Should I Buy a Condo as an Investment to Rent Out?

Posted by Tamara Berryman on Tuesday, April 1st, 2014 at 12:37pm.

buying-a-condo-as-an-investmentHere in Sarasota, and much of the west coast of the state along the Gulf of Mexico, there are a number of condominium communities from which to choose. The reason for their ubiquity is quite simple--reduced cost. Let’s take the average single family, two bedroom, two bath home, complete with a one or even two car garage and place it away from the coast. The price would be commensurate with the neighborhood. However, move it to the beach, and wala! Now, the price skyrockets.

Of course this is because of location, the home itself doesn’t offer anything more; but, with an exception view, easy access to the white sand and water, it becomes far more valuable. That’s what condo and townhome communities are about, splitting up the cost between many owners instead of just one. This reduces the entry fee so-to-speak. In addition, most of these developments feature resort style amenities. Owners typically enjoy such features as a pool, on-site security, a clubhouse, fitness room, and more.

Now, as to the question about purchasing a condo unit as an investment property to rent out. There are several things to consider, both logistically and monetarily. One of the things you’ll have to ask yourself is are you ready to be a landlord? You can hire a management company, but that will be another expense. What’s more, you’ll have to be prepared for periodic vacancies. Let’s look at some of the most key aspects such an investment will entail.

Unit Ownership and Association Rules

As the nearby quote states, you won’t have a “fee simple” ownership; instead, you’ll have a condominium ownership. This means you own from the interior walls inside. However, you will pay a homeowner’s association fee, which goes to maintain common spaces, as well as repairs to things outside your walls, like a new roof. In addition, you and your future tenants will have to obey the bylaws of the organization.

“Condominium buyers own the space inside the condominium and a share of its exterior common spaces. The size of the share, and thus the maintenance fee, is sometimes based on the condo's size. They can make excellent investments, but tenants must obey the homeowner's association rules, and investor-buyers must take care to make sure their tenants understand the rules, particularly regarding parking and pets, which are two common problems when owners rent their condos.” --San Francisco Chronicle


Here’s where the logistics come in--your tenants’ behavior is going to be paramount. If a tenant does something to violate the rules, you’ll be the one having to deal with it. Should you rent to a real problem tenant, you might be facing considerable fines. You’ll have to pay these and try and recoup your expenditure from the tenant because if you leave fines unpaid, the association can file a lien against your property.

Condos: Good or Bad Financial Investment?

This really comes down to your particular situation. The math isn’t all that complicated, but can be emotionally tough to accept.

Typical Expenses:

  • Cost to purchase, and possibly closing costs at settlement

  • Homeowner’s association fees, paid monthly or quarterly

  • Real estate property taxes without being able to claim homestead exemption

  • Homeowner’s insurance on your unit

  • Advertising costs to reach new tenants

  • Repair expenses if the tenant damages the unit

  • Legal fees in the instance of an eviction

  • Vacancy contingency expense of at least one month’s rent


Addition Factors to Consider:

  • Is it in a high demand area?

  • What if the association votes to restrict rentals?

  • Is the association financially responsible?

  • Will the bank approve financing?

The answer to the first question is obvious, but the rest we’ll expound upon. In the future, the HOA could vote to disallow renting all units; and, though this isn’t likely, it’s something to consider. Next, is the association’s reserves up to par to cover large repairs. If it isn’t, you might get hit with a special assessment and that could be a large, unexpected expense. Lastly, lenders are hesitant to approve loans for communities where there is a minor percentage of full time owner residents. In most cases, anything exceeding 50 percent might cause a higher down payment or kill financing altogether.

Many things will have to go into your decision as to whether or not this is a sound financial move. If you’re going to pay cash, that definitely changes the dynamics of the situation. However, even if you buy a unit outright, you’ll still be a landlord. So it comes back to the original question if you are or are not cut out to be one. This can produce a great ROI, and in this area, with some of the best beaches in the world, you won’t have as much worry about keeping it rented out.

Tamara Berryman
Google

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