Is there a way to purchase a condo as an investment property?

Question

I'm a new investor and I know there are a lot of pros and cons to owning an Condo as an investment, based on forums read. However, I'd like to know if anyone has used a successful strategy to either Quick-turn a condo or have positive cash-flow from one. I'd like to hear and learn from your experiences.

Don Konipol · Answer

IMO, condo investments provide a more realistic profit/loss perspective since much of the depreciation/repairs expense is in the monthly HOA fee.  Many investors in other property types use actual cash outlay for repairs as the total repair expense.  In any single year that figure may be way low (most likely) or way high.  For example, a roof last 20 years.  So roof replacement expense should be 5% of total roof cost each year.  Even if this is not a cash expense, it is real and will invariably show up when the roof does need to be replaced or as a lower sale for having an older roof.  A good HOA will be escrowing an amount each month for roof replacement.  So many investors fool themselves into believing their cash return is greater than it really is either by ignoring depreciation or by deferring needed repairs.  A well run condo association will have a monthly fee reflecting these future expenses.

Ulrich Burke · Answer

@Kyle Thanks, I actually didn't think about some of this factors. Do you know any resources I can use to get some of that information? in terms of local economical long-term wellness?

Kyle K. · Answer

Ulrich Burke, the number of things you should look for are many. Some of the things I would consider:

-What are the property taxes?
-How old is the property?
-How would I grade the area and type of tenant I'm likely to attract?
-Is the local economy poised for long-term wellness?
-In the case of the condos, what percentage of the complex is occupied?

Ulrich Burke · Answer

Kyle Koller So what else should I be looking out for when in an investment property?

Kyle K. · Answer

Ulrich Burke That is one of the risks of purchasing a property with HOAs. But, you can learn everything you need to know about an HOA's financial status before purchasing a property.

There are more factors than straight cash flow when considering an investment property. After all, one may be able to get $800/month cash flow from a $40k property, but that doesn't mean I would consider that a good investment.

Ulrich Burke · Answer

Kyle Koller Good point, but wouldn't giving up that much control will mean less returns and more so not being able to drive the investment in the direction to bring greater and greater (if a cashflow property) ?

I've been trying to factor in what could be the highest HOA fees in the area and they all seem to cut into profits, or generate minimal return. The only way is to increase the rent of the unit which is way above average in the area. I'm at a complete lost here.

Kyle K. · Answer

To answer your question, yes there are ways to purchase a condo as an investment property. It seems that many newer properties belong in communities that are governed by HOAs. This can be viewed in a positive or negative light. On the plus side, this generally ensures that all homes in the subdivision or complex are maintained at a pretty high standard. On the other hand, it sacrifices control. HOAs are not deal breakers in the real estate investment realm. If you want to get into newer properties, HOAs are often the norm. If the numbers work and long-term projections work in your favor, whether or not a property has an HOA doesn't matter.

Ulrich Burke · Answer

Bill Gulley:Thanks for the insight, you brought up a lot of point that I didn't consider. I have a few properties in mind and I'll look into that factor as well.

Larry K.: Thanks for the break-down, its a major help. I think its the clearest explanation I've found so far.

Don Konipol: Do you know any real estate lawyers your can refer me to over here in New York?

Don Konipol · Answer

Bill touched upon an interesting point. New York, Florida, Texas, Arizona and California seem to have a leg up on the other states when it comes to protecting condo owners from unfair practices by condo associations and condo developers.

Larry K. · Answer

Ulrich Burke
2% rule:  gross rent should be at least 2% of purchase+renovation.  Put another way, purchase+renovation should be no more than 50x gross rent.  Higher rent properties should be able to go over 2%.  Lower rent properties might be able to go less than 2%.

50% rule: half of your gross rent will be paid out for taxes, insurance, repairs, maintenance, vacancy, marketing, capital improvements/replacements over time.  So if your gross rent is $1,000 per month you can really only count on $500 per month.  This would mean you'd have $500 Net Income.  With this number you can figure the Cap Rate.  You have $500 with which to pay your mortgage.  With what is left after paying your mortgage you can figure your Cash on Cash Return which is like the Yield or APR in other investments.

The best way to go about this is make your own chart of income and expenses.  Use the "rules" as guides to keep you in line.  Meaning if your calculations show your expenses are just 30% of gross rents then you are probably too low somewhere and are forgetting something.

Lots of good posts on BP about this.  Put it in the search bar and read on.

Is there a way to purchase a condo as an investment property?

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