The question often asked is “is a condo a good investment property?”, or “Should I invest in a condo or single family home?” These are great questions with no cut and dry answer, but we’ll give you the facts to help make your decision easier.
Before Making a Decision
The type of property, the location, market, etc. are all going to be major factors and should still be your core reason for picking a certain type of investment property. With that being said, always factor all of your expenses into your financial calculations, including Home Owners Association (HOA) fees, which is going to be a big part of your investment if you consider a condo.
(Photo: Phil Leitch)
The Positives of Condo Investing
Before looking at the negatives, and there are plenty to consider, we will discuss some of the good points of condo investing.
Potentially cheaper insurance – with a condo, you an often get “four walls” insurance since the outer structure is covered by the HOAs insurance policy. This will greatly subsidize your monthly insurance since the HOAs insurance is paid for by the association and will cover problems outside of the four walls of your condo. You will definitely want to verify this insurance with the HOA of course, and talk to a licensed insurance agent as well about this.
Lower maintenance – if you work full time, have a very demanding job where you work more than 40 hours a week, or want to put more time towards expanding your real estate investment, the low maintenance of a condo may appeal to you. Although Home Owners Association Fees are charged (more on that later), you may find that your repair bill is lower. This depends on the age of the condo and how much cash the HOA has on hand to cover unexpected emergencies.
Remember that you can avoid a lot of these time-consuming maintenance and repair issues by hiring a property manager for a single family home instead of paying that HOA fee.
Desirable location for renters – This one is debatable, but condos are typically built in areas where housing is in demand. Picture all of the high rise condos by the beach in Miami or the small condo buildings right off an interstate or near shopping, employment, and restaurants. Condos can make hot rentals that rent quickly and promise easy living for the tenant. Since renters are often responsible for lawn care and other basics in a single family home, a condo may be an attractive alternative.
Newer properties with lower barrier to entry – Often, you will find 5-10 year old two bedroom condos for sale with prices ranging form $80-$100K, depending on which market you are in. Two bedroom homes are rare these days and newer homes could cost you $150K and above. The older 2 bedroom or 3 bedroom “slab” (no basement) homes in the 1950-60s are the ones that will likely fall in the $80-100K price range. If you want a single family home that is at a low price point, you’ll need to sign up for more maintenance and effort to make these properties “rent ready”. If money is of less concern, pay the higher price to get a newer home, but higher rents may make it harder to find tenants.
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The Pitalls: What to Watch Out for When Choosing a Condo
I’m sure a lot of you experienced investors are thinking we’re giving single family homes the short end of the stick! We certainly recognize the pitfalls of condo ownership, especially for investment, and there are many.
HOA Fees – We just hinted at it above. Home Owners Association (HOA) fees can range anywhere from $50 to hundreds or even thousands of dollars (no joke), depending on where you live.
Special Assessments – Watch out for special assessments. A special assessment is extra money that the HOA will need to cover major repairs and updates to the properties. Since you don’t “own” the common areas of a condo building, the HOA is responsible for fixing them. Common areas usually include the outer walls of the building, the roof, driveway, sewer systems, etc.
When you buy a condo, you typically won’t own more than the inner four walls of the property (verify this with your HOA). If anything goes wrong with these common areas, the HOA will first try to cover it with their cash reserves, but if they can’t cover it, that’s where the special assessment comes in! This could be hundreds or thousands of dollars that you are suddenly responsible for. This could cause you to negative cash flow for months and years until that special assessment is paid off!
The bank will probably do this for you, but ensure the HOA has plenty of cash reserves and also has a yearly budget for their reserves. An HOA shouldn’t leave expenses to chance. Don’t forget that there’s a difference between having financial records and keeping track of expenses…a budget ensures the HOA is not overspending.
Difficulties in Financing a Condo
Financing problems – Fannie Mae guidelines require that less than 50% of the units in an HOA are rented out, if you use a condo as an investment. See these guidelines for more. This could be a major showstopper if you are trying to get a bank loan for a condo association that has too many investors in it.
Another financing issue you may run into is that banks could be reluctant to give you 30 year fixed mortgages or preferred financing on condos. The housing crisis of 2008 caused a lot of people to quit paying HOA dues. Lack of HOA dues meant HOAs were going broke and properties were falling apart. I’m sure you know this already, but the bank is very concerned about your home’s present and future value. Think of it this way, you typically go into a property owning 20-25% of the investment while the bank owns the rest. They have a lot more at stake, however, they do get to take the house from you if you don’t pay! Expect to pay around 25% for a down payment on a condo. This is extra cash that you won’t be able to use to buy other investment properties in the future.
HOA Bylaws – We already mentioned those pesky HOA fees above, but the HOA in general can be a big problem for condo rentals. You want to have total control over your investment! An HOA is a (very) disinterested third party who wants to foster a strong condo community. Owner occupied homes property values, and low turnover are their key interests, so some HOAs may not want their properties to be used as rentals. Make sure the HOA allows rentals before purchasing the property! Some HOAs may be okay with you renting the property out for now, but could decide to set a restriction on the number of rentals. Some banks set rules that require 10% or less of the condos in the HOA to be rented. Since this can prevent owners from refinancing their homes, the HOA board of directors could want to drive out the investors to help keep their owners happy.
This is concerning, but don’t freak out quite yet! In order to change by-laws in the HOA, it typically requires a 75% vote, which is difficult. Also, the bylaw should allow current landlords to continue using it as an investment property during their entire ownership. If this is not the case, you may have luck speaking to a real estate attorney about this. Of course, we are talking extra costs here, and that hurts your cash flow!
So there you have it. Picking up a condo is certainly no easy decision but if you consider all of the pros and cons, you can weigh this against a similarly priced single family home. Although it’s important to carefully consider whether or not you should invest in a condo or single family home, in the long run, it’s really “all about the numbers.”