Why Not Condos?

It is no secret from my previous writing that I think the real estate asset class is both important and lucrative.  I would argue that adequate diversification requires at least a small allocation to this important revenue stream.  Even if one just dips their toes in with a smattering of REITs, syndication deals, or crowdfunding.  No one said that the process has to be hands on.  If you’re like me, however, the extra hassle is worth owning an actual physical asset.  Many prefer two-flats, multiunit buildings, or the all-time favorite, single family homes.  I consider myself a maverick for zigging when everyone else zags.  Thus, I invest in condominiums.  I have heard from just about everybody that this is not the ideal way to cash flow in the real estate game.  Yet, I have done just fine.  So I guess the big question is why?  Why not condos?

State of The Union

We currently own four condos in the Chicagoland area.  We bought our first in the city as a non investment property.  When we realized that we weren’t going to use it, we quickly converted the unit into a rental.  As the market crashed in the early 2000’s, we saw a good opportunity to buy foreclosures.  Years later, and after flipping one property, we now manage four units ourselves.

The properties cash flow fairly nicely.  Although our cap rate hovers around 5% (not great) and we  can’t meet the 1% rule on all our properties, we still manage to net well into the five figures every year.

So although I’m sure you have been warned against it, I say why not.  Why not condos?

Let’s look at why it works for us.

The Headache Factor

Taking care of a single family home or a multiunit building is a big pain.  There are just so many things that can go wrong.  Between managing the landscaping, beautifying the outer appearance, and keeping up to date with the mechanicals, there is never a moment of rest.  Not only do you have to spend time and money keeping the property occupied, you have to contribute double to maintenance.  You could hire a management company, but that will subtract from the bottom line.

Condos, on the other hand, are smaller.  Although the internal mechanicals still fall to the owner, external structure, landscaping, and community services are all covered by HOA’s.  Although you are responsible for this extra monthly fee, there are plenty of properties available where the HOA is a small fraction of the monthly upkeep of a single family home.

In fact, one of our buildings has a onsite maintenance team that will assist tenants and fix almost anything at cost to the owner. Talk about easy!

We have found that even as two busy professionals, it is quite reasonable to manage a condo by ourselves.  The daily needs are minimal and often easy to solve over the phone or with the help of the condo association.

The Economics

I have met so many real estate investors who won’t even look at a property if it doesn’t follow the 1% or 2% rule.  While I think that this is wise in general, in certain markets like Chicago, it’s just not possible.  The cost of real estate is too high and rents are too low.

For many, the simple answer is to either invest out-of-state or buy REITs instead.

I say, why not condos?

Condominiums have low maintenance, low upkeep costs, and rarely require the use of a property manager.  Thus, while the numbers don’t fit tidy into these great rule of thumb equations, the money you end up pocketing can often be the same if not greater.

Now, I know that some of you are concerned about the HOA’s.  But we have found very reasonable properties that rent for thousands with HOA’s in the $200 dollar range.  The numbers work out far better than if you had to hire a property manager.

Downsides

Well, of course there are always some.

Why not condos…

• Lower rents
• Crazy Condo Associations
• Special Assessments
• Slow Appreciation
• Difficult to sell

In Conclusion

Although straying from the typical real estate dogma, we have found it quite lucrative to buy and rent condos.  There are several advantages: fewer headaches, less maintenance, better cash flow, and the ability to succeed  in a tight real estate market.  We have avoided the pitfalls by only buying in highly sought after areas with good rent appreciation, scrutinizing the condo associations carefully before agreeing to buy, and managing the properties ourselves.

Are condos for everybody?  Of course not.  If we lived in a lower cost of living area, I am betting we would be more likely to buy single family homes.

How about you?  Do any of you out there own condos that you rent out?  Does it work economically?