The Pros and Cons of Condos as an Investment

Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Bill: Hi, I’m Bill Bronchick, host of the popular website, legalwhiz.com, and the IRA classroom instructor. Today, I’d like to talk about condominiums, whether they are a good or a bad investment.

Mike: This show was sponsored by passiverental.com.

Bill: Well, we’ll start with the lawyer answer. It depends. There are a lot of factors you have to look at when thinking about acquiring a condominium. Now, first let’s talk about, “What is a condominium?” A condominium is the right to occupy and use the space within a structure and some common areas and, usually, some parking as well, that is defined under what’s called the declaration and the formation of the Condominium Association.

So the building is actually owned by the homeowners association, it’s like a corporation. And then it issues out almost like shares of stock but they’re not, they’re just rights to live in certain units and have use of the unit and use of the common areas. So you’re responsible for the interior, generally, and the exterior, the homeowners association’s responsible for.

Now, in order to maintain those areas and expenses in running the association, the homeowners association, or HOA, is going to have monthly dues. Now, this could be a condo, as in one unit in a building with neighbors upstairs, downstairs, left and right, front and behind, or it could be a town-home style, which is a situation where you have neighbors, potentially, left and right, but no one above and below you. That’s still a condominium, legally. A duplex or a side-by-side threeplex, sometimes, those are not condominiums. If there’s no association, it’s not a condominium, okay?

So you first want to make sure, number one, you know what the fees are, what it covers. And typically, it’s going to cover things like utilities, insurance, it’s going to cover trash removal, sewer, that type of stuff, water. But you want to know what it covers and what it doesn’t cover. And just, by the way, as an aside, I mentioned insurance, that only covers the building. Inside the four walls, you want a separate landlord policy in case there’s any damage, like your hot water heater in your unit busting and flooding the unit below. And ask me how I know that. So make sure you have appropriate insurance for that.

Also, you want to know the financial stability of the homeowners association, and you could look at their financials before you buy it. And, again, look at their minutes of recent meetings and see if there are any planned capital raises through assessments and raising in dues for something like rebuilding a parking lot, or rebuilding a pool or something like that. And while we’re on the subject of a pool, what amenities does it have? Are you paying for amenities that your tenants won’t use, such as a tennis court, usually a loser, or a laundry room or something like that?

Then you want to look at location, location, location. So, condominium on the ocean, different than a condominium that’s just in a suburban area. Obviously, the one that’s on the beach or a view of the mountains is going to maintain its value better than one that isn’t, but generally speaking, apples-to-apples, if you’re not on the beach or right in front of the ski mountain, condos are usually the last thing to go up in value in a market and they’re the first thing to drop in value. They don’t usually hold their value as well as single-family houses do. So just keep that in mind.

Now, the good thing about a condominium, I like, is that you don’t have to worry about repairs because, I mean, let’s face it, there’s nothing my tenants can do to the inside of an 800-square-foot condo I couldn’t fix it two or three days. However, you have no control over the way the outside money’s being spent, which means you could have outrageous dues, assessments and a real . . . what’s the word I’m thinking of? Fascist homeowners association, who’s just running you ragged with rules.

And speaking of rules, you want to get a copy of what’s called the CC&Rs. That’s the conditions, covenants and restrictions, the CCRs. That’s going to tell you what you can and can’t do with the unit. So, for example, it may say you can’t rent it. Well, that’ll be a problem if you’re going to keep it as a rental. Or you can’t rent it for the first two years of ownership or one year of ownership, or you’re not allowed to do weekly rentals, such as an Airbnb rental. So you’ve got to know these things and what the rules and regulations are, and read through them very carefully.

Finally, you want to look at the age of the buildings that you’re actually buying into and that’s going to affect things like dues and assessments. The older the building, the more the dues and assessments you could potentially get hit with. But you’ve got to look at the math, income versus expenses. Can you get the equivalent rent, comparable to the value? Now, typically in a condominium, you’re going to get better rent than an equivalent apartment unit because most condominium units are more owner-occupied than renters, whereas a rental building is all renters.

So most people would rather live in a building where most of their neighbors are living there as their primary residence. So you can probably get a little more rent, comparably, than an apartment unit, but you can’t compare it to a house. A house is totally different, it’s got a yard, it’s got more space, a basement. You don’t get those things in an HOA condominium. So make sure that you dial in the rents by comparing other condominiums that are renting, or other apartment units, and add a little bit more, okay?

And the last thing that I want to mention is what’s called merchantability. There’s a $50 legal word. Merchantability. What does that mean? Well, it means that if you go to sell the property or refi it, some lenders won’t lend against it unless it is merchantable. What that means is, if it’s not qualified for Fannie, Freddie or FHA financing, you’re stuck with only selling that property cash or seller financing, and you’re only looking at buying it cash or seller financing, which might not be the worst thing in the world if you get it at the right price and terms.

But understand, if you’re going to buy, fix and flip and the association does not qualify for FHA financing . . . and you’d know that if you go to hud.gov and look up the homeowners association by name or the property location by address. If it’s not approved by FHA financing or Fannie, Freddie, I’d be real careful about the idea of buy, fix and flip because you’re not going to get someone who can come in with a loan, only a cash buyer, and that’s going to give you a lower resale price.

Threw a lot at you at once in this stuff, but I hope I hope you got some tips about whether to buy condos and the things to look out for. This is Bill Bronchick, your REI instructor, and I’ll see you in the next video.

Mike: passiverental.com is your source for turnkey done-for-you rental properties. If you’d like to be an investor and not a landlord, please visit passiverental.com to learn how to purchase cash flowing, professionally managed rental properties in the hottest rental markets across the country. We can also help connect you with financing for your next property. Invest the easy way today and get started by visiting passiverental.com.

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