Success with condominiums?

Question

Hi, has anyone had success with condos? Are multi family and single family homes the only way to go? I understand that multi family properties are the better way to go, but can buying and holding condos for the long run be a good idea as well? I find it easier to purchase condos while putting down 20%, I plan to buy and hold in the long run. What should I look for when reading about their HOA?

I appreciate everyone's input!

Elsa M. · Answer

Thanks @John Merritt I appreciate the time you spent in your reply, it was very helpful. I am also looking into townhouse style condos. When looking into a condo I want to buy, where do I go to read about HOA docs and CC&R's?  What should I be looking for?

John M. · Answer

You usually won't have access to the HOA or CC&R docs unless you have an accepted offer and the seller's agent should provide them as part of seller disclosures.  However, your agent can ask the seller's agent if there are any rules about rentals prior to making an offer - sometimes they will know sometimes they won't.  Also, if you find a condo you like and your agent can tell you who the management company is sometimes the management company will keep copies of the HOA docs on their website and you can download them and read them prior to making an offer.  If there's rental restrictions or anything you don't like then you won't be wasting time writing offers only to cancel them after reading the HOA docs.

The types of things you want to look for are obviously what kind of restrictions or rules on rentals, any lawsuits pending, and if there are minutes to the board meetings see if there's anything mentioned about upcoming major repairs or unbudgeted expenses  that would mean an assessment or increase in your HOA fees.   Also HOA fees will sometimes increase $20 or $25 a month for no other reason than "inflation" or so they'll say.  There's not much you can do about that unfortunately.

John M. · Answer

Hi @Elsa M. I have had good results but I should point out I don't have apartment style condos, I have one townhouse and one townhouse style condo (both are in 4plex style individual buildings), which may not be quite as restrictive as attached condos.  Also I read all the HOA docs and the CC&R's before I bought so I knew exactly what I was getting into before hand, i.e.  rental restrictions, pending or past lawsuits, special assessments, etc. during my due diligence period.  I actually think certain types can be decent investments IF you do the homework and read the docs and know what you're buying into.

I personally avoid high rises (too much cap ex and high maintenance costs mean poor return), poorly maintained buildings with lots of deferred maintenance, avoid non-warrantable buildings or complexes (hard to finance), I prefer townhouses or 4plex style condos with only one common wall and nobody above or below, that limits neighbor and tenant drama.  Also I invest out of state so I like knowing everything outside of the unit is taken care of and the tenant doesn't have to deal with landscaping or watering.   Also condos can provide tenants amenities like pool, spa, fitness center, etc that a SFR may not have.  And, as much as HOA's can be a pain, they do keep an eye on things so if your tenants are doing something they shouldn't be you will likely find out about it, where in a SFR you may never find out.

In general a lot of people don't like HOA's or CC&R's (I get it), or the possibility of unplanned special assessments (I get that too), but a certain percentage of the HOA dues you would have to pay in a SFR anyway (landscaping, painting, repairs and maintenance, insurance for the outside, pool/spa, gates, etc).  So it's not like you're getting absolutely nothing for your dues.  The townhouse I own is in a beautiful newer gated community in a great location with great pool, spa, picnic/bbq area,  and $140 per month dues which I think is totally reasonable.  A comparable SFR in the same area would cost more than 2 times what I paid for the townhouse and I would have higher expenses, taxes and insurance.  So it can be a great way to get into an A or B building/neighborhood at a lower cost.

Will Hanner · Answer

Im trading 2 condos on a golf course ($185K equity) for 4 blue collar homes; heres why;

$445 HOA means im converting -$55 cash flow on 300K condo balues for $860 cash flow on 560K value of the 4.

Tom Parris · Answer

Hi @Elsa M.

I think the only real downfall of a condo compared to a SFH is there's slower appreication. All the negatives that I read above are preventable if you do the research beforehand.

Every single condo in the country is set up differently than the other, and you should look for a community that is set up a certain way.

• No rental caps...You want to rent it out immediately
• There will likely be rental restrictions, but those are no different than what you want. Typically they only want long term tenants, 7 months and longer, they may want a background check to make sure they weren't drug dealers in the past. 
• Not older than 20 years. The older the building the more maintenance it needs, the higher the HOA
• No commerical space in the community. To obtain financing it can't be larger than 25% of the total community square footage. 
• 10% of the budget to go towards reserves
• No active or pending litigation (HOAs like to go after the developer for construction defects)
• No assessments (ask for the last 12 months of board minutes in your offer. If there's an assessment or litigation, you'll read about it in those minutes) Also, if you get the budget and you see a large increase in legal fees, ding ding ding, you may have litigation. 
• Make sure no 1 party owns more than 10% of the total inventory

The condo is only eligable for financing if it meets some of the requirements above. If it's purpose is for an investment, your downpayment size might be dependent on what the owner to renter ratio is.

Now, you need to realize that a condo is meant for a specific purpose. People on this site don't like them because they don't have absolute freedom. The HOA's purpose is to maintain the integrity of the community, and protect the owners. So if you think you can accomplish the same as a SFH, you're mistaken and it's not for you.

They're amazing cash flow options because so much of the maintenance is covered by the HOA. They work especially well for out of state landlords because of the total lack of maintenace. For my personal properties, I may send out a handyman and an AC service once a year.

George Lay · Answer

I assume that each state regulates grandfather clauses. Where i'm from, once the property changes title, the clause ends. Also if the existing tenant moves out, the clause will end.  It's probably not a good idea to rely on a grandfather clause to protect you if your investment strategy depends on it.

It's true that there's less to worry about regarding everything outside your unit, all of the things @Greg Scott mentioned are very valid issues and happen more often than people realize, i can vouch for that.

You want to read over the minutes for a number of years to see what longstanding issues are going to be problems. You may see comments relating to water leaks, or roof repairs, or engineer reports to pay close attention to. These can be big ticket special assessments once the HOA decides to deal with them. You'll also want to look over the financials to see how well the property is being managed and to make sure there is a healthy contingency fund in place. You'll have to draw your own philosophy and conclusions about the numbers. A surplus could be good because they're spending less or it could be bad because the HOA is neglecting some of the necessities.

One final word of caution, take all the minutes with a grain of salt as, not all issues are going to be obvious. For instance, there may be conversations of pest being found that don't make it into the minutes but could result in hefty extermination bills. You'll want to look at indirect things such as "warnings to residents not to leave food scraps in hallways" or "needing to replacing damaged wiring" etc.

Elsa M. · Answer

Does being grandfathered in help to protect you at all if you choose to rent? Or while you are renting can to HOA just take that away from you , assuming there is no issue with the renters?

I understand that it's trickier, but its also nice that there is less maintenance involved. When reading the guidelines of a HOA what should I look for?

Thanks for responding!

Greg Scott · Answer

Single family homes are pretty simple operations that most people understand pretty well.

A condo is similar to a house but with a lot less control over the investment:

• The HOA can hit you with "special assessment" fees whenever they want to make a large repair, hurting your cash flow.  Unfortunately, the special assessments are often not rare events.  In a two year time in her condo, my wife got socked with three of them
• The HOA may greatly restrict your ability to run this as a business.  Often there are restricts on the number of units that can be rented. So, if you are the one just over the threshold, you have a permanent vacant unit.   HOAs also have restrictions on signage and showing, making it harder to rent out.
• If the HOA ends up in a big lawsuit, often banks won't provide a mortgage which means you may not be able to sell when you want to or do a cash-out refi.  You may lose your exit strategy.
• You can't choose your neighbor.  For example, if your tenant ends up with a hoarder as a neighbor, be prepared for lots of calls for an exterminator

So, you can make money in condos but it can be a lot trickier.