Condominiums (condos) are groups of individually-owned residential units that usually share common driveways, landscaping, and walls. Since condos require minimal maintenance, they are becoming increasingly popular with people buying investment property. In addition, investing in condos is relatively cheaper compared to single family homes and multi family homes. Even though they can make for great real estate investments, there are a few unique challenges that can arise with condos. So it’s key to take into consideration these factors and get answers to the following important questions before buying a condo.
10 Questions to Ask When Buying a Condo
1. Is There a Rental Cap?
This is a very critical question to ask before buying a condo for investment. A rental cap is a limit set by the Homeowner’s Association (HOA) or condo board that restricts the number of units that can be rented out. The rest of the condos must be owner-occupied. As a real estate investor, you need to be sure that the unit you are buying can actually be rented out. If the condo complex has reached its cap, then you might have to get on a waiting list. In case you don’t have patience, look elsewhere.
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2. How Much Are the HOA Fees and What Do They Cover?
This is one of the most important questions to ask when buying a condo. Homeowner’s Association (HOA) condo fees are computed based on what it costs to maintain the rental property and the number of units there are. Get a breakdown of the monthly dues you will be required to pay. HOA fees cover things such as garbage, sewer, exterior building maintenance, a recreation center, security, grounds, and water. If the fees are too high, then the condo investment might not be a viable idea.
3. Are There Any Special Assessments?
Special assessments are fees charged to cover the cost of repairs and upgrades when the HOA has insufficient funds. For instance, if roof repair is going to cost $200,000 and the HOA has only $30,000 in its account, the remaining amount will be paid by the condo owners. Such assessments can be very costly, even running into thousands of dollars per unit. Therefore, before investing in a condo, ask the following questions:
- Are there upcoming or current special assessments?
- What does the special assessment cover?
- Is the payment split over several years or one-off?
- When was the last special assessment, what did it cover, and how much was it?
If there is a special assessment going on currently, you could ask the seller to pay for it at closing.
4. Are the Condos FHA Approved?
FHA loans are popular with many real estate investors since they only require a 3.5% down payment. If you are depending on this kind of loan to finance your condo, find out if the development is certified for FHA loans. A condo is FHA-approved when it meets specific loan requirements. For example, a certain percentage of units in the development must be owner-occupied. HOAs must go through a rigorous certification process before acquiring FHA approval. If you are depending on FHA financing, you will have fewer condo options compared to someone using a conventional loan.
5. Is There Designated Parking?
Parking is a very important feature in any town or city. A designated parking spot is something that would enhance your chances to make money renting condos. Before purchasing a condo, ask if the development comes with allocated parking. In some cases, parking space is offered on a first-come, first-served basis. If all the spaces are taken, then you should consider looking elsewhere in the real estate market.
To start looking for and analyzing the best condo investment properties in your city and neighborhood of choice, click here.
6. Is There Any Litigation?
When buying a condo for real estate investment, you don’t want to get involved in a drawn-out, costly litigation. One of the most common types of litigation is where the HOA is suing the builder for structural defects or omissions. Most new condo developments come with a 10-year warranty. However, the warranty is only as good as the builder’s willingness to honor it. The first items that are likely to wear out are the decks, roof, windows, and siding. Since they are exposed to the elements, any substandard work will be quickly exposed. If the builder decides not to honor the warranty, it is the condo owners who will pay for all the fixes. Therefore, it is very vital to ask about any upcoming or current litigation before making a purchasing decision. You should also find out if past litigations were addressed properly.
7. When Was a Reserve Study Last Done?
Just like any other structure, condos always require updates, repairs, and maintenance. HOAs hire companies every few years to carry out reserve studies on their buildings. The reserve study report will show all the repairs and upgrades that need to be done immediately, as well as those that should be dealt with over the next 5 or 10 years. The report will also show how much money will be required for all this work. If the expenses exceed the amount in the HOA account, the auditor could propose an increase of the monthly HOA fees. A well-organized association should have enough financial reserves to cover the recommended repairs and upgrades.
8. What Are the Vacancy and Rental Rates in the Area?
Buying a condo to rent out in a location with good neighborhood ratings is not a guarantee that you will easily find tenants. Check the vacancy rates in the development. If all the condos are not occupied, find out why this is the case. What are the rental rates for similar units in the area? This will show you if the condo has the potential to yield a good return on investment. You can use Mashvisor’s investment property calculator to carry out a cash flow analysis of the rental property before making a buying decision.
9. Do You Plan to Hire a Property Management Company?
Dealing with tenants can be very frustrating. They expect an immediate response to their problems and concerns. If you decide to manage the condo yourself, you will need to be available 24/7 to address issues in a timely manner. If you don’t have the time or ability to run your condo, consider hiring a property management company. Though they can be quite expensive, you will have peace of mind.
10. Can I Get a Copy of the Resale Certificate?
As part of the process of buying a condo, the seller must avail a copy of the resale certificate. This is a large file that comes with loads of information on the HOA and the condo development. It includes items such as:
- The covenants, conditions, and restrictions (CC&R)
- A financial statement
- The rules and regulations
- Copies of meeting minutes
- Copies of reserve studies
Don’t make an offer before perusing the resale certificate thoroughly.
Buying a condo requires lots of due diligence. Asking the questions above will give you an idea of whether the property for sale is a good investment or not. Keep in mind that you might need the help of a real estate agent or online real estate investment tools to dig out some of the answers to these questions.