Help on this condo deal:

[Sunny P.]

Okay, I know most of you are fairly negative on Condos, however, I want to ask you about this potential deal.  Condo is in Columbus, high rents around $1500

Selling price/ final price is $160,000 

HOA per month is $149. There are no restrictions on rentals from what I can tell and I called the HOA management company and the said the same thing. Basically the deed states any rental can't be for LESS than 30 days for transient use.

So I own 2 condos in this complex.  Bought 1st for $150,000 in early 2009 and second for $140,000 in Mid 2014.   When these were first built in 2007, they were selling for $165000 - 170,000

Now this unit that I am looking at is $160,000..Market has gotten very hot over the last year or so.  This one was built in 2010 so it's a bit newer.

Current rent for the other units is around $1500

So with that in mind if this is purchased with cash, main expenses would be $150 a month for HOA; about $150 a month in reserve for incidents

so left over is $1500 - $300 = $1200 x 12 months = $14,400 / $160,000.  That gives a  9.0% Cash on Cash return.

Only reason I like this is because I own 2 other units in this complex so it makes it a bit easy to manage..

Thoughts??

[Ed W.]

@Sunny P.

Please bear in mind that my comments are general in nature because I don't know anything about the association.  I could be dead wrong.

I've owned about 60 condos over the years in numerous associations in several states and - knock on wood - I've done well with them.  But I'm very picky, put the associations and management under a microscope, and proceed carefully.  I'm scheduled to close on one tomorrow morning (but it's the first purchase of a condo in about a decade). I know a lot about condos.

In answer to your question, most buyers have literally no clue about how condos are truly set up and how they are supposed to be managed, etc.  For the most part, they'll be oblivious to landlords unless and until things get bad and outward signs of bad tenants become apparent.  For that matter, most investors I know don't have a clue either.  

Here's the crux of the problem.  Not many investors are truly good managers.  Many investors pay too much, have poor cash reserves, and feel a strong pressure to fill a unit so they can meet their mortgage payment.  That leads to bad decisions and letting bad tenants in the door.  Every time?  Of course, not.  But the more landlords you have, the greater the likelihood of some percentage being bad managers and introducing bad tenants.  The more bad landlords, the more bad tenants.  The more bad tenants, the more it shows and the harder it is to sell.  The harder it is to sell, the more prices will decline.   It could take a few years or decades, it's hard to know how long it will take.  The mortgage market, the real estate market, the general economy, newer competing associations, lax management, indifferent owners - there's lots of moving parts that can play a roll.  Around 2005 there was a perfect storm that seriously hurt many associations, even those with a low percentage of landlords.

If you have a good, well-managed association that has strong rules and regulations that are enforced and supported by a good law firm and a restricted number of landlords as well, the easier it is to prevent/avoid a downward spiral.