Condos as First Investment?

Question

So I've read a lot about how condos are not good for investment rental properties because of their HOA fees and the special assessments that may sometimes come up. But are condos really that bad for being a rental property, even if it's just my first one? They're generally not as expensive as single-family homes, and as a new investor without a lot of capital to invest in most SF homes that aren't in the ghetto, wouldn't this be a good way to get my foot in the door?

Brian G. · Answer

I own condos and townhouses in South Florida. Looking at the comments above there are no right or wrong answers. Whats important is to take action and stop all these inner stories, the doubts and the second guessings. HOA's are no different than single family homes that could need a roof replacement, an unknow code violation due to structural/electrical/plumbing issues or a drug dealer that moves accross the street after you acquire the property. Some due diligence I do before acquiring a condo is what I've observed underwriters due before approving their loans. Long laundry list but it can be done - easy to google. I also own single family homes to mitigate and diversify my portfolio. On condos, if HOA management plays difficult then I start to show up in their meetings. Get to know presidents and vice presidens and shake hands before judging. At the end, if they are impossible to deal with I dump the condo and move on. What matters is to take action if you want to become that "beast investor"...

Samuel DeMass · Answer

@Kevin Choi,

Welcome to the site!

I think you have a valid point, you might be right, but I also disagree.  Let me explain:

I submit that you have to live somewhere, and living somewhere that doesn't suck is generally fairly high on anyone's needs list, especially Maslow's.

However, you want to start investing, and investing in something that doesn't suck is generally fairly high on a real estate investor's needs list.

To save some keystrokes, read my response to a similar inquiry about why condo's/HOAs aren't a good deal: http://www.biggerpockets.com/forums/88/topics/1959...

The same condo unit that I describe in the lease was making a great rental for my friend.  He was making money hand over fist because he bought it right.  However, he's now having to deal with the shenanigans that come with HOAs/condo's.  It's like getting in bed, or a partnership, with a bunch of people you have never met, and may not agree with down the road.

All this said, I still believe in crunching the numbers above all else.  There are exceptions to almost every rule.  You can probably find a condo that you could live in for a while and save up some money for your next investment, which might be worth it to you.

However, you are an ME major.  Live well below your means and don't increase spending with increased pay.  You'll be able to invest in high quality investments within a year.  It might be worth delaying investment and renting the short term to purchase a nice 2-4 multifamily on an FHA loan and do some house hacking for the first investment.  This would be my recommendation for you, brother!

Good luck!  Keep us posted.

-Sam

Adrian Chu · Answer

In most cases, if that were to happen and if you're already renting out your unit, you would be grandfathered, so they will continue to allow you to rent out your unit.  And then new rules would apply for any new owners.

Hugh C. · Answer

Don't buy something just because you "want to begin my investment".  Sometimes the market has moved to a phase of the cycle that there are too few deals to be found easily.

You may have to go to secondary, more distant, markets.

Buying a condo to rent out adds to the stigma of that particular condo complex; too many non-owner occupied units is frowned upon by mortgage lenders.

Martin Yung · Answer

@Brian G. @Adrian Chu

My concern with HOA is can the rules/covenants be changed down the road? For example initially during due diligence, the HOA rules/covenants allow rental without any cap. so investor happily purchase it as a rental property. After a few years, if some homeowners voted no to rental, can the HOA just change the rules and disallow or put a cap on rental?

Adrian Chu · Answer

Whether it is your first home, rental, or flip, condos can be a good way to get your feet wet in the real estate game.

In WA, all condo sales are accompanied by a resale certificate review.

A resale certificate contains information about the HOA including the declaration, rules/regulations, financials, etc and will allow you to determine whether the condo you like is worth pursuing.

Sellers generally order a resale certificate for buyers to review.  In some cases like bank-owned transactions, it becomes the buyer's responsibility to pay for the resale certificate.

A lot of times, you can get information about the HOA by directly talking to the property manager.  Your real estate broker should be able to help do that research.

The cool thing about condos is that their price-to-entry is generally lower than single family and multi family homes.  As a result, if the price is low, even if it doubles in value, it may still be considered affordable.  That's the kind of phenomenon I have observed in the Seattle market.

Best of luck!

Sandra Gibson · Answer

If I was to consider one, I would check to make sure that it would qualify for VA, Freddie Mac or Fannie Mae loan, incase I needed an exit strategy  to sell it. I would also make sure the HOA allowed renters and that it was financially fit. I would check out the utility costs, all electric, single pane windows, double glass sliding doors will make renters flee to more sustainable living.

Kevin Choi · Answer

@Samuel DeMass Your other post does make a lot of sense, and I never actually considered that HOAs may not take care of structural components or other issues until they become a huge problem. That's some really great insight. In Houston, however, small-multifamilies to house-hack is pretty hard to find because they're either in the really poor/shady areas or are way too expensive. I so badly want to begin my investment using house-hacking but it doesn't seem to be an option here. But yes, I completely agree with you and will most likely be delaying my investment. I appreciate the time you took to respond to my post, as well as the input from everyone else!

Andrew Sparks · Answer

@Josh Gangi I am really interested to hear how you do due diligence on condos - could please explain? Aside from crunching the numbers, are there any ways to case out the HOA? It seems like that's the biggest unknown quantity that can make condo rentals extremely unprofitable. I mean, even if you ask around regarding the HOA, I would be concerned about new personalities going on power trips after I invest. Thanks for any feedback!

@Kevin Choi, great thread topic. The points you raise are what I've always heard on the podcast and they make sense to me, but sometimes condos look pretty lucrative as a first step now that I'm learning more about REI and trying to figure out the best way to jump in.

Condos as First Investment?

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