real estate

Is it wise to buy condo to rent out?

Steve McLindenDear Real Estate Adviser,
I'm a single mom considering buying a condo and renting it out to make some extra cash, thinking about the future of my two kids. Is it worth the trouble?
-- Sue

Dear Sue,
While this is a subjective call depending upon the health of your housing market, you'll typically have much more control over how you use a conventional single-family home than a condo. That's because you're at the mercy of a condo board in the former.

  • If the condo association votes "no more rentals" at some point, your tenants would be forced to depart when their lease expired and you'd have to either try to sell the place quickly or move in yourself.
  • If a large repair is needed, the condo board can impose a special assessment without your consent or it can raise your fees. That could drain that future "extra cash" in a hurry.

But a condo's not all bad

In the plus column, all of the plumbing, property maintenance, exterior repairs and pool and other recreational facility maintenance are included in your monthly condo fees.

But often not as good as a house

However, you get to call all the shots at a single-family home unless you're governed by a picky or anti-rental homeowners association, or HOA. Certainly, a single-family home can be a tough sell when the economy sours, but condo sales and values tend to be even more mercurial. Condos are harder to move in a downturn. In fact, units can be a real challenge to sell even in the best of times, should too many appear on the market when you're trying to sell yours.

Most of the bargain-basement condos from a few years back, I'm afraid, have been snapped up. Depending on where you live, your window of opportunity there may have already opened and shut. Because so few condos were built between 2009 and 2012, mid-priced condos in many markets are now selling fast.

For example, median resale prices for condos and co-ops rose 10.7 percent nationwide in 2013, according to the National Association of Realtors.

Sacramento, Calif., had the biggest percentage increase in median condo prices in 2013; Norwich, Conn., recorded the biggest drop.

Know the condo's rules

If you do find a great deal and decide to buy an investment condo, read that condo agreement thoroughly about rental policies. Some complexes don't allow more than 25 percent to 30 percent of their units to be rentals and the seller may not disclose that.

Moreover, many banks won't lend money for a condo in a complex that has less than 80 percent owner-occupied units. Also, ask if the condominium's reserve fund has set back money for inevitable wear-and-tear repairs to walkways, roofs, fences, carports, etc.

Include all expenses

If you clear those hurdles, be sure to establish a rental rate that covers the total of your monthly payment, condo association dues, property tax, insurance and one-twelfth of the annual estimated maintenance cost of the interior.

In fact, if you're going to be a landlord in any capacity, make sure you set aside a fund of at least $1,500 for repair costs and legal fees if an eviction is ever required. Plus, have someone reliable lined up to make repairs. The best defense against a bad tenant is a very thorough tenant-screening process. The better you or your handyman are with minor repairs, the more profit you stand to make.

Keep expectations realistic

On that subject, a seasoned and reasonably cautious landlord can make 20 percent or more annual profit on a rental home, but most make about 10 percent, though some don't even break even if problems arise. Research the topic extensively; there are reams of books and articles available on the subject.

Good luck!

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To ask a question of the Real Estate Adviser, go to the "Ask the Experts" page and select "Buying, selling a home" as the topic. Read more Real Estate Adviser columns and more stories about real estate.

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