The Expert Guide

To

Condo Investing

Please note that investing in residential properties, including Condos, should not be considered a quick-turn, get-rich-fast scheme, but rather a way to earn cash flow and reap the benefits of appreciation if done properly, and assuming you can wait out any market downturns.

Are Condos Good Investment Properties?

www.dictionary.com/browse/invest:

to put (money) to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income, or appreciation in value.

An investment condo is purchased for the purpose of receiving a return on your investment. That return can be:

Cash Flow- As a general rule of thumb, you should be able to receive a positive cash flow when financing a property and putting 20% down, and a 30 year mortgage. Positive cash flow means your income exceeds all of your related expenses, including interest, taxes, HOA fees, utilities and repairs. If you are in a negative cash flow situation, this is generally not a wise investment. Some investors do not mind negative cash flow for a short period of time, as long as the reasons for the shortfall can be overcome.  

Appreciation- If you are a risk taker, or you have an insight into why a condo will escalate in value, and you can afford to sit on a property, you are an investor that is willing to forego normal risk advice for the possibility of appreciation. This increase in value is generally based on factors such as supply and demand, interest rates, and capital improvements, but could be based on more intrinsic reasons. For instance, if you know that a condo complex is located next door to a property that is going to be developed in the near future, and the development will have a direct positive result on the condo’s value, that may be reason enough for you to make the investment. Just remember, that a building moratorium, or a developer’s changing its plans and deciding not to build, could put a serious change in your economic equation, so don’t spend that profit until it is in the bank.

Equity Build- Every month that you make a payment on an amortized mortgage contributes to your equity build. If you have a 15  year mortgage, the equity build is even greater. Just think of this as your rent received as a long  term gain because in reality your tenant(S) are paying your mortgage for you.

A Combination- The best of all situations is buying a condo that has a positive cash flow, with you increasing your equity monthly, and the condo also appreciating at the same time. This is a win-win-win. Just remember that this may not last forever, tenants lose jobs, and real estate values have crashed before, and will certainly fall again. 

Note: If you purchase a condo with the intent of vacationing in the condo part time, and renting the condo at other times, there are other considerations to be considered, only because your goals are different, because you are willing to forego some of the potential income for the times that you will be occupying the condo.

Note: There are different types of Condos to consider. Some condos are run like a hotel, and the operator will basically take care of all renting and maintenance for you, and also charge rates that are considerably higher than any condo could ever rent for, because of the amenities and the level of service. These condos are not covered in this Guide.

See: Investing in Condo Hotels (Click HERE)

5 Things to Consider Before Choosing to Invest in a Condo:

1.  Your Goals- If your goals are to invest for cash flow, or for appreciation, that makes a difference. Investing for cash flow is more of a mathematical computation because the variables should be rather easy to obtain. For example, if you buy a condo for $200,000, and your goal is

2. The Market- Most investors that do not meet their objective loose before they purchase because their decisions are based on non-financial criteria. In a recent poll of investors that reported less than satisfactory results, over 30% of revealed that the geographic region that they were purchasing in had more to do with being conveniently located as opposed to strategically located.

3. Growth Potential- This is a positive and negative consideration, because something indicating positive growth is great, but the knowledge of a negative consideration can be even better if this information is the difference between you investing or not investing in a particular area. For instance, learning that a road expansion through a neighborhood will re-route traffic and a once desirable street is not going to be burdened by traffic congestion, can certainly be information that should sway an investor’s decision.

4. Housing Market- The information of the housing market may be the most important information that you can learn in your decision to invest. If the average days on market of the condos in the area is 200, and 2 years ago it was 100, there may be a reason, and the reason could be that the condos are simply overpriced. If there are 3 months of inventory for condos under $250,00, and 9 months of inventory for condos under $500,000, this is a clear indicator that you should take this into consideration before you decide to invest. Your local Real Estate Agent that is knowledgeable of the market should be able to assist in this area.

5. Job Market- There is no doubt that there is a direct relationship between the housing market and the job market. If there is an announcement that a large employer is entering your market, that will certainly have an impact on the housing market. The more white-collar jobs that the employer is bringing, the better the housing market should be, at least for higher priced condos. If the median income is lower, and the new employer is bringing mostly blue-collar type jobs to the area, then that condo market should also have a positive impact. Again, your local Real Estate Agent that is knowledgeable of the market should be able to assist in this area.

Do your Homework: Use a Calculator and Never Guess

Know your Investment Costs and your Monthly Carrying Costs.

Basically, your Investment Costs are everything you spend up to the day your Tenant takes possession. This will include:

Down Payment- if you are financing, or the entire purchase price if you are paying cash.

Inspection Costs- are generally between $300 - $500. Never skimp by getting a cheap inspection, because a bad inspection can cost you thousands if needed repairs are overlooked. Just remember that if your inspector does not find the needed repairs, your tenant will find them for you.

Closing Costs- Your closing cost will vary depending on whether you are financing your purchase, and the charges that your lender is charging you. Without financing your Closing Costs should be between 1½% - 2%, and if you are obtaining financing, your closing costs should be between 5% - 7 ½%.

Repair/Rehab Costs- Depending on how new the property is that you are buying, your repair costs will vary. Generally, your inspection should be a clear indication of what the repairs should be, but you may want to do some additional changes or upgrades, depending on certain factors, For instance, a lot of landlords choose to eliminate all carpet when they rent property. 

Monthly Carrying Costs

Most of your Monthly Carrying Costs should be relatively easy to obtain or estimate. These include:

HOA Fees- These are the fees charged by the Condo Association, which pay for the insurance on the building, water, sewer, trash, maintenance of the ground, and care for the amenities. This could also include cable, which your tenant will appreciate. Your association may also be collecting for reserves, or a special assessment for a capital improvement, so remember to ask before you buy if there are any intended improvements.

Mortgage Payments- If you finance your purchase, you will pay a mortgage payment each month, and this will general include principal and interest. A simple mortgage calculator can help you estimate this monthly charge.

Real Estate Taxes- In Florida, your tax bill comes out in November of each year. As a general rule, you can estimate that your taxes will be approximately 2% of your purchase price. If you have a Lender, a lot of lenders will make you pay your taxes  along with your monthly mortgage payment. This amount should be 1/12^th of the anticipated taxes.

Insurance- In addition to the insurance on the building exterior, you should have additional coverage on the contents, which will also have liability coverage. This is almost  a necessity when you have tenants. You should contact a local agent to get an estimate of this coverage amount.

Property Management- Unless you are a glutton for punishment, you may want to consider to have your condo professionally managed. The Management Company will find you a tenant, screen the tenant, collect rent, arrange for repairs to be fixed, oversee the tenant matters, and basically do anything else that you would have to do as the owner. Obviously, there is a charge for this service, but just remember, if a tenant has a backed-up toilet on a Saturday at midnight, the tenant is going to call either you or the Management Company.  Generally, the charge for a Management Company is between 7% - 10%.

Maintenance- Your condo is like your own home, with the exception that a tenant is not as likely to take care of things the way that you do. Most properties will have routine maintenance requirements, like changing AC  filters, changing toilet flappers, that if done properly can save money in the long run. You should estimate a minimum of 5% of the rental income for maintenance items.

There is a difference between estimating and guessing when it comes to budgeting. You can estimate your maintenance costs based on prior experiences, but never simply guess, because you are sure to be wrong, and you can bet that you will guess too low for expenses.

Now, Let’s do the Math:

This is based on a $200,000 purchase, with 20% Down, and a $160,000 Mortgage at 4.5%.

First add up the Potential Income (Let’s say the monthly rent is $2,500)

Income- $2,500  x  12 (months) = $30,000

Less (all related expenses):

HOA- $375 x 12  = $4,500

Mortgage Payments- $811 x 12 = $9732

RE Taxes- $4000

Maintenance- (5% of Rents) = $1,500

Insurance- $1,200

Property Management- (8% of Rent) = $2400

Based on these projections, the Potential  income is: $30,000 - $23,330= $6,670

What could go wrong with this scenario?

The above scenario assumes a lot. It assumes a good tenant that pays their rent, and does not cause an abnormal amount of damages. It also assumes that the tenant was found day 1, and stayed the entire year. If you were doing projections over several years you would want to at least have a vacancy factor of at least 1 month, because that is a national average, and more than likely your tenant may leave after a year. 

Questions to ask yourself (or maybe your Real Estate Agent):

1.     What are the Condo Rental Restrictions?  Make sure you get this in writing!!
2.     If you are financing your purchase, What are the Lender Requirements?
3.     What are the HOA restrictions as they relate to you, and your potential Tenants?
4.     If you rent the condo, how much will the insurance be?
5.     Assessments & Reserves—Are there adequate assessments, are there any planned increases or special assessments?
6.     What is the overall condition of the Condo’s common areas and amenities?
7.     Will this condo be a management headache?
8.     Have you confirmed the actual and comparable rental rates in the building and the surrounding areas?
9.     How accessible and reasonable is the HOA?
10. Is the condo under any litigation?

See: Rookie Mistakes when Buying a Condo (Click HERE)

Investing in a condo is not like investing in other types of real estate for a number of reasons. The number 1 reason is that the condo association can be you best friend, or your worst enemy.

They can be your best friend if they let you know what the rules are, enforce the rules fairly, take care of the building and the amenities, and treat you and your tenant responsibly.

Your relationship with the Association can be a nightmare if there are issues that the Association has with your tenant, especially if you have to deal with the issues from long distance.

Another reason why investing in a condo is not like other investing is that you are not in complete control of your own destiny. If you buy a home, you can hire a lawn service, a pool company, and repaint your home every 2 years if you choose. Because Condo Associations are run by a Board of Directors, these decisions are made by others who you literally may have no control over. For this reason, if you are considering investing in a condo, you should consider a condo that has gone through the normal growing pains and has had a Board of Directors in place that you can see their accomplishments.

 For information about Condominium Laws, please refer to Chapter 718 of the Florida Statutes (Click HERE)

Written By: Denise & Melissa Stewart