To some investors, it may seem like buying a condo as a rental property is a wise choice because on average, the condo prices are lower than single-family home prices. However, this article will explore why buying a condo as a rental property can be one of the worst investments you can make.
You don’t have control over the decisions made or not made by the Condo Board
As I write this, the search and rescue at the collapsed condo in Surfside, Florida, continues. The death toll as of now is 26 with 126 people unaccounted for.
The preliminary reports show that the most likely cause for this disaster is deferred maintenance and the inability of the condo board to reach an agreement on levying assessment for the repairs that were desperately needed. The lawsuits have already started.
No control over when and how repairs are done
If you own a single-family home as a rental, you have control over when and how repairs are done. When you rent a condo, the association’s management makes those decisions. Unless they’re very responsive, it can take days or weeks for them to make any repairs.
I have a personal experience with some leaky windows that created a mold problem in one of the condos I was managing. It took the association almost six months to make the repairs.
Higher cost of turnover and vacancies
On average the vacancy rate for condos is 25% higher than for single-family homes. Renters living in condos and apartments are more transient and less invested in the homes.
High condo fees
The biggest problem with condos is that they have high condo fees. In Florida, it’s hard to find a condo with less than $400 monthly fees. Most of the time, these fees eat all the profit from the rental.
The unpredictability of when assessments happen and the cost
Condos are expensive to maintain especially as they get older. The amenities and equipment, like elevators, pools, gyms, need to be replaced and repaired. As the building ages, it has to be repaired, so the association can impose special assessments. A landlord has very little say when these assessments happen and what the cost is.
Difficult to add value for resale
It’s very difficult to add much value to your unit through rehab because the condos are pretty uniform. Mind you it’s not impossible if you buy right.
Too many rules – read the CC&Rs before you buy
The covenants, codes and restrictions is a legal document that protects but also limits your rights as a property owner.
CC&Rs is an agreement that makes it clear to the buyers that they agree to the rules and terms and if they chose to ignore them, they may face a fine, lien, or foreclosure.
Read your CC&Rs before buying a condo!
Restrictions can range from prohibiting parking for oversized vehicles, no pets rules, and more. Many boards require approval of tenants, which can extend your leasing period by a month or more and some even restrict renting.
Years ago, one of my clients was shocked to find out that the condo board voted to forbid rentals entirely. This was after he had owned and rented the property for five years. This, of course, is a rare occurrence but it can happen.
Everything you just read doesn’t apply to all cities and neighborhoods. I lived in Washington, DC for many years and I know that investing in condos in some urban areas can very profitable, mostly because of the appreciation potential.
However, I firmly believe that appreciation should not be the only consideration when investing in real estate.