Condo Units Make Sweet Investments…Which Can Lead to Problems
The obvious motivation behind real estate investing is to purchase real property for which the investor could charge a rent that exceeds the property’s carrying cost. At its root, it’s a pretty simple and straightforward concept.
The best types of properties in which to invest are those that are in move-in condition and require very little maintenance thereby maximizing the net annual profit to the investor. Multi-families, such as 3- or 4-units or more, also present opportunities to generate profits by allowing the collection of more rents on one property.
Condominiums also create an ideal situation for this as there is no exterior maintenance. The investor purchases the unit and simply pays the association fee. The association is responsible for any exterior maintenance. The investor won’t even have to mow the lawn, in most cases, and would only be responsible for the maintenance of the interior.
Condominium units that are under $100,000 are prime targets for investors because of the low carrying costs. I have noticed in my data collection for condominiums in Connecticut, projects with units in the range of $50,000-75,000 typically do not have a problem selling whether they are approved with FHA or not. Based on the above, I would attribute this to investor purchases with some first-time buyers mixed in.
In speaking with many property managers who have condominium clients in this price range, they have relayed to me that many of these projects have issues with investor concentration. That is, there are more investors than owner-occupants. When this happens, financing units becomes more difficult.
This also renders the condominium ineligible for programs that cater to first-time buyers, such as FHA and CHFA in Connecticut. Luckily, Fannie Mae released temporary guidance last year that will allow the ignoring of the investor concentration if the loan is to an owner-occupant or for a second home.
However, once the threshold is crossed to where investors are the majority in a project, it is very difficult to turn it back around. When units become difficult to sell, unit owners who wish to move become landlords and rent out their units, thereby further increasing the investor concentration.
Another issue that can occur with a high investor concentration is that the overall pride of ownership of the community becomes diminished. Many investors and tenants do not care for the property and the community with the same enthusiasm as the owner-occupants.
Projects with a high investor concentration often have financial difficulties. As mentioned above, the investor is concerned primarily with the carrying cost of the unit which affects the bottom-line profit. Single investors with a high percentage of unit ownership can pose a serious problem to the financial status by refusing to pay (or timely pay) association fees and/or special assessments. To an extent, this places the burden on the remaining unit owners.
Condominium associations must be diligent to monitor the number of investor-owned units within their community. I have spoken with many who go so far as to amend their legal documents to create a limit as to the number of units that may be rented at any given time.
If your association wants to obtain an FHA condo approval and is concerned about leasing restriction language, please feel free to contact me.
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