As a result of the real estate crash in 2007, local markets in many cities have been flooded with a glut of distressed, bank owned, and unsold developer-owned condos, many of which are being offered at ridiculously reduced prices. This may lead you, the real estate investor, to wonder, “are condos good real estate investments?”. Ever since I lost $40,000 gambling on appreciation on a condo investment I’ve always felt like the answer was a resounding NO! Obviously we all know that all real estate is LOCAL and there are no hard and fast rules for every market but with that being said . . .
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Here are the reasons I’ve stayed away from condos as investment properties.
Every unit in a condominium pays condominium fees to cover the costs of the common elements and services in the building. Condo association fees range from hundreds to thousands per month depending on the type of building, the buildings requirements, and the amenities offered. Typically monthly condo fees are allocated towards the property’s master insurance policy, doorman/doormen, snow removal, trash removal, reserves, professional services like lawyers/accountants and possibly some utilities. In luxury buildings condo fees may go towards other amenities like fitness rooms, pools, valet parking, 24 hour concierge and chauffer driven vehicles. These condo fees, while beneficial to the owner occupant, are problematic for the real estate investor.
Monthly condo fees make it virtually impossible for an investor to put down the minimum amount required to purchase an investment property and still end up sufficiently cash flow positive. In order to “make the condo work” as a cash flow positive investment, a higher down payment is required which means less money is available for future or concurrent opportunities and the leverage opportunity is diminished. Apples to apples the ROI and cash flow on a condo are less than what they would be on a single family or multifamily investment at the same price. It’s true that condo association budgets are created annually and they can fluctuate up or down, but most owners of condominiums will tell you that they usually go up and rarely or never go down – so there’s no end in sight.
Increased Risk Alert: Special Assessments
Condo owners always face the risk of the dreaded SPECIAL ASSESSMENT. Over time the condo association will need money to make capital improvements like new windows or a new roof and will require each unit over to pay his or her pro rata share of the expenses. Special assessments do improve the property, but can cost anywhere from a few thousand to tens of thousands PER UNIT. Obviously this is catastrophic for the investor who isn’t living at the property and will likely see no increase in income as a result of the new roof or windows. It’s not difficult to envision a scenario where a special assessment therefore negates positive cash flow or turns an investment cash flow negative for a year or several years.
Other Investment Concerns With Condos
- Landlord Control – Owners of single family and multifamily are free to make decisions as they see fit. Condo owners are subject to condo bylaws and must follow rules that others set for them.
- Rental Restrictions – Too high of a ratio of non-owner occupants is bad for the financability of a condo. To combat this recent trend, condo associations have started limiting the number of units in a building that can be used as rentals. I’ve seen a few situations where the waiting list for permission to use a condo as rental, required a wait of 1-2 years. If you purchased a condo as an owner occupant with the intentions of renting it out as an investment down the road, consider the effect a 12-24 month vacancy would have on your return.
- Volatility – There’s plenty of data out there that shows condo values drop more quickly that single family homes and that condos don’t appreciate as well as single family homes. This volatility exposes the condo investor to increased risk as real estate prices fluctuate between cycles.
- Supply and Demand – Another concern with condos as investments in the possibility that a developer can come in and build a 100-200 unit condo building in the same space that say 20 or so homes would fit. Right or wrong I’ve always felt that this possibility makes condos less scarce and thus less valuable.
Buying a condo as a quasi-investment might work for someone who has a full time profession, like a doctor or lawyer, if that person is willing to sacrifice ROI for the maintenance and management conveniences condos offer. Alternatively, a condo could work as a quasi-investment for a buyer who will eventually occupy the condo but is only looking for equity build up and tax breaks in the short term. For a real estate investor focused on ROI and cash flow, I simply can’t think of a reason that justifies buying a condo over single family or multifamily homes.
Photo: Ines Hegedus-Garcia