Condo For 1st Rental Unit Purchase?

Question

Hello everyone,

Thank you for reading my first post on here.  Looking to enter the world of Real Estate.  I do not own any property currently and I am saving 80-90% of my income to get started and maybe make this a career.  I live for free currently so I want to take advantage of the opportunity.  There are some great deals on condo's in my area.  Any thoughts on as to what type of property is a good starter to gain experience, learn the business, and build cashflow to expand my business? My plan would be to buy and hold on to my properties for income, maybe look to sell when retirement arrives.  I am 23 years old and work for Chase full time.  I'm looking to have around 50k to use before my first purchase if that helps anyone with, "what I would do in your situation.."  : )  Thank you so much again for taking the time to read this, looking forward to hearing from you experienced pros!

Cody B.

PS: Tips or LINKS to on how to leverage my capital to get the most out of it is welcome and greatly appreciated.  Sorry if I should post this in another category!

Hal Thompson · Answer

Condos as rental units get a lot of hate around here. Some of what has been said is valid, but the risk from the HOA can be mitigated.

First, if you're going to buy in an HOA, understand the basics. Is there a rental cap in the building? Has it been met? If there is a defined rental cap and it isn't close to being met, then I think fears of that changing in any decent size association are overblown. In fact, rental caps in general are under assault: http://communityassociations.net/is-your-condo-ren...

The biggest deal killer is special assessments. You need to do a lot of research into the building, read the board minutes, talk to agents and people in the building, and see what kind of shape the financials are in. In addition, don't pay market for a rental condo unit. We've picked up distressed condos at approx. 60% of market value, and they have been great investments, but that's because we didn't pay market. That means we have room for a special assessment and will still make money both on a rental and appreciation basis, because we were under market to begin with.

For a first time investor, condos are also a lot less headache than SFR's. You mainly only have to worry about the inside of your unit, the rest is taken care of for you.

As in all things, the answer is it depends. I would highly discourage buying condo units in "bad" areas. If you buy in desirable areas for below market, you should be fine. Even for a good deal, shady areas tend to be deal killers for condos, because even if the area gets better, the condo generally doesn't.

Anyways, those are some thoughts off the top of my head. I think condo investments get a lot of hate on Backpage, not all of which is undeserved, but the truth is you can do very well buying condos if you are diligent and patient. However, buying just any old condo can get you in trouble.

Account Closed · Answer

I agree.  The homeowners associations can say you can't use the condo as a rental.  They might say today that you can, but next year say you can't.  The dues can go up like crazy.  The rules change all the time.

I bought a condo I intended to live in for many years, and sold it 2 years later.  Because of the HOA.

So, I suggest you buy some property that has no HOA associated with it.  Then, you're in control, or at least only under the normal city/state laws.  And you won't have the unknown future cost of rising dues.

Cody Barrett · Answer

Awesome, thank you so much everyone! I will continue to read, lear, save, and hopefully I can get my hands on a couple of nice properties to start off!

Will Koederitz · Answer

@Hal Thompson

Those are very good points.  Like you said, even if it is a condo, the deal may be good enough to surpass the downside of it being part of an HOA.

Also, see if any of the HOA members have rental units within the complex.  The person for the HOA of my rental has a unit that he rents out (theres 24 units total).  Having HOA member with the same intentions as you can be helpful, I assume.

As @Mindy Jensen said, I would get a multi-family and house hack.

Mindy Jensen · Answer

@Hal Thompson has some good points, and I am not as up to date on the Vegas market as he is, but Vegas was hit hard in the recession, and prices dropped like a rock. They are picking up now, but not where they were. I think potential homeowners are still scared to jump into the market there, but people still want to live there.

@Cody Barrett I am also not that familiar with the Racine market. My own personal experience with condos goes like this: I bought my very first property, a condo, and did not do my due diligence. I paid $200 a month, every month, for my HOA dues. Until the second year, when they exercised a special assessment of an additional $200 a month, every month that entire year. The third year I lived there, they did the same thing. Want to guess what they did the fourth year? BAM! Another special assessment.

I moved into a SFR for a while, then bought another condo. I didn't learn my lesson from the first time around, and right before we sold it, the HOA issued another special assessment for $700.

I no longer have any interest in condos.

If you are living for free, save like crazy and find an SFR to purchase. A multi-family would allow house hacking - you live in one unit and rent out the rest. You can qualify for an FHA loan up to a 4-plex. FHA allows as little as 3% for a down payment. Of course, then you are paying PMI (private mortgage insurance) and those rules have changed recently. It used to be that you only had to pay PMI until you had 20% equity in the home. Now you will have to pay PMI for the life of the loan. You can refi out of it once your equity increases, but that is still a chunk of change to pay every month. If you can swing a 20% downpayment, you skip PMI.

Good luck!

John Negomir · Answer

Condos can make good rentals when the price is right, just make sure to due your due diligence. Your realtor should be able to help you quite a bit,  and your surprise repairs are likely to be smaller than with a sfr.  Probably the best mitigation strategy for the hoa is to go to the meetings and get involved - highly educational and helps to inject the investor viewpoint.

Cody Barrett · Answer

I appreciate the feedback! Great points that I didn't think think about.

Will Koederitz · Answer

My first rental purchase was a condo earlier this year.  It was basically the best property I could qualify for under my circumstances in my area.  It is part of a very small complex with a low fee.  I studied the HOA before purchasing and they had just increased dues by roughly 10% and it was the first increase since 2005, which seemed pretty good.  Also, check if there are any special assessments coming up.  Cody and Sue are absolutely correct that they are unpredictable and can change whenever they want, so it is definitely something to take into consideration.  I spent 63k (I could not get a house in the area I was looking) but I was going after young professionals in a desirable area that want the convenience of a condo.  So far its working out, getting more rent than I initially expected.  I'm sure I will learn something from this property about HOAs at some point.

Cody Barrett · Answer

Ah I see. Thank you!!

Cal C. · Answer

no.  There is way too much hoa risk.  If you have several rentals you may be able to mitigate the risk, but not when it is your only property  and all of your funds are tied up in it.

Condo For 1st Rental Unit Purchase?

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