Are Condo Rentals Easy to Manage????

Question

What's it like to be a landlord who rent out condos?  What are the pros and cons?

Adrien C. · Answer

This is my opinion and I'm sure others will disagree. In fact, I would've argued the other side as little as 3 months ago. But I do not believe a condo is a good long term investment. I have owned an investment condo for 4yrs and I am speaking from experience having both SFHs and the condo. I purchased the condo in 2006 at the height of the market as a personal residence. The majority of the condos in my building were owner occupied and mostly elderly folks. I was 25 at the time. Anyhow, when it was time to buy a house in 2012, my condo was still significantly upside down. I paid $120K and during the crash, they were selling in the 70s. Even over the past 3 years, they've hovered in the 90s with little appreciation. I think the problem regarding appreciation is that the buildings are now 35-40yrs old. Newer condos are selling in the $135K range and are larger with more modern set-ups and amenities. With money being so cheap, the monthly payment difference between 95 and 135 is minimal so people are opting for those. I am on our condo board and we are currently at 51% tenant occupied. This is increasing the insurance rates and making it difficult to attract owner occupants. What's happening most times is when an owner dies, the family is practically giving it away to an investor so they don't have to deal with it. As a board, we've spent countless hours discussing ways to increase owner occupants and no ones has any valid ideas.

As far as an investment- I originally was all for condos are a nice starter investment. I considered the HOA expense the same as a capital expense I would hold back. Instead I help back 10% for maintenance and repairs and 8% for vacancy. I liked that I only had to deal with the inside which wasn't a big deal. From a maintenance standpoint, there is a lot less risk. Now I purchased it with a small down payment many years ago so technically, my CoC return is amazing. After debt services, HOA, and setting aside the 18%, I cash flow $150/month. I've run the CoC numbers for the investors paying $75-85K cash for these and their returns are 6-7% which sucks. Condos are appealing because the price point is cheaper.

So after our last sets of board meetings, my view changed on condos. As mentioned, paying cash is bad because the ROI is low. In my area, I can get 12-15% all day or more on a SFH in certain areas that are C+ and higher. That factors in taking out reserves for cap ex and other bigger maintenance issues. Financing a condo as an investment is challenging. The association needs to be in good standing and have a certain chunk in reserves. We felt we had a solid reserve fund but we're finding banks questioning it this summer. Secondly, condos are tougher to rent. Fewer people want condos. Smaller pool and lower rents. Might find yourself squeezing and putting in a less desirable tenant. The turnover is higher. I've had 3 tenants in 4 years and that's above average. It's like the condo is a stepping stone to either renting a house or buying a house. My condo is nice and I get above average rent and it rents quickly but I see several in my complex that are dated and cheaper but sitting for months. Lastly, you always need an exit strategy. The appreciation on condos sucks. They fall the farthest in a recession and take forever to return. I doubt my condo will return to the mark I purchased it at for another 3-5-7yrs. It just isn't moving and we've had 10% appreciation on SFHs this year. So unless you want to will it to your kids and their kids, it's a tough sell. Now keep in mind I'm speaking in generalities. There are several areas where condos are hot but the midwest is not one of those markets.

So that's my 2 cents. For the $150 I make a month, it's not worth it. I'm only glad I didn't have to pay cash for it. I spoke with an investor who has 4 he just purchased for cash and I'd rather buy 4 houses in an area where rents are equal but appreciation is higher.

Good Luck .

Joseph Leonard · Answer

@Aaron Grant - I own one condo in Southern California while living in Indiana. I kind of became an accidental landlord when I was relocated to Indiana by my company. I have been renting my condo for almost two years now and things have been great so far.

In my opinion, a pro of owning condos is you don't have to worry about the exterior part of the building. You of course do have an HOA that covers exterior maintenance on the structure, but to me, I just like the idea that I'm not having to worry about those major exterior maintenance issues like a new roof, new siding, etc. I guess you could say by having to pay the HOA dues each month you are basically forced to "sit aside money for cap ex" but in my opinion this is a good thing.

I have seen people on BP discuss the fact that you should speak with the HOA before you purchase the property to see what shape the HOA is in. How much do they have in reserves, if they increase the HOA dues often, when their last special assessment was, when they plan to do another special assessment, etc.

One other thing to keep in mind about owning a condo which has also been discussed on BP and in various real estate books is the fact that condos are normally the first to lose value when the housing market declines.

Russell Brazil · Answer

I have owned every type of real estate. Condos, townhouses, single families, rowhouses, multis etc.  I have found that my condos were the easiest to manage. People who live in condos are much like people who live in apartments...they tend to be lower maintenance people than the ones who live in expensive single family properties. Combine that with the fact that I typically have almost no maintenance, repairs or capex in a condo...they are just way easier to manage I think. I get better cash flow out of my condos, but a lot less appreciation.

Stephen E. · Answer

Yes, not having to organize exterior maintenance is a benefit but not the greatest one I have found. If you start from the insight that renters by and large have lower incomes and cannot afford expensive property it follows that they must in general rent cheap property. I am not a slum landlord, which would be the cheapest approach. Instead in most cities condominium apartments and condominium townhouses are amongst the most affordable properties. Those are the types of properties that I have bought. You could try something more expensive but first do a little math and take the ratio of a year's rent to the purchase price of the property. This rent to value ratio is a source of much wisdom. Essentially, rents do not rise proportionately as property prices rise. Generally, more expensive rental property is just not as practical to operate as is cheaper rental property. The rent to value ratio is key. The greater the amount the property can earn relative to purchase price the better off you will be. This is especially important if you plan to buy and hold for any length of time.

From time to time I have looked at more expensive property but each time the message of the rent to value ratio has been clear. I return to the initial observation: renters don't have much money. That means the best rental property is cheap rental property. Not junk, something desirable and that people would want to live in. But not expensive either. The affordability of condominium property in most markets is a powerful argument for it being attractive to operate as rental property.

Demetrius Davis · Answer

My experience has been that condos are easy to manage.  My rental condo in Chicago has a small board, but the two very involved owner-occupants on the board take tremendous pride in the building.  They were excited that a few of us new investors were motivated to help make it a high quality building and wanted to attract high quality tenants.  The improvements done to the building during my time as owner have added great value to my rental.  The cost of the improvements were all covered by our association.  Having to only focus on interior components is huge.

Thomas S. · Answer

Generally condos have poor cash flow and poor appreciation. Additionally there are very often neighbour issues between owner occupied and renters. Owners do not like renters and renters tend to be inconsiderate toward the interests of owners.

Poor cash flow + poor appreciation = poor investment.

If you want to make money you have to work for it. If you want to be a landlord, not work for and not make money, invest in a condo and hope for the best.

Andy D. · Answer

I agree with what has been said here and the pros and cons given. I also agree with what @Joseph Leonard says with respect to the CA market. I have had great success with my condos there - and much headache! Whether something - for buy and hold - is going to appreciate, depreciate or go up in flames really is pure (bad) luck. One might give it educated guesses but ultimately the operating figures need to work out for it to be an interesting object.

I like the idea of looking at HOA fees as CapEx put aside. Never thought of it that way.

Anyway, why headaches? Because HOA are the worst to deal with! I can tell you a few stories where you wouldn't believe me a second. And all would be true. Apparently the people working there seem to all be idiots (sorry for stepping on a few toes of those who do work for an HOA ;-) ). They don't seem to care about those people who own the property and pay them. All they care about is making lives of these people (= me) miserable. The logic behind this must exist, but it has to be entirely twisted.

Do check into the HOA before buying. Some are in real bad shape and I'm not only talking about financials! I therefore prefer those run by "professional" companies which does at least, typically, ensure that the paperwork is in order (such as, you know, CC&Rs  on file etc.)

Would I buy a condo with an HOA again? Yup. Just did a couple weeks ago. Several for that matter. And will continue to do so in the future. You just need to do your due diligence on the HOA as well, in addition to the one you're doing on the property itself. In that case both come bundled. Both need to be looked at. Oh, and it helps when the properties are fairly new because then the HOA is also fairly new. Less chance of a mess. Which, of course, doesn't mean that they won't turn it into one.  ;-)

Edward Rhoads · Answer

Pros:  No mowing, ect.

Insurance is a bit lower

Cons:  1) the condo fee are often quite high hurting your cash flow

2) they are tougher to sell

3) banks really hate giving loans on them which also is part of #2

So, if you get one make sure it is in a really good area.  I made the mistake of buying one in a bad area and tried to resell it and after 2.5 months on the market only 2 people have looked at it and I had it at 38k and dropping to 35k.  Very sad...

Joseph Leonard · Answer

@Adrien S. does make some good points about the values of condos. He is correct that condo investing can be different based on what part of the country you're trying to do it in. I've owned 2 condos in CA. Here is my story and my long term thought on this:

2012 - purchased my first condo in CA for $260k. Lived in it for about a year and a half, rented it for about 6 months and then sold it for $450k.

Now, keep in mind, this was a matter of PERFECT timing. My wife and I talk about this all the time. That condo was the first home we ever purchased. Had we bought it 5 years earlier, we would have probably bought it high and then it probably would have lost a lot of value in the 08 crash.

During the time I had that condo rented, we purchased our second condo in CA (which is the one I still have rented out today) for $493k. We did a full remodel on it and it is in tip-top shape. With the rent, we are just breaking even right now. We are holding it for the long term because 1) If we sold it, we may lose money, 2) we want to move back to CA eventually & move back into it 3) we have a 20 year mortgage on it and 4) I hope the CA market will continue to appreciate over time.

In my opinion, condos in CA are a bit different than condos in the rest of the country. In the Midwest, most people want to live in a big house with a big yard and they can do so because houses cost less. In CA, most families cannot afford a single family house and turn to condos if they choose to purchase.

Chris T. · Answer

Personally I think if you can buy a condo in a hot appreciating market, and flip it, that is the most ideal situation. Not as a rental. My parents did 1 in Singapore, made over $100,000 within a year and did not even have possession of it, and so did 1 of my former classmates.

Not sure how many condos she has flipped but she/her husband are millionaires now. On the other hand, it has slowed down now so that model no longer works.

1 of my buddies is buying 1 in the west loop in Chicago and hoping to flip in a couple of years!

Are Condo Rentals Easy to Manage????

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