If you are considering buying a condo to rent out, proceed with caution. Here are some of the common pitfalls to be aware of when renting out a condo.
Homeowner Association Fees (HOA)
Condominiums charge HOA fees to run the building. These fees often include costs for a property management company and insurance for board members of the HOA. While these expenses benefit the HOA, they do little to add value to a rental unit. In fact, they are often duplicative. Why pay for a property manager for the common areas when you need to hire another one for your condo unit too? HOA fees will significantly reduce your cash flow with little return on your investment.
Condo associations often vote on making building improvements or repairs. These one-off expenses are usually paid for by a special assessment. It’s an unavoidable fee due immediately to fund the project. If you are unable to pay, the HOA can impose penalties and obtain a lien on your condo unit. While many assessments may bring value to the building, if not your individual condo unit, many will not. I once had a board vote to add a deck to a bottom floor unit. How does that help the value of my unit?
Condo Association By Laws sometimes include caps on the percentage of units allowed to be non-owner occupied. It is absolutely critical that you obtain a copy of the by laws and know the number of current rental units BEFORE buying a condo to rent out. I’ve heard horror stories where investors have been unable to rent a condo they bought because of these restrictions. Do your homework!
Hostile Condo Boards
Some Condo boards can be downright hostile to landlords. They will impose extra fees for renting out a condo or require more insurance coverage. They feel that you are just an investor looking to profit off of their homes. You must have deep pockets so they feel justified. My advice if you find yourself facing a hostile Condo board is to join the board.
Meet the board members and have a say on issues that will impact your investment. Convey to the board that you are just as vested as them (if not more!) in maintaining a great living environment for your tenants and their neighbors. Reassure the board that you have a strict process to make sure only quality tenants will live in your condo and you will quickly deal with any issues if necessary.
So are there any benefits to buying a condo to rent out?
There are a couple of benefits to renting out a condo. When a major repair is needed like a new roof, it is good to share those expenses across a number of owners. Also, condos are often located in urban, high demand areas. They are highly desirable for young professionals and can often command top rent.
Despite the higher rent and desirable location condos sometimes enjoy, most novice investors should avoid buying a condo to rent out. There are many more risks than potential rewards.
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