Using Condos as Rental Units
When I first got into real estate investing, every real estate self-help book talked about starting with condominiums. They talk about finding one then laughing all the way to the bank. They always skip over the potential ugliness that can come with having a condominium. I never saw a story about Special Assessments that drove the cash flow negative for nearly a year.
Some investors recommend condominiums as investments due in part to their relative cheapness. Compared to buying a single-family home (SFH) or even a duplex, condominiums are cheaper. Are they really the better vehicle for investing?
Condos are typically cheaper to purchase than Single Family Homes (SFH). The biggest difference: a yard. Banks just love a property that stands on it’s own, surrounded by grass.
But that leads into the second benefit which is there isn’t a yard to maintain. The exterior of the actual condo is the responsibility of the Home Owners Association (HOA). They make sure the grass is cut, the pools are maintained, any public buildings are clean.
If anything public is affected and needs repaired, the HOA pays for it. For instance, if you and several other units experienced blocked plumbing, the HOA would have the plumber come out and fix the problem. Who pays the bill? The HOA does using your monthly fees.
As a rental unit, HOA fees are tax deductible. If not all then a portion certainly is.
No private yard usually translates into lower rents. Tenants do like to store things on the property. Broken down car, dog house, meth-lab and usually they are willing to pay a premium for it. Because of this, condos typically rent less than a SFH would.
As the house market fluctuates, condos are typically the hardest hit. When a market correction occurs, condos are the first to lose value and the last to recover.
Read the HOA agreement carefully. Several points:
– HOA fees can be increased year over year without membership voting. Either by a small percentage or a flat fee. Build this into your business model.
– Associations can decide if condos are used as rentals or not. They may decide to screen your tenants and give final approval. You’d have no say in the matter.
– Special Assessment will become two words you’ll hate to hear. The HOA may decide to install flamingo pink around the property. YOU have to pay for it out of pocket.
Choosing not to pay HOA fees or the Special Assessment may result in your property being confiscated or liens being placed against your property. A lien on your condo is a fast way to bring your investing career to a screaming halt. Your library card may even be revoked.
This is not to scare you from considering condominiums as a rental income machine. Many investors do it and are quite please with the results. Before jumping in, make sure to review the HOA agreements thoroughly along with your other documents during escrow. It is critical to ensure you are purchasing an asset, which will put money into your pocket rather than a money pit.