The strong rebound in the housing market has fueled record profits for fix-and-flip investors, but also depleted the supply of investable houses. Some rehabbers are addressing this challenge by investing instead in alternative properties such as condominiums. Condos can be good investments, but landlords and rehabbers need to scrutinize the numbers carefully and weigh the advantages and risks associated with this property type. Here are four pros of investing in condos:
Pro #1: Affordable purchase costs.
Prices vary by market, but condos are usually priced at least 30 percent below comparably-sized houses. Condo property taxes are also lower and insurance and maintenance costs are less since expenses are shared by multiple tenants. Another advantage of investing in condos is that comparable data is often readily available since all the units within a complex are similar. In addition, when compared to a single family home, rehab costs are usually much less.
Pro #2: Fewer repairs and maintenance issues.
In most complexes, there is a Home Owners Association (HOA) that is responsible for exterior repairs and landscaping. Rehabbers don’t bear all of the costs for big ticket repairs such as a new roof, siding or landscaping. The only costs borne specifically by the condo owner are interior repairs to his individual unit.
Pro #3: Appeal to retiring baby boomers.
Condos have a reputation as being more difficult to sell than houses, but that may be changing as more retiring baby boomers begin to downsize. Approximately 10,000 baby boomers are retiring each day and many plan to sell their homes and move into lower maintenance townhouses and condos. RealtorMag, the official magazine of the National Association of Realtors, recently noted that baby boomers are buying condos and renting apartments at twice the rate of millennial buyers. This surge in demand for condos is favorable news for condo investors.
Pro# 4: May have more upside currently than houses.
Condos were the first property type to drop in price during the housing market collapse and have been among the last to recover. This is due to the fact that a high percentage of condo owners were first-time home owners who lacked sufficient savings to cover monthly mortgage payments as jobs disappeared. Foreclosure activity hit record levels and devastated the condo market. So far in the recovery, buyers have been quick to jump on bargain-priced homes rather than condos. While prices of single family homes have rebounded more than 40%, condo price gains have been meager, suggesting more room for their prices to improve in the future.
On the other hand, there are also specific challenges associated with this property type, some of which are discussed below:
Con #1: HOA fees erode profits.
Virtually every condo has a Home Owners Association (HOA) and HOA fees reduce profits for landlords and rehabbers. HOA fees are collected from condo owners to cover the cost of complex exterior maintenance and landscaping, water bills, trash pick-up, snow removal and maintenance of shared amenities such as clubhouses, swimming pools and tennis courts. The HOA is also responsible for enforcing the complex’s rules and regulations, some of which may be restrictive enough to discourage some potential renters. For example, most HOAs don’t allow work trucks or trailers in their parking lots and many have noise restrictions and limits on the size and number of pets.
Monthly HOA fees can increase on short notice and special assessments are sometimes levied to cover major structural repairs or financial shortfalls. If you buy a condo in an older development, you are more likely to experience a big hike in HOA fees or a special assessment. HOA rules may also limit the rehabber’s ability to make upgrades to his unit. A simple change like choosing new paint colors for the condo may require prior approval from the HOA.
Investors shouldn’t automatically assume that comparatively low HOA fees make a condo a good deal. Low fees may indicate that maintenance has been deferred, leading to special assessments in the future or long wait times for needed repairs, resulting in unhappy renters. Investors can minimize exposure to deferred maintenance risks by looking at recent HOA financials, assessing the level of reserves and how funds have been spent in recent years. Also ask how quickly maintenance issues are resolved and inspect the exterior of the structure, paying special attention to the condition of the roof, siding and balconies.
Con #2: FHA lending rules may limit the number of buyers.
Another drawback of investing in condos is FHA rules that may make it difficult for potential buyers to secure financing. For example, FHA will not fund a condo loan in a complex where more than 50 percent of the other units are owned by investors. FHA also restricts funding if there are many foreclosures within the complex or if a substantial amount of HOA dues are in arrears. For buyers to qualify for FHA financing, the complex must be approved by FHA. Approval can be verified by checking the FHA database. Investors should also check the certification expiration date and whether the complex is seeking re-certification. Regardless of whether financing is FHA or conventional, condo developments that are already compliant with FHA regulations are preferable since many banks incorporate the FHA standards into their own lending guidelines.
Condos offer the advantages of lower purchase costs and ease of maintenance. In addition, due to fewer competitors, buyers usually have more room to negotiate and tenants enjoy access to amenities like pools and tennis courts. On the flip side, condos can be more difficult to sell than houses due to FHA lending restrictions. In addition, HOA monthly fees and special assessments can diminish profits.
Investing in condos can be a smart move for landlords who want to collect rent without dealing with the hassles of repairs or ongoing maintenance. However, selling a condo can present special challenges and the profits from flipping a condo are generally less than those from a comparably-sized home.