Condos Buy and Hold : Why the resentment?

[Andrey Y.]

So I have been listening to several podcasts, which are all awesome and super-informative. Can't think of a higher yield source. (See www.biggerpockets.com/show75 specifically) and there seems to be a mistrust or no interest in the buy and hold strategy with condominiums. The issue also occasionally comes up on the forums.

The biggest argument against it is the evil associations, with people that are power hungry, and may raise the maintenance fees without you having any control over it. And I get that. I will address all this in the coming text. 

If you are investing in single family homes, people glady accept that they will have to pay roughly 50% of the rent on expenses sans debt service. For multifamilies, the number is closer to 60-62%. I wanted to get your guys input on all this. For multis @Ben Leybovich 

Now I look at these numbers, and how are people okay with this?

Hear me out some more. 

1. If you buy a condo that has association fees, at least 50-75% of tenant phone calls for ANY reason (repairs, grounds, etc.) can be eliminated.

2. We all value our time. Why should we be tasked to find handymen, contractors, and coordinate how they get payed? Not only that, make sure the appropriate work gets done and the tenant is happy, and the contractor gets payed. I think this is a huge time saver in condos because a lot of these phone calls are effectively eliminated.

3. I think its an art to find a well-maintained condo with low maintenance fees relative to rental income. Just like anything else in RE, we need to do our due diligence.

4. Also, let me address this concept of 'whoa they can raise the maintenance fees at their whim, and you have no control over it.' Listen, I have never heard of maintenance fees DOUBLING in 5 years or less. Even 10 years or less would be rare.

5. Things like HVAC, roofs, grounds, windows, siding, etc. are just things that you don't have to worry about when investing in condos.

6. About power-hungry association members.. so what?? You can lay on the beach, travel abroad, spend time with friends/family, and let them hash it out. Rest assured that even if the maintenance fees get raised, you will never have the expenses (and your time spent, this is HUGE) of a single/multi unit. This is assuming the appropriate due diligence, as we do with every investment.

So why are single/multifamily investors OKAY with paying 50-60% of rent in expenses? I am early in the investing game and I am still trying to wrap my head around that. I think with condos, $400-600/month cash-flow is all day everyday. With SFH/MFH, mostly people are happy with $100-200/door, and the $500/month are those rarer instances where the market is down and a fantastic deal has been found by the investor.

[David Krulac]

@Andrey Y. 

A condo is a form of ownership, whereas a TH is a style of house.  The terms are neither mutually exclusive, nor always the same.

I've owned TH that were condos, and I've owned TH that weren't condos.  I have a TH for sale now that is not a condo, but is/has an association that takes care of lawn and parking lot.

I even developed a condo in a building built in 1902, which is well before condos became popular.

In the area that I live there are few high rises, but there are some.  In the town I live in I think the tallest building is 3 or 4 stories.  I actually own some 3 story buildings.

I have owned condos that are TH and the roof and the exteriors in those building s are covered by the condo.  I've also owned condo that don't have a roof per se as there is another unit above them that has a roof, and the roof was condo maintained.  I've owned condos that were build as apt. rental then converted to condos, and I've owned condos that were built as condos initially.  Obviously the 1902 building was not built as a condo.

To throw another wrench into the discussion there is another form of ownership called a co-operative or co-op which is used in NYC and FL, where you are buying stock in the company that owns the entire building in proportion to the square footage your unit is in ratio to the total building square footage.  that's not a condo either but is another form of ownership.

There's also something called a PUD, which is another form or ownership that's like a condo, sort of. I owned one of once and I had a deed for the land that the TH sat on plus 1 ft in the front and back. The rest of the land was owned by the PUD association.

The pecking order as to buyer preference in this area is traditional and goes in this order.

1st SFH detached

2nd SFH semi-detached, nobody lives above or below you.

3rd SFH attached on 2 sides, nobody lives above you or below you.

4th somebody lives above you or below you.

In actuality those are styles of housing and ALL could be a condo,  In this area there are no condos in the first category that I'm aware of; but in some other areas of the country yes.  In some golf course communities they have detached housing that is also a condo.

There are certain things I like about the condos, like exterior maintenance, and the condos that I have are well maintained.  I don't like the costs or lack of control over decisions that affect my wallet.  And I don't like the condo with the 35% of income condo fee.  In that unit the heat, water, sewer and trash are included in the rent so the tenants like the low costs of utilities basically electric (but not heat), telephone and cable.

But I have similar units with tenants paying heat and hot water and you don't get much more in rent if any for the units with those utilities included.  The typical tenant doesn't know what the utilities cost is and therefore see other units with $x as the rent and expect that a unit with utilities will cost about the same.  Tenants for the most part don't pay extra for amenities, particularly if they don't think they will use much.  Like a swimming pool or tennis courts or gym.  The cost of operation is included in the condo fee but many tenants and owners don't use those facilities, but they are paying for them in the condo fee.

All of the units that I have had and rented, I have paid the condo fee.  There are some few units that get the tenant to pay the condo fee, but that practice is not widespread and not readily accepted by the tenants here.

I have also owned some condo units with rental restrictions.  I mentioned them in Bigger Pockets Podcast #82, as two units that I fixed and flipped because I couldn't rent them.  both condos limited rentals to 10% of the total units and already had their limit so these units could not be rented.  Their thought is that owners are a better class of occupants over renters.  But I did a little informal study and my conclusion was that most restrictive rental condo associations were selling at LOWER prices as a result, because no investors could buy and at that time investors were a big part of the buyers in the market place.  The condo associations THINK they're doing a good thing, but in actuality are taking money out of every owners pocket and equity.  Go figure.  For one of the condos I have an excellent tenant who was an Army Colonel and wife with no children at home, stationed at a local base.  Ironically the Colonel had a condo at their last duty station that they couldn't sell because of the rental restriction there.  I felt they would have been an excellent tenant for 3 years, but the condo association was unbending. 

I had another condo, where the president of the condo association tried to talk me out of renting my unit. I wasn't dissuaded, and rented it. It was the only non-owner occupied in the complex. The tenants were excellent, mature couple with grown kids, who only moved out of state to occupy a house previously owned that wasn't selling! That house was age restricted SFH where all owners had to be 55 years or older. If you're 54 years old, sorry Charlie, you can't buy here. That is the only form of discrimination (age) that is sanctioned by Federal law.