Dave Says: Condos Are Fine, But Do Your Research

Dear Dave,

I know when it comes to investing you like mutual funds and paid-for real estate. What do you think about using condominiums as investment properties instead of single-family homes?

- Jason

Dear Jason,

I don’t really have a problem with condos as paid-for investments. I own a couple of them myself. When it comes to making this kind of investment for the first time, however, I would advise that you keep a few things in mind.

Based on equal price and equal neighborhood, the average single-family home will probably increase more in value over the years. Now, a nice, well-placed condo will obviously go up in value faster than a traditional house in a lesser neighborhood. So speaking in an overall sense, they’re not bad investments if you do your homework.

You have to think about what you’re getting into and also take into consideration a number of variables. What are the HOA dues or condo fees 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 provide proper maintenance or keep a certain percentage of the complex owner-occupied versus rental, the condo association or 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.

Research on these kinds of things doesn’t take an awful lot of work. Just call the management company, and the realtor who’s involved if it’s listed, and ask for the documentation. Most of the time this sort of stuff is public information, so it’s not hard to access. Some other questions you might ask are: 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.

- Dave