Condos – Nightmare Investment or Dream Deal?

Posted February 8, 2009 by Bernz

Condominiums have the potential to be great investment properties.  But if you’re not careful, they can turn into an unexpected nightmare.  Make sure you do your homework upfront to turn your condo purchase into your dream deal.

Here’s the good news.  Many condominiums are at the low end of the neighborhood’s pricing scale.  This means your purchase price will be low.  It also means that more people can afford them, so there will always be a ready supply of buyers.

This may be a good situation if you’re planning on fixing up the distressed condo and selling it for a profit.  But if you’re planning on holding it as a rental, be sure to ask questions and read all the documents before you sign the final papers.  Here are some things to watch out for.

There may be large assessments in your future.  Periodically, condominium or homeowner associations have to pay for major repairs like a new roof.  Ideally, there will be a reserve fund available to pay for these expenses.  Realistically, however, it’s more common for associations to keep their monthly fees as low as possible.  This means the reserves never get funded, and large expenses require “special assessments”.

When that happens, each owner has to pay a portion of the assessment.  Sometimes this can amount to several hundred or even several thousand dollars.  You can find this out before you buy.  Make sure you get a copy of the homeowners’ association documents and recent meeting minutes, and then read them carefully.  Any mention of “special assessments” should be a red flag that means you need to research further.

While you’re reading those documents, be on the lookout for any mention of limitations on renting your unit. Homeowner association rules may restrict your tenant turnover or even whether you can rent at all.  Some communities simply don’t allow rentals, others require yearly leases.  So if you wanted to be able to offer a six month lease, you would be out of luck.

Also, pay attention to how many other rental properties there are in the condo community.  Most residential lenders have internal risk management guidelines that won’t allow them to approve loans in communities that have a high number of tenant occupants compared with owner occupants.  Even if you were able to get a loan to buy your property, if your community has too many rentals, it may be hard for potential buyers to get financing.  This could make it difficult for you to sell your property when the time comes.

Buying a condominium, or any property with a homeowners association, requires extra investigation.  Take the time to do the research upfront, and you’ll avoid unpleasant surprises after closing.

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This entry was posted on Sunday, February 8, 2009 at 8:34 pm and is filed under Investing in Real Estate, Misc. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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