When you’re thinking about getting started as a real estate investor, condominiums often seem like the way to go. And I get it. The first real estate investment that Amon and I bought was a condo.
And while buying a condo can be an easy way to get your foot on the property ladder (and it does have further benefits) it also has its drawbacks. So today, I’m going to explain some of the issues I have with investing in a condo - keeping in mind that (yes!) Amon and I have owned several condos!
1. The Homeowners Association
Most condominiums are run by an HOA (Homeowners Association), which consists of investors and property owners. The reason this could be a problem for you is that, often, the values of HOA members may not align with your own. And you may even be put in situations where these values clash. This is especially true of homeowners, who are going to have vastly different decision-making processes than you.
2. HOA Rules vs Your Investment Strategy
When you purchase a condo, there will likely be a set of rules for ownership in place. But don’t get too tied to those rules. Can you imagine buying a condo based on a certain set of HOA rules in place when you bought your condo . . . only to have those rules changed later on down the line? This can happen. Rules can change.
These changes could include all sorts of intrusive things, like prohibiting a certain percentage of renters in the condominium or barring you from running your condo as an Airbnb. This can be very tricky when you have a set of ideas of how you’re going to use your condo and make money from it.
3. Deferred Maintenance
Let’s say you buy a condo and don’t realize that none of the condo's previous owners have made repairs on the complex. Now you’re stuck with making up for years of deferred repairs. This happens more often than you probably think! It happened to us . . . multiple times - numerous elevator repairs (on the same building!), repair on a retaining wall, plumbing repairs . . . even condo wall repairs because of vermin (I think that’s a nice way to put it) trapped inside the walls during the condominium construction phase!
4. The Condo’s Financial Dependence
One thing to keep in mind is that the financial well-being of your condo is not always dependent on you. For example, if other condo owners aren’t paying their HOA fees, this is going to impact the property. Think of it like this: If you want to refinance or sell your condo, and the bank (or even potential buyers) see that other owners are behind on payments, it can affect the resale of your home.
5. HOA Fees
People often underestimate HOA fees, to their own detriment. Because if HOA fees increase by ten, twenty, thirty percent or higher, the rent you charge can’t always keep up with that. If this happens, your bottom line is going to take a heavy hit in the long run. Funny thing we noticed (or, not so funny actually): our HOA fees always seemed to go up . . . they NEVER went down!
6. Owner Occupancy Rates
The owner-occupancy rate is measured by the number of owners versus the number of renters that live in your condominium. This helps lenders to dictate whether they will issue a mortgage or not. Having too many renters in a condo can significantly affect the resale value of the property. And, depending on the HOA rules, you may have no control over that owner-occupancy rate. Imagine buying a condo at a time when the owner-occupancy rate complied with the lending requirements for most banks . . . only to find out that when you’re trying to sell your condo, the owner-occupancy rate is no longer in compliance.
7. Drops In Price
Condominium pricing can be a tricking thing. If you’re investing in a condo long-term, you may be more interested in the rental income that the condo generates. But, if you’re looking for a short-term investment, you may be more interested in the potential appreciation of the condo. In this case, beware!
Compared to single-family homes, condominiums typically drop in price first. Not only that, but the prices of condos generally take longer to recover (compared to single-family detached homes) after a drop.
8. Limited Renovations
Feeling handy and want to take on a potentially lucrative DIY project? Make sure you know what you’re getting yourself into when it comes to condo renovations! In most cases, there are limited types of renovation work you can do with your condo. If you love DIY home renovating like we do, this will be especially frustrating. Even if you can get permission to renovate, the process to get approval can be long and drawn-out.
9. Neighborhood Disputes
If you’ve ever lived in a condominium complex like Amon and I have, you know that you can find yourself in some pretty tight corners - especially when it comes to your neighbors. Most condos have neighbors on all sides - to the right, to the left, on top, and on bottom. In situations like these, disputes among neighbors are bound to happen. Someone plays their music too loud, someone walks on their floor (i.e., someone else’s ceiling) too loud, someone smokes on their balcony, someone’s kids cry too much . . . the list goes on. As a landlord of a condo, that list of problems becomes your list of problems to solve!
That’s because it’s not uncommon for a renter to call his landlord to solve a problem the renter may have with a neighbor. It’s happened to us! These issues could be social, noise control, property damage, etc. Trust me . . . plan for issues!
10. Too Much Competition