Should I purchase a condo as a rental property

Question

I recently came across some condos in my area ( Baltimore,MD) and the range from  90k to 130k in pretty good condition(minor repairs needed). My question is are condos a good investment the average mortgage is about $600 TO $800 per month pulling in about $1225 average rent in the area. But condo fees are the killer most are about $180 per month cutting into the rental profit.

Christopher Giannino · Answer

So I actually own a rental that's a condo in an HOA community and personally, I love it and haven't really had any issues.  I will say that I am still a newer landlord so I guess take my last sentence with a grain of salt.

I do sit on the board of the HOA and I do it so I can be more in tune with what's going on and maybe have a little more say then your average homeowner if a problem should arise.  Additionally, I use my background (budget and FP&A work experience) to help set the community for future success by ensuring there's enough going into the cap reserves.

I will say that if you do plan on buying in an HOA community (rental or personal residence) make sure you know the age of the community as well as have a sense if things have been up kept.  My community is around the 30ish year mark so we have a lot of maintenance jobs going on.  Luckily, we have enough reserves in place and don't have to have a special assessment but our dues go up yearly.  We raise them with inflation so it's nothing dramatic but this is our specific board.  I've heard from others in the past that what I have/am part of is not usually the norm.

Daryl Luc · Answer

I was a president of a condo association for 15 years...my advice...put your money someplace else. Condo boards are run by people with little to no experience with construction, contracts, money management or dealing with things they don't like. Think high school student council. This will only cost you because the board makeup changes frequently and the results never change unless there's a dictator (that was me). Contact the president directly to gain an understanding of how rentals are viewed.
A quick note on what made up the condo......Condo Assoc Declarations and Bylaws were crafted by the developer before one person bought a unit. This is to protect the developer's interests (money) until the last unit is sold by including at least one clause that establishes a min sale price by any member). They are by that nature, very restrictive! At the point the last unit of the entire development is sold, the whole shebang is turned over to the residents and they are put in charge.
If I haven't stopped you, then the next thing you need to do...get a copy of the Declarations and Bylaws. Read them thoroughly and know every word. Some prevent rental, occupancy in excess of x people per unit, per bedroom, no at home work or business is allowed and so on. All of these restrictions have to be incorporated into your lease and acknowledged by tenant's signature. A condo deed is a personal contract that is agreed to by you upon purchase without any opportunity to make changes to its content. And it is binding! As anyone who has tried to sue their condo association or board found out...you can't. As a member of the association, you would be suing yourself, not a single jurisdiction would ever permit this. Board members get sued for their idiotic decisions(see above lack of skills)....and those tend to go nowhere because they are indemnified from any causes as a result of their performance, except illegal acts.

Most condo fails are due to expense control.  The financials are the place to look, specifically at the reserve account.  Nothing like getting a letter that state a new whatever is needed and the assessment equals thousands which is due within 60 days.

Calvin Ozanick · Answer

I am personally not a fan of condos. I worked with a condo recently, and many of the rules are very strict and not convenient to a real estate investor. I feel that you would most likely be able to find a SFR in the same price range. Best of luck regardless of what you decide to do.

Brian Ploszay · Answer

First, the cheaper condos are often in buildings that have some major capital issues coming up.  That might result in a special assessment.  Do your homework and check the reserves of the condo association.

You are correct that the HOA fees will eat into your profit.  Add this into your analysis.  If it still is a high yielding property, you can buy it.

I have generally avoided condo rentals, although the formula has worked well for some of my colleagues. One factor of their success was they were experts in this investment niche:  They knew the buildings, their history, the budgets, the rules (rental caps), the board members, the sales comps, the number of rental units in the building, they bought in areas where there was strong rental demand and a good exit strategy of selling one day.  They occasionally joined the condo boards so they could proactively push their visions of maintaining and repairing the buildings.

Theresa Harris · Answer

@Eric Lawson  There are pros and cons of condos.  Often you have less maintenance and lower property taxes.  However, as other said, a poorly run condo is a nightmare.  I've had 3 condos.  The first I bought to live in when I was a grad student.  They kept having special levies as they were not good at managing their money.  I sold it after many years, and right after I sold it they took out a massive loan to do renos.  No idea how the current owners are dealing with that as it is tens of thousands of dollars per unit.  The other two I bought more recently and they are smaller complexes and both are very well run.

Before buying a condo, go over the condo documents and the minutes from the last set of meetings.  See what condo fees are, if there are special levies, and what the rules are.

Brandon States · Answer

I had a friend that purchased an apartment and on top of HOA fees was hit with a huge expense to update the exterior of the building. They could have purchased a car with the amount they paid. I personally stay away from them unless I have the ability to to cash flow very well or a few exit strategies.

Ola Dantis · Answer

@Eric Lawson You answered your own question.

Fees such as HoA and just the general restrictions that come with owning Condos might be a pain for you.

It all depends on what you want to achieve via REI.

Lien Vuong · Answer

Lower appreciation with less control of your unit but you are more hands off and larger repairs and cap ex are taken care of by the association. Depends on what you want for your lifestyle and investing goals. I would not rule it completely out honestly.

James Mc Ree · Answer

You need to model each investment prospect.  There is no way way to say any asset class is broadly "good" or "bad."

Tally all of your projected revenues and expenses to determine cash flow.  This is what you would do for any rental investment.

For condos, there are at least 2 additional things I can think of to keep in mind: trend for HOA fees and capex reserves.  The trend is likely to continue, so you can just model that into your cash flow.  The association needs to show you how well capitalized they are for upcoming major expenses, such as a new roof or paving.  They could be under capitalized in the reserves which becomes a big surprise for your down the road.  You would want to model that too.

Bjorn Ahlblad · Answer

@Eric Lawson investors make and lose money in every segment of REI you can think of. Personally I am a MF fan. Condos would be great if they did not have HOA's and associated fees. I think there is more upside and freedom in MF, and it is way easier to navigate without HOA's imposing their regs and restrictions. All the best!

Should I purchase a condo as a rental property

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