Better deals in condos right now?

Question

I've been seeing plenty of condo units that are going for $100,000-110,000 in B neighborhoods of Tempe and Phoenix that are renting for $1,000-$1,100 and needing little to no work before going on rental market. I know there are a lot of varying opinions on condos, but they sure seem to be the better buy on paper these days for long term cash flow holds relative to single family and even multi-family in most cases. Not just talking MLS either. I see plenty of wholesale SFR's being offered nowhere close to the 1% rule and needing at least a moderate amount of rehab before rent-ready condition.

It seems like this shift has come with increasing rental prices at an equal rate with single family versus condos, but increasing purchase prices much more rapidly on the single family side versus the condos. Sure there are HOA fees of $150-170/month on most of these condos, but you also remove several expenses with condos that you will have with single family as well as lower property taxes and essentially 100% depreciation come tax time.

Anyone else feeling the same? Hoping the condo haters and condo lovers alike will chime in on this one.

Stone Jin · Answer

So maybe I'm a value investor and wouldn't spend 275K on a rental in the PHX market.

Since you've asked for number so I'll give you the numbers on the last condo (late 2015) we bought and the last sfh (summer 2016).   Also our portfolio is about 50% condos and 50% SFH.

Condo: Purchase price: 115K in Mesa.  Community built in early 2000's gated community 1 car garage. 2/2 1000sqft.  HOA is 140.  rent is 1000.  So in my case if we take the 140 off of the 1000 we are at 860/115000 =  .75%.  Current ARV is around 125K so maybe 10K in appreciation over a year.

House: Purchase price 135K in AJ, Cookie cutter 3/2, had to put about 10K into repairs, so call it 145K purchase price.  HOA is 40bucks, rent is 1150. So 1110/145000 = .76% so roughly the same in terms of percent rule of thumb.  The arv back then was 165k and now is about 185K.  So 20K in about 4-5 months.  Maybe my comps are a little off since I'm not a realtor, so only rely on my experience and watching zillow and MLS.

I realize two data points don't make a trend but I just feel like if I can buy comparable houses and condos I get a much better return in terms of appreciation, the cashflow is about the same.  If I can't find a house that match our criteria, then we just keep looking.

The other thing about condos is that the HOA goes up at a much quicker rate than sfh HOAs.  We have had increases for 2017 in nearly every condo community and maybe only 1 community for SFH.

There is nothing wrong with buying condos, I would just prefer to buy a house.

Josh Mitchell · Answer

@Patrick McCandless I don't mind a condo deal if it makes sense, however, keep in mind with those HOA's, they can simply vote to not allow rentals at the complex. Then what? They also go up annually (2-4%/yr. and what about special projects that need done) I have 2 condo's but I made sure to do my due diligence of rules/decs & bylaws/ Budget/condition of building/ etc. as I am sure you would as well. You can meet a lot of the "rules" with condo's if you buy right. Good luck!

Patrick McCandless · Answer

Account Closed i agree with everything you just said 100%. Thanks for your input!

Account Closed · Answer

@Patrick McCandless

I am a strong believer that investing in condos is a much better cash flow investment than single family homes. (I only invest in A.B  neighborhoods so this does not apply to C,D). The price of homes tends to be significantly higher than condos in these areas while the rental rates are pretty comparable. This represents a great opportunity for a buy and hold investment that generates great cash flow. SFHs probably have more potential for appreciation. However, as a leveraged real estate investor cash is king and I am more than happy to trade cash flow for appreciation. My two condo units are currently generating cash on cash return of 15% and 20% in A and B neighborhoods respectively. Both of my tenants are married professionals with income to rent ratios over 4 to 1 who treat the place like it is their own.

I am not sure why HOA fees scare off so many BP investors, HOA fees should increase every year just as the cost of all products and services increases every year. This is no different than maintaining a SFH. Condos also have a lower CapEx and Insurance costs, trash collection and water due to the HOA fee. These costs should be deducted in an analysis.  There is always a risk the HOA will drastically increase fees out of the blue. However, reviewing HOA policies, budgeting and reserve study before buying a condo can mitigate this risk. SFHs have the risk of being solely on the hook for major structural or roof issues which in my mind is much more worrisome than an increase in fees.

To me the biggest red flag is if governing documents have clearly not been updated for decades.  The governing documents should have strict guidelines that cover all aspects of the association from the Board's rights and powers, to a code of conduct of residents and renters to a process for making exterior modification to individual units. These regulations need to be current and reviewed by a lawyer at least every five years.

Patrick McCandless · Answer

Great rundown @Stone Jin. It sounds like we are on the same page here. My first choice would also be a SFH, but in the B neighborhoods I look in and my clients are looking for the numbers in an SFH just don't beat that of a condo. I haven't exactly been keeping an eye on AJ as that's not an area of interest for myself and hasn't been for my clients yet. Thanks for the rundown. Best of luck!

Patrick McCandless · Answer

@Stone Jin To make a general statement that SFH is a better buy than a condo in Phoenix is... well, very general. Let's assume 50% rule and both ready to rent immediately, if you have condos selling for $100k that could rent for $1,100/month versus the single family homes in the same neighborhood selling for $275,000 that can rent for $1,500/month are you saying that you think the SFH's are a better buy than the condos in terms of long term cash flow? I'm looking for more meat and potatoes than "I think X is a better buy than Y." Gimme some facts behind that opinion, please, because I'm just not seeing it.

Stone Jin · Answer

If I recall correctly in 2008 the condo market crashed quite a bit more drastically than SFH.  Maybe my memory is foggy.  I'm not saying another crash is coming, just something to be aware of.

There has been huge amount of new apartment development in the East Valley, so your competition is going be greater unless you can offer a better product cheaper.  I know a lot of investors are turning to vacation rentals esp since AZ law permits it.  However, my feeling is that market may get over saturated very quickly.

Generally, buy and hold investments in Phoenix metro is very competitive and returns aren't very good.  I think in today's market SFH is a better buy than condo.

Patrick McCandless · Answer

No other condo lovers/haters in the Phoenix, Scottsdale, Tempe, Mesa, Chandler, or Gilbert areas with input?

Patrick McCandless · Answer

@Armando Raygoza I sent you a private message.

Better deals in condos right now?

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