Condos, good or bad, why for a first time investor?

[Leul Wolde]

Hello, my name Leul Wolde, I'm 19 and I'm thinking about investing in real estate in the famous stack method. I want to know what are some of the pro and cons that come with investing into a condo.

[Ari Bachrach]

It seems like most people on BP don't like condos. I started with condos and own a few. Here are some good and bad things about this.

In my market real estate is expensive so it's very hard to make things cash flow. Condos haven't appreciated as much, so it was easier to make them cash flow, even with their high HOA fees. Your mileage will obviously vary, just don't forget to count the HOA fees in your calculations. For example the 1% rule becomes to 1+HOA% rule.

Vacancy is a bigger deal because you're paying HOA fees. How long will it take you to get the place ready to rent? If it will take 3 months, it will take 3 months of HOA fees too.

While they cash flowed better on paper, smaller units are the hardest things to rent out. Don't fall for cheap 1 bedroom units like I did. Unless it's near a university, no one wants to rent those.

You will have much lower capex - there's no roof, no foundation, no gutters, no hot water heater, etc. I know a lot of working professionals that only do condos for this reason - they just don't have time to deal with the increased aggravation of a house.

There is a lot less competition from fellow investors. As I mentioned initially a lot of people on BP are anti-condo, so it simply means you'll have fewer fellow investors competing with you.

HOAs can be a pain in the neck, and condo associations are more invasive. First you should obviously check that the condo rules don't prohibit rentals. They can also limit what you can do inside the unit - everything from floor coverings to type of windows may have rules.

When it comes time to refinance into a conventional mortgage, the condo association will likely be scrutinized too. Fannie Mae and Freddie mac will only take mortgages of the condo fits certain rules. These associations are warrantable. If your units are unwarrantable, it's going to make it harder (not impossible, just harder) to get a mortgage.  

The last thing is that you've simply brought an additional partner into your management. Normally there are two people involved - the landlord and the tenant. If it's a condo, the condo association is involved too. Are parking spots assigned? Does the tenant want to rent out the condos party room? Did someone else's unit spring a leak and leak into your unit? All these issues now involve three people - landlord, tenant, and association.