10 Questions to Ask Before Investing in Condos

Written on August 30, 2016 by , updated on December 2, 2016

Should I Buy a CondoSo, you have a little cash and think you’d like to invest in a condo.

Who doesn’t want a little residual income? Not to mention capitalizing on the current appreciation rates. Or the low, low interest rates.

As real estate agents and long-time residential property managers, my partner Tim and I work with all types of people who are considering purchasing a condo as investment property, such as:

  • first-time buyers who would rather purchase an investment property before one that they themselves will occupy;
  • folks who can afford a second home and believe their money would be best spent purchasing a condo to rent out;
  • savvy investors who have multiple rental properties but who don’t yet have a condo in their portfolio.

Whether you fit into the above categories or are a rogue investor, before you take the plunge into condo investments, there are some things you should consider.

1. What are the lender requirements?

If you are planning to finance a condo purchase, there are often tighter restrictions on condos than detached homes. For an investment property (condo or other), lenders typically require a 20-25% down payment and some lenders require the condo purchaser to live in the unit for up to one year before renting it out.

If your lender doesn’t require you to live in the unit initially, then you might have to pay an even larger down payment.

As a general rule, lenders won’t finance condos that are in a building that’s currently undergoing litigation (see more on this below). Contact your lender for specific rules and regulations regarding condo investment purchases.

2. How long do you plan to keep the condo?

Unlike detached homes, condos typically don’t appreciate as quickly. However, this depends on the area and market, of course. I recommend thinking of a condo as a longer-term investment to see the highest return on your money. Plan to hold on to a condo for at least five years.

3. Does the building have a rental cap?

Many condo buildings have what are known as “rental caps.” This is a limit, set by the condo board or HOA, that restricts the number of condos that can be rented out (vs. owner occupied). As an investor, you’ll want to know for certain that the condo you’re purchasing can in fact be rented.

HOAs have more power than you would think.

Some buildings do not allow any units to be rented. First, find out if there is a rental cap, then ask whether it has been met. If it has, ask if there’s a waiting list and the approximate wait time.

4. Is the building currently under litigation?

If a condo building is under litigation, typically for some sort of building defect, it’s unlikely the units will be for sale as it is near impossible to obtain bank financing for a condo in a building undergoing litigation. If you are purchasing with all cash, be wary of litigation. Where there’s one major problem, there are usually others.

5. Have there been any recent special assessments?

Special assessments refer to the fees charged by a Homeowner Association (HOA) to cover condo building repairs (like a new roof, seismic upgrades, or siding repairs) that exceed the amount in the current HOA account. They are mandatory and can be costly (in the thousands of dollars per unit).

If a building is dealing with a special assessment, it’s common for the seller to pay the assessment in full, either at closing or before the condo goes on the market.

6. Are there any upcoming special assessments?

Often, a HOA will have periodic site inspections, or reserve studies, performed to determine the current state of the building and grounds. These also contain information regarding recommended upcoming repairs.

Request reserve studies from your agent; these will help you figure out what, if any, special assessments may be coming up so you can budget accordingly.

7. What are HOA fees and what do they cover?

Some people are surprised at HOA fees; it’s true, they can be high. But once you find out what’s covered, the sticker shock may wear off. It can vary widely, but many HOAs cover water, sewer, garbage, exterior building maintenance, grounds, security, a community center, pool and more.

Think of the HOA payment as a mandatory savings account for maintenance. Some condo owners choose to pass along the HOA payment to their renter. If you choose to go that route, I recommend incorporating the HOA payment into the monthly rent amount instead of asking your renter to pay the fee directly to the HOA.

8. How active and accessible is the HOA?

Sometimes it’s difficult to access anyone from the HOA before you are the condo owner, I recommend going through your agent. Request as many documents as you can from the HOA (your agent should be able to acquire them after an offer has been accepted, if not before), including the CC&Rs and by-laws (read them!) any reserve studies, the annual budget, special assessments, HOA board minutes, etc.

Reading through these documents will give you a rough idea of how active the HOA is. Try to find out if there’s regular maintenance (vs. deferred maintenance) and if there’s an ample reserve account (money saved for larger repairs).

9. Have you verified rental rates in the area?

Just because a condo is for sale in a hot market doesn’t mean you’re going to have an easy time renting it. Check the vacancy rates in the building. Are all of the units occupied? If not, how come?

Try to find out the rental rates for other units in the building (your agent may be able to get this information for you). If you can’t find out, conduct a quick Craigslist search to see what condos and apartments are renting for in the area.

Related: How to Price Your Rental Using Research and Actual Comps

10. Do you plan to manage the condo yourself or hire a management company?

With more that 10 years in the property management business, I can say that dealing with tenants is not always easy (no matter how much pre-screening you do) and they usually have very high expectations of their dwellings, especially in markets where rents are on the rise.

They expect prompt responses to requests and immediate attention given to malfunctioning appliances, plumbing issues, etc. It’s your responsibility as a landlord to address their concerns in a timely and careful manner. You should expect to be available around the clock (unless you have established a protocol for who to contact in case of emergencies or if you are out-of-town).

Always have your rental agreement and lease terms in writing. It’s best to use official forms (research the multi-family housing association in your area; they will likely have forms for purchase) as often as possible and be consistent and diligent. If you have a dispute or have to evict someone, forms will quickly become your best friend and ally.

If you don’t love the idea of being an on-call manager or dealing with forms, hire a property management company. They can be expensive (and some are just plain a rip off, so do your research) but in exchange can provide peace of mind.

Related:

  1. Should I Hire a Property Manager?
  2. Top 20 Questions to Ask Before Hiring a Property Manager

Summary

Owning a condo as an investment property may seem daunting, and yes, there is a lot to know, but a good real estate agent will be able to guide you through the process and know what questions to ask.

Now that you’re armed with some basic condo-as-investment-property know-how, go forth, fellow real estate mogul, and find ye a rental condo!

photo credit: Milan, Italy via (license)
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