Are Condos Profitable as Investment Properties? Let’s Look at the Numbers.

by | BiggerPockets.com

The short answer is probably not, but maybe… you know, it kind of depends.

There certainly can be times when it makes sense to buy a condo or co-op.* For example, we recently bought a package of 17, which was a very good deal. But there are a lot of things that you need to be careful about when investing in condos or co-ops. We’ll start with flipping.

Flipping a Condo

The biggest concern I would have with flipping a condo regards the market you live in. If you are in a dense, urban area like Manhattan or San Francisco, then there isn’t much of a problem with flipping a condo. But in some more sprawled out areas, condos tend to be less liquid. In other words, they can be harder to sell. For example, here are days on market (DOM) for active listings in Kansas City, MO:

Houses DOM                              Condos DOM

As you can see, in August of 2018, the average actively listed house had been on the market for 23 days and averaged about 30 or so days since the beginning of 2016. On the other hand, active condos had been on the market for 50 days and had averaged about 70 days since January of 2016. This is more than twice as long!

Nationwide, according to the National Association of Realtors, condos and co-ops have a slightly longer number of months of inventory than houses (4.5 to 4.3), and that has been slightly higher for the last few years. (“Months of inventory” denotes how many months it would take for all the currently listed properties to sell given the number of sales there were that month.) While that discrepancy is much smaller than Kansas City, it must again be stressed that this depends on the market you are in. In a densely-populated city with a large number of condos, there shouldn’t be much of a problem with liquidity. But in a city that is more spread out (like Kansas City), it can present a bit of a challenge.

The reason for this is rather simple: Most people looking to buy a home are looking to buy a house. A survey from Zillow, for example, showed that 83 percent of those surveyed preferred to buy a single-family home. Part of this is because some condos don’t allow pets, and Americans love their pets. In addition, Americans love barbecues. (Although the lack of lawn maintenance that condos provide is nice.)

Related: How We Purchased Our Easiest (& Weirdest) Deal Yet: A Package of 17 Condos

The other problem with flipping condos is related to the first; the HOA (Homeowner’s Association) fee. Each condo or co-op has an HOA, and each HOA charges a monthly fee. While these HOAs do provide some services (to be discussed below), what they mean for the flipper is primarily that your holding costs will be higher. Each month you fail to sell that condo is another month you rack up HOA fees. These may be relatively minor on a more expensive flip, but they may eat into your precious profit margins on a cheaper one.

Again, I am by no means saying that flipping a condo doesn’t work. You just need to know what kind of market you are in and build in a bigger margin for higher holding costs.

Holding a Condo

Far and away, the biggest problem with holding a condo or co-op is the HOA fee. Now, HOAs do valuable things, so they are by no means useless. They will usually do all exterior maintenance and repairs, as well as pool maintenance if there is a pool. They will almost always pay for trash removal as well. HOA’s provide insurance on the exterior of the building (you will need insurance on the interior of your unit of course). Sometimes, they provide maintenance and replacement of the HVAC and electrical systems. Sometimes they pay for water and sewer. Sometimes they pay for a doorman. It all depends on the HOA in question.

But these services are usually things you could have done cheaper or don’t need in the first place.

Most of the time, I’ve found that the HOA eats up any profit margin I was hoping to have when analyzing a condo. For example, here’s a condo with a $300/month HOA and a market rent of $895 (something I’ve seen quite a bit in Kansas City):

OK, so you make $270/month, which isn’t bad. But what if you want to finance this condo? A condo with these types of numbers could go for around $100,000 in many parts of Kansas City. So, if you got a 75% loan at 5% interest with a 30-year amortization (which is very hard to get on a condo bought as an investment in the Midwest), the monthly payment would be $402.62 ($4,831.44 annually). In other words, you would be losing about $132/month or just shy of $1,600/year.

But if these numbers were for a house and you could get rid of that pesky $250/month HOA, all of a sudden you would be making $118/month. (Of course, your maintenance and recurring CapEx would go up some, so it would be more like $50-75/month).

That being said, we’ve found condos that work, but even the ones that work are tighter on the cash flow. In Kansas City at least, condos that make sense as investments almost always have an HOA of $200/month or less. (This is for condos whose prices range from $50,000-150,000.)

The Bylaws

Another thing you have to be very careful about is the bylaws. Always request a copy while doing your due diligence and review them carefully. We had one condo we almost had to back out of (or flip) because the bylaws said we couldn’t rent the unit until we had owned it for three years. Luckily, the HOA had relaxed that rule.

In one of my less brilliant moments (of which, admittedly, there have been a few), I got a condo in Overland Park under contract. We requested the HOA bylaws, but never received them, and then I just forgot about it. Once we started to try and rent the unit, though, we realized that condo owners in this complex were prohibited from renting out their units. So we decided to sell. This wasn’t the end of the world because we had equity, right? Well, unfortunately we ran into the problem noted above, and it took a good long while to get the unit under contract. Then, the buyer had to lower their offer because of something to do with the loan they were getting (long story), and I decided to accept it because that HOA fee just kept eating away at our equity. In the end, our profit came to $2,498. Not a disaster by any means. But also not the typical real estate success story you’ll hear from whatever guru on a late night infomercial.

Related: The Ultimate Guide to Investing in Condos and Townhomes

Regardless, though, you need to carefully read these bylaws and make sure they don’t contain anything objectionable. In some areas (particularly those expensive, dense cities that are usually the best place to buy condos and co-ops), the bylaws give the HOA a lot of power over who an owner can rent or even sell to. Indeed, these boards can reject leases. I’ve even heard of them rejecting refinances! But there are other questions you need answered as well. Are pets allowed? What does the HOA pay for? Do you have a parking spot attached to your unit? Etc., etc., etc.

Management Quality and Special Assessments

One of the other things I really don’t like about owning a condo is that I become dependent on the HOA to make sure the complex doesn’t go to the birds. In fact, we backed out of one condo recently because the HOA was out of money, the complex needed serious repairs, and there appeared to be a high level of vacancy. As the owner of only one out of many condos, you just won’t have the power to turn such a complex around. And if it starts to fall apart, there’s not much you can do but cut your losses and sell (unless, of course, you want to run for HOA president and spend your precious time squabbling with the rest of the board and other angry condo-owners).

In this same vein, you have to keep in mind the specter of the “special assessment.” If the HOA needs to do a large repair and doesn’t have the money in the bank, it will have to issue a special assessment to all of the condo owners. This is just an additional fee that is over-and-above the normal HOA fee. In some instances, they can be quite high. Therefore, if you are looking to buy a condo, ask to see the HOA’s financials to make sure they have some money in reserve. And take a look at the building as well. Ask yourself (and the HOA manager) if there are any major repairs the complex will soon need and if a special assessment may be coming down the line.

Conclusion

In summary, condos and co-ops usually make for difficult investments. But they are by no means impossible. A small percentage of our portfolio is made up of condos, and I’ve seen plenty of people successfully flip them. Indeed, if you consider a $2,498 profit to be a successful flip, then I have one of those under my belt as well!

Typically, condos and co-ops make more sense to pursue as a flip than as a hold and also make more sense in densely-packed cities. But they can be a good investment anywhere. I would just be very careful with them and probably avoid them as a beginner.

*The difference between a condo and a co-op is that with a condo, you own your unit and a percentage of the common elements. In a co-op, you are a shareholder who owns a percentage of the entity (typically a corporation) that owns the complex. Condos are generally a bit more desirable and usually sell for more than co-ops.

Would you invest in condos? Why or why not?

Comment below!

About Author

Andrew Syrios

Andrew Syrios is a real estate investor in Kansas City and a partner in Stewardship Properties along with his brother and father. Their company owns just over 500 units in four states.

10 Comments

  1. Mark Beeson

    We rent a condo that we once lived in. Very nice updated condo 2BR 2BA and rents for $750 which is low. Cash flows $172 per mo. and we are lucky to have great tenants. At the time I thought it made sense to cash flow $172 instead of selling and investing the $15k proceeds in a low interest investment. Of course selling and reinvesting the 15k in another property may have made better sense. But we are happy with our decision. Suggestions anyone?

  2. Stuart Scholer

    I am a RE Agent in Houston, TX. I commonly see three… no… four major flaws in Townhouse and Condo HOA’s that are making major expenditures annually. Board members that are incompetent, corrupt or naive. The fourth is corrupt management companies. In Texas a management Company does not have to have a License. They are not beholden to anyone except local law enforcement ( who have very little interest in criminal cases unless well north of $50K or more) or a private civil attorney. They are also not in business to look after the best interests of the community. Their only fiduciary duties are related to the handling of the HOA monies but not their handling of services or contracts. All you need is two of these factors present and the HOA just went up at least 10% in the long run. I have seen Boards with all four factors in place and I figure certain individuals were slitting between 10 and 20% of the gross annual expenditures. This is very common in these types of Properties. I am beginning to see this in newer and larger communities of single family homes where the HOA fees are typically $700 – $1200 annually. But not as bad. It’s all about the contracts man!

    • Andrew Syrios

      I’m sure this is a problem, but of course, corrupt and incompetent management companies is a problem with pretty houses and apartments too. Although at least you are dealing with just one management company and not with the HOA (and the management company operating it in many cases) as well as a management company for your unit.

  3. Cindy Larsen

    Andrew,

    Your description of the problems with condo ownership is right on the money. I would not recommend them for a buy and hold investor.

    That said, the very first property I owned was a condo. I was a young adult renter, frustrated becauee every apartment I found that allowed pets was not somewhere I wanted to live. They were all slightly grungy (or more than slightly) and not in great locations. I was not going to giv up my two cats, so I bought a nice condo in a nice location for $80k, in Silicon Valley, and lived there for five years. My PITI plus the HOA fee was about equal to the rent on one of those grungy apartments I had rejected. And I got to deduct mortgage interest and property taxes from my income. This was the eighties, and interest rates were high, so I paid down my mortgage as fast as I could, got rid of PMI, and built up equity. When I decided sell the condo and buy a house, the condo had appreciated by just about the inflation rate, which was disappointing. But, the equity I had built up allowed me to put 20% down on the $225k house (no PMI 🙂 and pay my closing costs. That mortgage on the condo also helped me build up my credit to the point where I could buy the house. So, as an investment, NO, not a good idea. As an entry point into the real estate market, it worked for me, when I knew almost nothing about real estate.

    In todays market, first time homebuyers with decent credit and jobs can probabaly qualify for a SFH, (or even better, a duplex) since the interest rates are so much lower now. I remember being pleased that my new interest rate on that first house I bought was only 10%. The condos’ interest rate had been higher. Everything is relative. I’m sure the condo is now worth a lot more than $80k. But, the house I bought ($225k in 1988) with the equity I built up in the condo, I sold for $1.25M in 2015, (and it currently has a zestimate of only $1.97M: down from $2.32M 30 days ago. That 1368sqft house is on a 50×90 lot, six blocks from downtown mountain view, CA: 2 beds, 3 baths, not fancy, very middle class. Yeah real estate in Silicon valley is outrageous.

    There are a lot of paths into investing in real estate, and some are better than others. But starting down a path is the important thing. And owning a condo can be a lot better than throwing your money away on rent, if you use it as a stepping stone on your path.

  4. Eric Hrlbock

    After I did my first flip in 2014 I bought a condo as a buy and hold. In next 2 months I was in contract for 2 more. Over next 4 years I bought 10 condos and flipped 3 within weeks of me closing, sold them almost instantly. I made 20 grand at least with minimal work. I sold 1 more after holding it for 3 years and made 30 on the sale and 30 on rent.
    I love me some condos. I also buy single and this summer bought my first multi. To be honest I will only look for multi. I will still buy condo and houses but only looking for multi
    Great article. I still find condos a valuable part of my investments

  5. Yvette Saul

    This is great. Thanks. I am just starting out and was looking at condos/townhomes in my area but the HOA scares me. The other scary thing is that you need HOA approval to rent the unit. I think I will stay away from condos for now

  6. John Barnette

    I would add as well that condo’s tend to be much more cyclical is market pricing (not necessarily true underlying market value). Condo’s rise a bunch in boom times, new, flashy, easier to buy into for younger first time buyers. And they fall a bunch in the downturns…often below replacement value or what a comparable new unit could be built at. I bought a couple extremely under priced short sale condo’s in SF after the crash. Rents held and prices crashed. I saw true “value” and made the purchase. Timing is critical. I am saddened by new investors buying new construction condo’s for long term holds in a hot market. May seem easy bit extreme amounts of unknown risk.

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here