on the rehab.

    3Reply
  • Haley Powell
    OP
    New to Real Estate · Dallas, TX · Member since 2019 · 86 posts · 41 votes
    6y

    @Fred Cannon

    Thank you for your help Fred!

    I had never considered one bedrooms in that light before! I’ve always limited myself to looking for 2/2’s to make it more attractive to roommate set ups, but I can totally see your logic. Lawn care does seem like a serious potential money drain, especially if you want it done right.

    So far I've been banking on taking advantage of an FHA loan to grab a property while the market's low and getting a roommate to subsidize mortgage payments, but I do see your point. Plus 20% down would be much more manageable if I were looking for one bedrooms.

    Thank you again for your comment, I have a lot to think about!

    0Reply
  • David MartinPro Member
    Cypress, TX · Member since 2016 · 137 posts · 119 votes
    6y

    @Haley Powell Did the same back and forth with our first buy... condo v. house... after months of frustrating analysis, it nearly always came out to the house being winner, and the few times when the condo met the math, the disqualification was almost always existing issues with association rules that limited doing anything near househacking and/or renting after we left. I'll agree there is opportunity during CoV, looking to see how many homes go to REO once protected forbearance lifts up.

    0Reply
  • Haley Powell
    OP
    New to Real Estate · Dallas, TX · Member since 2019 · 86 posts · 41 votes
    6y

    @David Martin

    Thanks for weighing in David! I feel like I'm blowing in the breeze of everyone's opinions. Each person who adds something has me 100% convinced right up until I read the next comment! But thank you for sharing your experience, it's a good reminder to check with HOA's on what's actually allowed.

    0Reply
  • David MartinPro Member
    Cypress, TX · Member since 2016 · 137 posts · 119 votes
    6y

    @Haley Powell Yeah, a common one we would find would be percentage rules on renting... so let's say 50% renting rules... so in order to rent one unit, you would need to own and occupy one other unit in the condo. I would generally advise just basically reading the life out of all the CCR's for any HOA, even for a neighborhood. You would be amazed the things you would find. We found one neighborhood that, I guess, assumed because they had large lots, then it would be loads of large homes with wealthy individuals, but probably the market at the time, due to this place being the middle of nowhere compared to Houston, ended up just being a lot of mobile homes (they didn't have the foresight to block that I guess), but the HOA rules were written with things codified to where like the only way you could rent one room (and literally only one room) was if it was "your servant's quarters", and it couldn't exist anywhere but part of the house, because you also couldn't have any living space in out-buildings... so like the super-common Houston area 'garage apartment' ADU setup was blocked as well.

    1Reply
  • Haley Powell
    OP
    New to Real Estate · Dallas, TX · Member since 2019 · 86 posts · 41 votes
    6y

    @David Martin

    Man, I never would have guessed anyone HAD servant’s quarters these days!

    And yes, that makes complete sense to check into. I'm staying with my parents rn and their HOA has a fair amount of oddities in it. For one thing, the two halves of the subdivision have completely different rules, with the newer half having more stringent restrictions. What's even more aggravating is that the residents of the older side take it upon themselves to nitpick the newer side. It's a strange set up, and even typing that makes me feel gun shy about HOA's!

    0Reply
  • David MartinPro Member
    Cypress, TX · Member since 2016 · 137 posts · 119 votes
    6y

    @Haley Powell Yeah, from general perspective, I get why they exist, but I tend now towards wanting to be HOA free and just hold my properties to a high standard in the neighborhood without being forced to do so.

    0Reply
  • Mike D.
    Investor · Marion, IA · Member since 2010 · 177 posts · 117 votes
    6y

    @Haley Powell  If I was in your situation I'd start with a condo. Find one that's been on the market for a while because it is either overpriced or needs some paint and carpet.

    Check the HOA regarding pets and rental restrictions which you can find on the county recorder website.

    Ask the realtor or association for a balance sheet of the funds of the HOA. Make sure they are able to cover their annual costs with existing HOA fees and that they have a decent reserve.

    Walk/drive the association looking for big ticket items that will need replaced which could trigger a special assessment. Ie deteriorating roads, failing retaining walls, bad roofs. 

    The more units the better as you will gain economies of scale.

    People always bring up horror stories about condos but they rarely happen. If the association outlaws rentals then you'll be grandfathered in. Association fees can go up and special assessments can happen but this is not a normal occurrence. You should be raising your rents anyway every year which will cover the HOA increases should they happen. Special assessments are rare if the HOA is covering the annual expenses.

    I own apartments, houses and condos and definitely prefer condos over houses. For the same price a condo will be newer, attract better tenants and  have much less maintenance and management.

    Good luck!

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