Condos: Why are they a bad investment & what happens to old ones?

Question

I have some great mentors in my city, but none of them invest in condos. When I have talked to them, they keep it simple and say that they are just bad.

I am aware of special assessments, HOA fees, but what are the major issues to look out for? Also, what happens when condos get old? Are they renovated in a major overhaul or bought out and bulldozed? Thank you for any guidance!

Mike G. · Answer

@Mindy Jensen all valid points to consider. sounds like SFH in a non HOA community would be a better option. @Andrew Johnson thats a great point when looking at the vacation rentals in the longterm view. If assessments are only going to go up, the question is will the rising rents keep up with the rising assessments interms of not affecting your cash flow too negatively. Sounds like condos have more downside than up. Thanks for the feedback

Jeff Kehl · Answer

@Trevor Burbank I think Condos/HOAs can be good and bad like anything else. Look at it this way, they are kind of like an additional government that collects money from all the members and are supposed to perform a set of services for the common good of the members. To the extent that they do that efficiently and honorably it works well but it probably goes bad more than it goes well. The biggest reason I think is because they try to keep dues lower than they should be to handle what they're responsible for. For instance if your condo association is responsible for the $30k roof of the building and they don't reserve for it for the first 30 years to keep fees low they look pretty good but that poor guy that buys right before the 30 years is up is going to get smacked with a special assessment.If you're going to get into one you just need to do a lot of work to make sure that the finances of the association are in good shape for the services they are responsible for.One last thing, if your plan is to rent the condo out make sure that is allowed because a lot of them have caps on the number of units that can be rented.

Dan Bryskin · Answer

@Trevor BurbankHere are a few reasons I stay away from condos/ town homes / associations1. HOA. Not only you are paying fees. They can change rules. Not allow rentals for example, or come up with the pet policy or smoking policy or what ever someone things off. 2. Capital calls. Would you like to receive a letter from association stating they have decided to replace siding and you need to contribute $15k?3. During the crash / correction they often become a desert towns with the few units occupied, no dues means differed maintenance4. Some HOA's are run well and some are not. Some times you are paying 3x for someone's nephew to clean the snow and 5x for someones brother to paint.5. It seems like people come to HOA meeting to complain. Why would you pay money to let other people control your property? But hey, some people think they are a great. Good luck

Ike Mutabanna · Answer

I've owned condos in the past and wouldn't do it again. Apart from the reason mentioned by others, condos tend to lose value faster in a market correction, and they gain value slower in an upswing. It's fine and often desirable as a lifestyle choice, but can be tricky as an investment asset.

Diane G. · Answer

One of my rental in San Francis is in a small HOA of 5 units.... HOA all of a sudden tries to prohibit rental ... luckily in California, there is a law that says new changes after purchase does not apply to existing owner....imagine if we don't have that state law.... !!!!!!

Andrew Johnson · Answer

Logan McCray One thing think about is that the HOA dues come regardless of if you're in peak season or not. Even taking out the risk of a condo HOA changing their mind on a whim it's basically a fixed cost. A lot of vacationers want amenities and the condos that come with those amenities typically (over-generalizing here) have higher HOAs. Not to mention I've never heard of a condo HOA that has lowered a monthly assessment so it will be a rising cost over the long term.

Mindy Jensen · Answer

@Logan McCray , the same cons apply to short term as long term. You still own it, so you're going to be the one hit with fees and special assessments. The HOA may decide they no longer wish to allow rentals, they may restrict to only annual leases, etc.@Trevor Burbank , I have owned two condos - both owner occupied. I have never lived in a condo without a special assessment being levied. Not one year.In addition to all of the above, there is the chance that the complex will become Unwarrantable or not FHA approved.Unwarrantable means banks won't lend on any units in the complex. It has to do with Fannie/Freddie rules about low owner-occupancy and if you are able to pay cash for your unit, this won't affect your ability to buy it. But if you go to sell, you significantly reduce your buying pool. Most people buying condos don't have a lot of money - and therefore need to get a loan. When banks aren't handing them out for your property, many of your buyers will look elsewhere.Many of those buyers are looking to use the FHA loan, too. If the complex is not approved by FHA, you can't use an FHA loan to buy a unit. Again, limiting your buying pool.

Mike G. · Answer

Any word on using condos for the purpose of short term vacation rentals? Yes yes I'm aware that the HOA may allow or or not allow this or some nosy ass neighbor could report you because there are new tenants going in and out of your condo. But any more experienced investors in this niche when it comes to condos and the airBnB thing? Pros? Cons? In your opinion do the pros outweighs the cons or vice versa????

Marian Smith · Answer

IMO condos as rentals compete with spartment complexes. SFHs with attached garages, yards and no shared walls do not.

Andrew Johnson · Answer

Trevor Burbank I think you've nailed the biggest issues. You can ask about the HOAs reserves (if they have any) during the purchase process. The last thing you want to do is to walk into a special assessment. While they can be a good investment it's hard to forecast when an HOA will raise their monthly assessment and if/when they will change whatever rules they have. It just makes it a little harder to model, adds a little more risk, etc.