Condos- Good for rental properties??

Question

Hello-

New to this site, but have eard unbelievable things and excited to get going. Was wondering about condos. It seems like, for the time being, they are the last affordable thing in growing and popular cities. Do people have any insight on condos as an investment? Good for renting out? Good for appreciation? Any advice? Tips/Tricks? Thanks!

Tim Deimer · Answer

We have two condos in Phoenix that we rent out and I mostly agree with Scott. We got the first one in 2009 for almost nothing in an auction. Even getting it so cheap, it took three years to make any money. It wasn't a great neighborhood and I couldn't begin to describe how terrible the rental market was. After the first two tenants we got, I left it empty for a year because it was cheaper to pay the utilities and hoa and not have tenants trashing the place than collecting $1500 and paying $4000 to repair the place! We bought the second one in 2016 with no intention of renting it out, but the Phoenix market took off and when we were going to sell it this last winter, the capital gains tax would have been more than we ever want to give to the government, so we're renting it out long enough that we'll be able to do a 1031 exchange. We're doing real well with both of them right now - the first one because we bought it when the market was in the toilet and we just got lucky on the second one. Not that we were trying to time the market, but it can be done accidentally! I haven't run the numbers at today's prices, but I'm sure these wouldn't do much better than break-even. As far as appreciation goes, I think the condos have done alright in the Phoenix market. Houses are getting so expensive that condos are an entry-level option that allows a buyer to get a little nicer place than a similar priced single family home and have more predictable expenses since the condo fee covers some of the maintenance and repairs that would be on the homeowner of a house.

Now for the stuff we've learned the hard way!

First, many condos don't allow rentals. The ones that do, generally aren't as nice as the ones that don't. If all the owners are on site, everybody cares more about property values and just keeping things nice.

It's nice to know that if you need a new roof, the association has to pay for it. That's what the dues are for, right? Well, sort of....I have a long story about a 9 year fight to get a roof fixed that I'll spare you, but it did cost me a $1000 deductible and my insurance company $9000 before they decided we were right, the roof needed to be replaced. The point is the HOA pays a management company, who's job is to not spend a dime of the money you pay them. Too many cooks....

That leads me to number 2 - You have to check the HOAs financials. The one where we had the roof problem is actually in good shape. Those units are almost all rentals and many people own multiple units, including the people on the board. They keep the condo fee low and keep a close eye on the checkbook. It's a double edged sword, sometimes they don't spend money when they really need to. But they are solvent. The other place is about half rentals and half owner-occupied. The downside to that is most of the owner-occupied are first time homeowners who squeal like stuck pigs if they even whisper about raising dues, and that HOA is having money trouble.

That's probably the worst of it. The positive side of being around many identical units (both complexes that we're in have 3 or 4 floorplans) is comparable sales and comparable rents are easy to find. As far as appreciation goes, identical units to the one we bought in 2009 are selling for around 12-13 times what we paid, (and that was not an exceptional deal at the time) and units like the one we bought in 2016 are going for 3ish times what we paid when one comes up for sale. Our daughter's boyfriend just sold a condo in Scottsdale and had a gain of around 85-90% in about 2 years. That's Phoenix right now though, everything has been going crazy.

I doubt that it's likely, but if you find one where the numbers work, just remember the extra headaches of dealing with HOAs. And don't assume that a nice complex is in good financial shape. The complex where our daughter's boyfriend was was also having some drama related to money.

Good luck! And if there's anything else I could clarify for you, don't be afraid to reach out.

Bob Ritner · Answer

"Good" is a relative term that really depends on your location and personal goals. In my case and in my location (So Cal) condos worked really, really well. Here is the good and the bad:

Good:

1. 5 condos and a duplex allowed me to comfortably retire early (with no other source of income) once I had everything paid off. I appreciate that my maintenance is limited to interior repairs, which affords me more time to do things such as travel, without having to pay for a property manager.

2. The association does all of the interior common plumbing, electrical, termite repairs as well as exterior roofing, paint, site and landscape maintenance for the HOA fee I paid so I was able to better focus on my day job and make money while I was working.

3. I spread the risk to several condos instead of 1 or 2 houses so a vacancy had less impact on my bottom line.

4. Renovating when a tenant left meant only doing interior repairs / refresh; cutting time and costs.

5. In my market condos appreciated 3x in a time period when Single Family only doubled, so I think some of the other commenters are using a broad brush based only on their experience. The corollary to the up side applies in a downturn, though.

6. Condo associations do basic rule enforcement so I only need to get involved if the tenant does not heed the HOA warning, which is rare.

7. Condo tenants in my market generally to expect to live under a set of rules when they move into that type of environment but they also appreciate the condo amenities (pool, tennis, etc.), vs Single family renters who tend to want a more rule free lifestyle for better or worse. I also have a good pool of prospective tenants in a niche area.

8. I fill a niche market. My condos are in an area with a very high percentage of 1st generation Mexican, Central and South American immigrants who are hard working, appreciate the opportunities afforded them in this country, appreciate the safe environment that the condos afford, are respectful of the property and pay on time. They also appreciate having ready access in this community to grocery and access to other amenities that they are familiar with from their country of origin.

9. Condos are smaller than SFRs and so there are fewer opportunities to have surprise room sub-letters, long term guests, etc. and are a lot less money to renovate when I have turnover.

10. In California and, I presume, many of the other states that have or are considering some form of rent control, condos and singe family homes are either not rent regulated or less rent regulated than multi-family.

Bad:

1. As others have said, the condo HOA fee eats into profit

2. Sometimes you need to do battle with the HOA to get them to pay for things that are their responsibility.

3. Success of condos as a rental are highly location/market dependent. If you invest in an area with high maintenance, low quality tenants then a condo would be a nightmare.

4. It is important that the HOA finances are in order and that there is not a high level of deferred maintenance that could result in unexpected special assessments or significant HOA dues increases.

In my case, I only bought cash flowing properties that also had some good appreciation potential and were in a niche market that I knew well. It took patience to find the right properties, but as the saying goes money is made when you buy a property. Yes, time will solve a lot of mistakes in real estate, but it is better to make money out of the gate then to buy wrong, have your money tied up, and wait 5 or 10 years for inflation to solve the problem.

Chris Mills · Answer

Unless it's a forever hold, I wouldn't touch a condo. Condo docs, condo fees, the condo association telling you what you can and can't do, and all the appreciation issues already mentioned make it a last resort. If there's another reason to buy it, like sending your kid to college or something, so be it. But there are too many other, better, places to put capital and energy these days than condos.

Saundra De Montano · Answer

I manage several condos in Las Vegas as a corporate housing provider. The rents that I collect are significantly higher than what could be collected if the condo were leased long term and unfurnished (~$4,050 vs ~$1,800 for a one-bedroom). If you've got an A-grade condo in a great location with amenities, you could do very well. Minimum lease terms within the corporate housing industry is one month but average stays span 80 days. There will be vacancy throughout the year as the next resident rarely moves in the same day that the prior resident moves out but the benefits are significant: 1) Asset preservation - you get to enter your property to check on it several times throughout the year 2) Use - you can use the property yourself in between tenancies (and utilities are on) 3) Higher caliber clientele - the residents are usually owners themselves relocating or on short-term job assignments 4) Higher income - about a thousand dollars more per month even with the vacancies.

Check your municipality's laws regarding the definition of short-term rental for your county as well as your HOA CC&Rs. Fines could be stiff if you are caught incompliant. In much of Las Vegas, short-term is defined as 30 days or less, so all of my rental agreements are 31 days or longer. This avoids both having to pay "hotel tax" and having to register as a short-term provider.

Hope this information helps!

Scott E. · Answer

In my opinion, condos are not good for renting out and also not good for appreciation.

1. Not good for renting out due to HOA dues eat up the cash flow, and HOA also may impose regulations around rentals.

2. Not good for appreciation due to supply and demand. When you have a condo for sale in a complex with 200 other condos that look exactly the same, it causes very slow appreciation growth. Smaller boutique complexes will do better with appreciation though.

All that being said, I've heard chatter lately from realtors that a lot of buyers are looking for more low maintenance "lock and leave" lifestyles, which condos cater to. So keep your eye on that trend.

Brian Walters · Answer

@Saundra De Montano are there restrictions around corporate housing in the Las Vegas area similar to those around short term rentals?  I know the city is tough on STR's but corporate housing sounds like an interesting way to go.  I'm looking into condos in the city and the HOA numbers end some deals before they start.  But that's based on long term rentals, not STR or corporate housing.

Would love to hear more about your experience, what areas you look for, etc.

Basit Siddiqi · Answer

Condo's can be great investments(There are multiple strategies that work).The issue many people have with condo's is1) There is a monthly fee that needs to be paid(can eat away into your cash-flow)2) You have less control on any assessments that they charge.best of luck.

Kar Sun · Answer

Excellent points. Condos work beautifully for me. They are also keepers for the long haul. A nest egg. Better than any 401K and other non sense.

Zach Wain · Answer

One issue with some Condo complexes during resale is passing the Fannie Mae/Freddie Mac "warrantable" standards.  These have relaxed a little over time, but every conventional loan is required to get a Condo questionnaire from the HOA/property management company.  If the condo has serious litigation against it for example, a buyer may not be able to purchase the property.  Or, if its a rental purchase and there are too many non owner occupied tenants already, it could be denied.  Or large single entity ownership. Etc etc.

Likewise, for a FHA or VA buyer, they must be on the FHA or VA approved condo lists.  There are some "spot approvals", but those are less common.

IMO, that is a major reason why condos do not appreciate as fast as a true townhome (Single family attached)/PUD/SFD home.  Note - many properties that appear to be townhomes are actually zoned as Condominum projects.  Its cheaper and easier for the builders.  Do your research before you fall in love with a townhome!

Kar Sun · Answer

What does good mean to you? I have a few A class condos and my appreciation has been tremendous. In 4 years they have doubled in value. If I put them on the market I will probably get at least 10 offers on each and they will go over their doubled value. They are also cash flowing about $400 each. One thing to watch is HOA fees and assessments. However, if you have to fix a single standing house that becomes a moot point. There is no such a thing as not doing any improvements unless you want to run the property down. Also depends who are your tenants. I do prefer to have HOA restrictions as they allow me to turn away the tenants I do not want.

Condos- Good for rental properties??

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