First Investment, should I take a chance on a Condo?

Question

I am brand new to Bigger Pockets and this is my first post. I have not made an investment deal yet but have been researching properties and strategies for the last several months. I live in Dallas Ft Worth and the area is booming. At first my intention was to flip a house or two and see about making some cash. I currently am a Sherwin Williams sales rep that deals in the multi family industry exclusively, so I have a lot of contractor contacts as well as rental knowledge from the past 6 years. I think instead I am now leaning on a buy and hold strategy. I cam across an HOA community that had a 3 br, 2 bath condo for sale for $145k, right in my wheelhouse! The trick is that is is burned down and in the process of being fully rebuilt by the HOA. This means brand new unit so no rehab! This will take 6-8 months and I am not sure if I want to wait and not collect rent for that amount of time. I should be able to rent out for at least 1750/month. Asking price is quite a bit lower than housing in the area and the location is just off a major highway and 5 minutes from a university. I would be using my heloc on my house to purchase for cash or could look for financing to keep cash flow for other investments. Any advice is much appreciated!

Patrick Liska · Answer

Joseph,

First step for you should be to find out if the HOA allows renting out of the condo, some do not. so before you go buying the place do your due diligence.

Louise A. · Answer

@Joseph Calvano

Don't be tempted by condos!  My main beef is that you don't control the property.  The HOA board does.  I don't think anyone in the thread mentioned the rental cap?  Is there one?  If there isn't the board can institute one anytime and you could lose your right to rent.  The board can choose to special assess at any time and raise HOA dues at any time.  My first property was a condo and I sat on the board and we voted to put a $120K roof on the property.  19 units.  That's a bill.  And I could rent it, so I sold for a loss.  I may be biased!

Domenick T. · Answer

Welcome Joe. You made the right decision. The beauty of real estate is being able to control your investment. This just isn't possible with an HOA!  Good luck in your search.

Joseph Calvano · Answer

Thanks for all who have replied. I have looked at the Rules and Regulations of the HOA and they do put a limit on rental units at 15% of the 136 unit total, currently they are at 12%. No assurance that I could lock mine down as a rental once completed. They also have in there they need to screen the tenants and approve. I questioned the management company on many aspects of the health of the HOA and they did not answer because this condo was now under contract. HOA dues were roughly 350 per month and I would need to pay them for the 8 months it would take to rebuild. All of this said, cash flow would be tight once rented. I am beginning to see that not having control could of expenses of the HOA could severely hurt my cash flow on this property. This was a good exercise in research and due diligence, but I think I'll continue looking. Thanks!

Jamie Carter · Answer

Hi Joseph, and welcome to the BP community! As a new investor myself, I am in the same boat as you- except I started house hacking for my first property. Like the many posts before me, definitely do your due diligence on a condo and the fees and regulations associate with them. I advise against them for your first one. I know the fact that it's near a college makes it tempting to invest in that area (simply due to the fact that MANY students would rather live off campus than on) but I would consider who you want living in that property, and the risk that is associated with it. Also consider meetup.com for investors near you. They may have more insight into investing in that specific area vs an outsider. Hope this helps and good luck in your investment adventures!

Ross Denman · Answer

This may not apply to your market, but Indianapolis, rents do not rise much over several years in most areas. I tend to dissuade my clients from considering condos as the HOA fees rise more rapidly than rents which means an annual reduction in cash flow. I would do some research on how much the HOA fees rise annually and compare that to whether or not you can adjust the rents accordingly.

You might consider buying it and owner financing a sale and make the residents responsible for the HOA fees. There are various ways to create an owner finance deal (lease w/ option to buy, seller carryback, full land contract, etc.) Just things to take into account.

Joseph Calvano · Answer

Thanks for the welcome Sejal!

I have calculated primitively for those expenses and it still looks good, although the HOA fee is more than the property taxes. Have you formed an LLC to make your first purchase? I want to protect my personal assets but not sure if it is necessary for this first one. I was also thinking of Cash then refinance to free up the cash for future deals.

Sejal B. · Answer

Hi Joseph, welcome to BP! I'm also new and like you, have been researching for a few months and am looking for my first buy and hold deal.

There will be plenty of seasoned folks who I'm sure will offer you great advice but here's my two cents worth.

I would use leverage if possible and use what you get from the heloc as down payment to buy several properties.

Have you factored in monthly HOA fees, cap-ex, property management fees, buffer for vacancy, etc already?

First Investment, should I take a chance on a Condo?

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