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

Question

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 · Answer

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.

Bobby Stead · Answer

@Leul Wolde, @Ari Bachrach has some great points. My wife and my first investment was a condo in Ft. Meyer, Fl. that we essentially "house hack" by renting it enough to pay for the mortgage and HOA fees, that still leaves enough time for us to enjoy it when we want. That's the first thing we checked before buying, and in our case we're probably closer to retirement than you may be and this is an area and lifestyle we are leaning towards when that starts - now though we'll be investors in retirement from our W-2 jobs. In my limited experience I'd echo what most on here would say, do the math, take out the emotion from the deal and pick a strategy that you like and works for you. Some like SFH, some MFH, and others wholesaling, etc. Pick what you love and use the BP resources to learn as much as you can but don't forget to take action when it makes sense. Find some local meet ups and network like crazy.

Good Luck.

Leul Wolde · Answer

Thank you all, I definitely learned something from your guys' post.

Stephanie P. · Answer

Some condo issues to look for:

If you can live in it for a while and then use it as an Air BnB, then you may have a really solid investment.  Check for restrictions for short term rentals.  Buy in a destination location.

Watch the HOA fees.  They vary wildly and can be expensive.

If the condo complex is non-warrantable meaning FHA or Fannie Mae or Freddie Mac won't lend there, you have a problem.  What makes a condo non-warrantable?

• HOA becomes insolvent
• HOA doesn't put away enough money in reserves
• If one entity buys more than 20% of the units
• If the investor concentration exceeds 50%
•  and there are other reasons but those are the ones we see most often

If it's non-warrantable, you've essentially bought into something, through no fault of your own, that you will have a difficult time reselling because it will be difficult to get financed.  Non-warrantable condos require higher down payments than traditional financing.

Great investments for some and nightmares for others; buy wisely.

Best of luck

Stephanie

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

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