Condos are fine, but do your research

Jason is considering doing real estate investing through condominiums rather than traditional, single family houses. Dave doesn't have a problem with condos, but he warns Jason to do plenty of research before making a decision.

QUESTION: Jason calls in from Columbia, South Carolina, to ask Dave what he thinks about using condominiums, as opposed to single-family homes, as investment properties. Dave says he doesn’t really have a problem with condos as paid-for investments, but he advises Jason to do some research before making a decision.

ANSWER: I own a couple of condos, and they’re fine. The thing you want to look for is this: of equal price in an equal neighborhood. In other words, if you’re going to buy a $100,000 condo or a $100,000 house in the same neighborhood, on average, the single-family house is probably going to go up more in value.

Now, a well-placed condo will obviously go up faster than a single-family home in a bad neighborhood. You just have to think about what you’re getting into, and you have to look at what the HOA dues or condo fees are going to be. Is the condo association being managed well? That and the neighborhood are the two biggest concerns I have when buying a condo. A lot of condo associations are very poorly managed. And if they don’t keep up the maintenance, or if they don’t keep a certain percentage of the complex owner-occupied versus rental, the condo association or the condo complex can lose the ability to get normal permanent financing. If they can’t get FHA, VA or conventional financing, the values are going to drop like a rock—because you’ve only got cash buyers and investment buyers at that point.

So you’ve got to watch and make sure they’re managing their ratios of homeowner-occupied versus tenants. Also be sure that they’re doing the maintenance and properly managing the finances of the condo association. This kind of thing doesn’t take long to do. Just call the management company, and the realtor that’s involved if it’s listed, and pull up the documentation. Most of the time it’s public, and it’s not hard to access. What are the reserves for the roof? What are the reserves for paint and the parking lot? Are they collecting enough to pay their bills, and are they actually paying their bills?

Then you start looking at things from a buyer’s perspective. Would I want to live in here and have my wife and children here? Would a normal, reasonable person want to live here? If the answers are yes, then you’ve probably got a good, solid condo complex and it’s fine to do. You just don’t want to get a junky one or one that’s poorly run. Those kinds of things will make you wish you hadn’t. But other than that, I’m fine with it.