Condo for first deal?

Question

Paul G. · Answer

You will get varying responses on this.  People who are against Condos usually say this:

The HOA will eat up a lot of your profit.  And finding a condo that satisfies the 1% rule can be pretty tough.

It can also cause problems when trying to sell depending on if they are FHA approved, or even lendable.  Some are not due to HOA reserves and restrictions.

There have been cases where an HOA has decided they no longer want to allow rentals in the unit, which if passed, can really cause problems.

HOA's can demand a special assessment if their reserves aren't in order, which could be thousands of dollars.

If you've noticed a theme in everything I've written above, you're right.  Buying a condo, in my opinion, requires just as much sleuthing of the HOA as the condo itself.  If you can find a condo with an active HOA and one that has a healthy reserve and is run well, condos are amazing investments.  But they can easily turn on you if they are run poorly.

I personally love condos, because I don't want to worry about a 20K roof repair, or exterior structure / lawn care.  I like knowing that someone is taking care of the exterior of the unit, so when I go to sell, I won't have to worry about a unit being painted teal and bright pink with boarded windows ( exxageration for effect :) ).  They also offer a much better price point for entry. (at least where I am).

Edit: One other big thing I forgot to mention.  Condos are usually much harder to get a mortgage on as an investor.  Lots of hoops to jump through that you don't have to with a townhome or SFR.  Just something to keep in mind.  I don't mind the extra work, but it can be a pain at times.

Rachel N. · Answer

@Paul G.,  when you research the HOA for a potential condo investment, do you just contact them by phone, tell them you're considering buying a unit in their complex, and ask them 1) to confirm what their monthly fee is 2) if rentals are allowed 3) to email you their condo docs 4)  what their reserves are, and 5) if any assessments are coming up? Am I missing anything, or do you have a different process for this?

I went blindly into my first condo purchase and have a second one under contract, but I wasn't quite sure about what I was doing with those two transactions, since I hadn't discovered Bigger Pockets yet. Hoping to figure out the best way to look into these investments in the future.

Account Closed · Answer

^ he said it best. Condos are generally horrible cash flow investments. There is literally no control when owning a condo.

You're better off buying an SFR. Bigger buyer pool, more control, better appreciation. Yes, perhaps a tad bit more work, but real estate investing shouldn't be easy.

Paul G. · Answer

Account Closed I disagree.  Real estate investing SHOULD be easy.  The hard part is finding the deal.  Once you find the deal, the dream is to have it on autopilot from then on.  Most people go into real estate to be passive investors.

My condo I cash flow $300 a month from, and my second one I'll be at about $190 (once I close and update it).  My first condo appreciated 85% in 4 years and I was able to cash out refinance it to pay for my second condo.  (and have funds for a 3rd when I can find one I like) I've had decent tenants so far and my HOA has been amazing.  They're responsive, easily accessible and are on top of maintenance issues in a proactive way instead of being reactive.  To each their own I guess.

I'd rather have 2 condos that cash flow $500 where I don't have to worry about the roof, and when the AC dies, I can replace for 4K instead of 8-10K, over a $500 cashflowing house any day.  But that's just me

Frank Chin · Answer

I just like to comment on the comments you don't have to worry about roofs in condos.

I bought a newly converted condo, converted from a local high school. Everything inside is brand new, walls, kitchen, AC, heating, plumbing etc. I bought it after a real estate crash, 1992. values dropped from $120K, to 40K sold at auction. Then the market sprang to life, 10 years later, went up to $100K again, I sold and did ok.

But the roof was the original roof from the high school, and naturally no one checked the roof. The building had historic designation, meaning the new roof costs $1,000,000. With 104 units, special assessments would run $10,000 per unit.

So I gave my buyer several thousand dollars off the sales price due to the problem.

Add this to the HOA unfriendly to rentals. They restrict rentals to 20% of the total. Later on they had to approve tenants, then later still they had to approve the leases. These added rules would severely restrict my cash flow.

How do I know this. I owned rentals in NYC for 35 years, and there's plenty of coops for rent, though I don't own any. But through the years, I rented to plenty of good tenants tired or waiting for coop board approval, a month or two, and rented from me instead.

Kyle Evans · Answer

I started with a condo and would recommend it. Great way to get started and definitely possible to cash flow well if you buy right. Good luck!

Rachel N. · Answer

@Paul G., thanks, that is helpful!

@Phil Pereira, I found this article here on Bigger Pockets about condos, which is useful and also has a good discussion in the comments:

https://www.biggerpockets.com/renewsblog/2016/03/0...

Paul G. · Answer

That's about right.  Most of the statements you will get from the CC&R and meeting minutes.  To get a mortgage for a condo, it is contingent on certain items from the HOA (namely finding out the reserves on hand).  Other than that, you should be able to just call and ask a few questions if you have any concerns.  I walk the pool if there is one on the property to see what the plaster/pebbletec looks like and the underside of the lip.  I also check pool decking to see what the state is there.  That usually gives you a basic understanding of how attentive the HOA is.

As far as assessments, they probably wont tell you if something major is coming up, but it depends on the HOA.

Paul G. · Answer

@Rachel N. Good point about the heat.  I live in Arizona, so it's the same thing.  115 degree summers, bleh.

I think it's pretty dependent on where you live and what opportunities present themselves.  I know there are some places where SFR make much more sense than condos, but in my particular market, both are pretty accessible.

Condo for first deal?

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