Is a condo a good rental investment (first investment)?

Question

Hi everyone! I think I'm ready to make my first offer on my first rental property in North Providence, RI. It's a 2 bed, 1 bath unit in a relatively small condominium. After running the numbers using the awesome BP calculator, it looks like it will Cash Flow $200/month. My main concern here is after talking with the owner (my friend), she said there was previously a bad management company who didn't respond to owner concerns and who did not offer to pay for repairs that occurred outside of owner's control. For instance, this unit is the top floor. The roof partially caved in and damaged her ceiling. She paid for the repairs out of pocket and the management company refused to compensate her. HOWEVER, it is now under new management and they did compensate her for the repair price. So she said the management communication and upkeep is getting better. She said there is a leak in the apartment below her and the tenant and owner keep going to her to pay for repairs even though the leak seems to be stemming from poor flashing around their window.

Big question: Is this a common issue in condominiums?

Tchaka Owen · Answer

@Jamie Derasmo - It appears that your friend does not understand how condos work. Yes, some management companies are better than other, however the law is the law. Generally speaking, the owner is responsible for "walls-in"....so the roof is the responsibility of the association. If the mgmt company doesn't do their part, you go to the board (ie, assoc) and things will get moving. If not, you make them aware that you will file a lawsuit.....at which point the roof will be repaired, they'll be liable for your attorney fees and there will be issues with buying when they're forced to acknowledge the association is involved in litigation.

As far as people below are concerned, friend should let them know there aren't any leaks from within her walls. If the assoc wants to look between walls, they're welcome to do so.

That said, if the numbers work for you, go ahead and purchase. Some investors avoid condos because they don't have full control, however the most experienced investors here in FL (where we have tons of condos) do not eliminate them all. Not every condo deal is bad. Good luck!

Jamie Derasmo · Answer

Thank you all for your insight! It gave me a lot more to consider and brought up some good things for me to be aware of now and in future decisions. I appreciate all the BP community support!

Katie M Reece · Answer

I would also add that investing in a condo as a rental is risky due to the HOA being out of your control. If they raise their fees more than rent is increasing you will either lose or split any increased rent with them. I was looking at condos in PHx and any that were affordable had high fees—which made me think the owners were losing that profit to the HOA. Renters don’t care how much of their rent goes to you vs the HOA. They have an expectation for how much a 2bd should rent for and that’s what you can charge.

Anthony Thompson · Answer

@Jamie Derasmo I've heard a lot of stories like yours over the years and my impression is that most condominium complexes aren't managed well, whether that's due to the condominium association itself (a committee of people who have little experience in real estate and too much time on their hands to debate everything) and/or the property management company (often the good PM companies avoid dealing with condo association boards because they're a PITA, leaving the poor/mediocre ones who need the business).

While I would "never say never", I personally have decided to avoid investing in condominiums unless I'm getting an incredible deal.

If you do decide to go forward, make sure to check out the condominium association docs, particularly whether you'll be able to rent your unit. Some have restrictions on the number of units in the complex that can be rented, or may prohibit AirBnB if you were thinking of that. You'll also want to check out major items like the roof and heating system and see when they're due for replacement, whether the condo fees have allowed replacement reserves to be built up or whether they're running it pretty close to the bone, whether any special assessments are coming up, etc.

For me, real estate investing is complicated enough already, that I usually don't personally feel that adding more complexity with having to deal with a condo association and its politics and finances, is worth it, but if I was getting a steal, or I already knew the association and had confidence it its players and finances, I guess I could conceivable do it at some point.

Julie Hartman · Answer

I will give you the PM angle on this - to answer your question: yes this is common. We have managed several condos and had issues with water related repairs at nearly all of them. We've had at least 4 with either upstairs or downstairs neighbors coming to us looking for the owner to pay up on a leak. This is even before any investigation was done on the origin of the leak and who the actual responsible party was. The HOA's want to hide whenever there is a repair because sometimes they are responsible and it's like pulling teeth to get them to move. We had one of our owners hit with a 15K "special" assessment due to roof hail damage. Luckily, he had coverage for the fee gap in his insurance policy but it was still a shock. Out of 10 HOA's, there is usually 1 that is responsive or easy to work with. I wish you much luck with your decision!

Brandon Thomas · Answer

Sounds like just an awful management company. Especially if the issue is pretty clear that the issues should be paid through the HOA, etc.

Condo's are tricky and generally tougher to cashflow because of the HOA fees, but if you ran the numbers and they look good, that's an important factor for the green light!

Do your due diligence, triple check the numbers, and does not hurt to try and get a meeting with the new management company to feel them out.

John Mocker · Answer

Jamie,

The documents that govern what is the unit owners property and what is the common property of the association are the Declarations and Bylaws.  There may be outside laws that impact that as well.  I would start by reviewing those two documents to see whether or not the description of the unit includes the ceiling as property of the unit owners.

Also, you may want to find out who the Associations insurance carrier was and find out from the Adjuster who handled it why her damage was denied.  It may me that her part of the claim was never put in to the associations carrier.

Lastly, you may want to consult a Real Estate attorney familiar with Condo Associations to see how this should have been handled.

Is a condo a good rental investment (first investment)?

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