I spoke at an Online Trading Academy Wealth Management Event last week. At the event, there was a question about buying condominiums as an investment. The question is a good one, but it wasn’t one that could be answered quickly. So, I thought I’d use this week’s article as the opportunity to provide the pros and cons of investing in condominiums as rentals.
If you are going to purchase a condominium as a rental, the most important thing is to be sure it can be rented out. Don’t take this for granted. In fact, even before you make an offer, ask to see a copy of the CC&Rs that govern the complex. I know it sounds crazy, but the HOA (Home Owners Association – the governing body of the condominium project) has the right to limit how an owner uses their property.
- The relatively lower price makes the barrier to entry for a rental property affordable
- Lower hands-on maintenance than a single-family home
- Condominiums don’t typically have any personal yards – good from the standpoint of no yard maintenance
- Condominiums are created and defined by law. This gives the owner a degree of legal protection and recourse that doesn’t exist for owners of single-family homes
- Condominiums can have a lot of amenities
- Condominiums tend to be targeted to a specific group. Some target income, demographics and/or lifestyles, to name a few
- Tend to get a higher caliber renter
- The opportunity to be part of leadership for the condominium complex
- Depending on the area, the condominium could also lend itself to be a vacation rental
- HOA Dues – These are the dues that are paid along with your other costs, taxes, mortgage and insurance (note: HOA dues are tax-deductible only if the condo is a rental)
- All maintenance and repairs are paid for by HOA, which can be very costly if there are a lot of amenities
- HOA dues can increase year over year without a vote of membership
- Condominiums are typically the hardest hit by a market correction; they are the first to lose value and the last to recover
- Condominiums typically rent for less than a single-family home. When looking at what rent the market might bear, be sure to compare apples to apples
- Special assessment – an amount of money that is required by each unit owner to cover the cost of improvements, or a large maintenance item that can’t be covered by the HOA dues and reserves
- Add ons – many times things like parking spaces aren’t included in the purchase price of the unit and are an additional expense
The right condominium is a good way for the newbie investor to get into the market. Because many of the costs are fixed, it’s easier for an investor to budget. There are also condominium projects that offer rental management services, i.e., screening of prospective tenants, collecting rents and minor repairs.
Another concern about purchasing condominiums in today’s market is getting funding. In late 2009, new condominium financing rules went into effect for Fannie Mae and Freddie Mac. First, the building must be an “approved” property or buyers will not be able to finance through FHA. If the building is not an “approved” property, the process can take up to six months. FHA (when they get around to it) will go through the property’s budget, financials and other information. FHA is looking for a wide variety of factors that include but aren’t limited to: Number of people who are late on paying their assessments, the amount of cash in reserves, property maintenance, ratio of leased to owner-occupied units and lawsuits. The ease of financing can also be another important factor to consider.
So, whether you’re investing as a buy and hold rental, vacation rental, or as a residence, there is due diligence that needs to be done at the onset of the process.
– Diana Hill firstname.lastname@example.org