Why should I stay away from condos??

Question

I am new to real estate investing and I am looking for my first deal. I want to buy and hold. I have heard that I should stay away from investing in condos, but I am not sure why. Can you guys give some advice on the reasons to stay away from condos?

Jeff Copeland · Answer

1. HOA/COA Fees

2. HOA/COA Rules and restrictions on leasing

3. The HOA/COA itself

4. Condos can be almost impossible to finance; They are a cash asset for the most part

5. The HOA/COA

6. The HOA/COA

Why is the HOA/COA a problem?

1. They control all of the finances for things like common area maintenance, pest control, landscaping, and capex. You have little or no control over whether they hoard cash and let the community fall apart, hire the HOA president's brother to paint the buildings pink, raise the HOA fees to the point where you are cash flow negative,  lower the HOA fees to the point where the HOA goes broke, or fail to treat a termite infestation or cut the grass.

2. They may (or may not) allow leasing. Maybe they do now...but at their next meeting, they may decide to start doing things like secondary tenant screenings, interviewing your tenants before approving them as residents, or they could ban leasing altogether (this is not uncommon) or require a year or two of owner occupancy before you are allowed to lease your unit (this is very common).

3. They can limit how and when you sell, and to whom. Many HOAs/COAs require that you get their approval before selling. Many want to interview the buyer in person before allowing them to buy and live in the community.

4. They can, and do, control and police ridiculous things like what color you paint your front door, the condition of your window screens, the type and color of doorknob you install, where you store stuff, where you and your tenants park (I've had an HOA/COA tell my tenant she was not allowed to park her car on the property because her car was too ugly) - All of these are actual examples from my own experience - I am not making these up).

5. They often hire a third party management company (at your expense) to perform some of these functions, adding yet another layer of dysfunction and bureaucracy to the mix.

I could go on and on...all of this, and you pay them for the privilege!

Note: The term HOA (Homeowner's association) is synonymous with COA (condo owner's association) in this context.

Greg Scott · Answer

Many people think condos are a safer investment because someone else worries about the outside.  In reality, you have a lot less control with a condo than you do with a single family, so they are a riskier investment.  Here are just a few reasons:

• A poorly run condo association may charge special assessments to make unplanned repairs
• You may not be able to sell if the condo HOA gets in a lawsuit
• As a landlord, what do you do if the neighbor, who owns his units, is a hoarder and attracts rodents?
• What do you do if the HOA votes in restrictions on renting units?

Jeff Copeland · Answer

Townhouses have less problems with financing, but the HOA situation can vary.

Dustin Kunasek · Answer

@Jeff Copeland @Greg Scott Would you also stay away from Townhouses for this same reason?

David M. · Answer

@Dustin Kunasek

All that being said.. if you have an association that has its act together and is well managed, it may not be too bad.  I think in the south it sounds like it’s more of a rampant problem than around me.

Also NJ has horribly high propert taxes. However, when I consider the condo’s property tax and fees annualized, it’s really about the same as having a single family.  Then, if you consider that the outside is being taken care of, the fees are sometime worth it.  Plus, some tenants actually like the use of the pool and clubhouse (with fitness equipment).  There is real money saved there, albeit for them but my logic is that there is more money leftover hopefully to pay me rent

Everytime I have a tenant who does a poor job maintaining the landscape I think of the condo situation...  its the same as why you don’t let tenants do any home improvements, even if it’s painting...

I’ve never had trouble getting loans on condos or townhouses...

Again in my case, nj is heavily oil, well, septic.  Condos and townhouses are automatically ng, public water, public sewer, and central air.  Big difference in costs / cost avoidance.  I’ll never rent a septic...  oil rentals have been problematic...

So, it all depends.  Do your homework.  Sure there are some not so great associations around me, but I just don’t look at them for investment.  Sure, there are some well performing associations but their properties and expenses are too high, too.  But, so are some single families.

Good luck

Dustin Kunasek · Answer

Thank you guys for all your input.  This had definitely helped.

Will Gaston · Answer

@Dustin Kunasek One word: Control.

A huge reason investors shy away from condos is the lack of control. There are way too many people that have a say in how well your investment does.

Dustin Kunasek · Answer

@Greg Scott thanks for the feedback. Very helpful.

Why should I stay away from condos??

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