About the author: G. Brian Davis is a real estate investor who has owned dozens of investment properties over the last 15 years. He’s also the co-founder of SparkRental.com, an online resource which provides free landlord education and video series for anyone looking to build passive income from rentals.
The Real Estate Investor's Guide for Condos
When you’re perusing properties as a real estate investor, sometimes a condominium jumps out at you as attractively priced—until you learn it comes with a $500 monthly maintenance fee.
That’s the tradeoff with condominiums. The association takes on certain headaches for the owner, but every condo owner in the community shares the cost of outsourcing those headaches, whether they want to or not.
What is a Maintenance Fee?
There’s no way around them—condo maintenance fees, or often referred to as Homeowners Association Fees, are simply a reality of owning a condominium.
Monthly maintenance fees pay for communal services and building upkeep (more on that shortly). After all, someone has to maintain the building’s roof, right?
It’s worth pausing here to note the difference between a condominium, an apartment, and a townhouse. The word “condominium” is a legal term—it denotes a type of legal ownership, where the individual condo owner owns the interior walls and space, but not the land or the exterior of the building.
The words “apartment” and “townhouse” are not legal terms, but rather names for physical structures. An apartment can be owned as an individual condominium, or it can simply be a rental unit among many others in an apartment building. This is important to have listed out when drafting your real estate business plan as you move forward with costs.You can learn more about the different ways to invest in real estate here, including direct forms of ownership and indirect real estate investing tactics.
What Do Condo Maintenance Fees Cover?
All monthly maintenance fees include exterior building upkeep and, yes, maintenance. For example, the condo association takes care of roof repairs, exterior wall repairs, and foundation repairs. Condo fees also cover shared services like groundskeeping, lawn care, snow shoveling, and other communal grounds-related upkeep.
Monthly maintenance fees nearly always cover exterior structure insurance as well. This insurance covers some—but not all–of the hazards covered by traditional homeowner’s insurance policies. Any structure-related damage is typically covered, such as a building-wide fire.
Condo maintenance fees can also include some, or all, utility costs, such as electricity, gas, and water. Or utilities could be charged individually based on separate meter readings. Depending on the local municipality, and on the condo association, trash collection and sewer usage fees may also be included in the monthly maintenance fee.
If the condo community has shared amenities, such as a pool, gym, tennis courts, or parking area, these are also maintained through flat maintenance fees. Likewise, shared community services, such as a security guard at the front desk, or a concierge, are also paid for with monthly maintenance fees.
What Don’t Monthly Maintenance Fees Cover?
As outlined above, condo maintenance fees cover insurance, but that insurance doesn’t cover everything. Generally, these insurance policies don’t cover interior damage, such as a pipe bursting within your condo and causing water damage. Appliances and other interior fixtures also aren’t covered.
The condo association insurance also excludes any personal belongings inside the condo, such as furniture and electronics. While that doesn’t impact typical landlords or house flippers, it does impact vacation rental owners.
The same logic of the community-wide insurance applies to maintenance: you’re responsible for maintaining the interior of the condo. Updating the kitchen and bathrooms? That falls to you. New flooring and paint? Also your responsibility.
Everything inside the walls of your condo is your responsibility. Everything outside the walls is usually covered by condo maintenance fees, which are also your responsibility.
Comparing Condo Maintenance Fees
As a prospective condominium buyer, your job is to gauge the value of a unit’s condo maintenance fees. In other words, are they worth it?
Because you’re a real estate investor, this exercise is more geared to helping you choose marketable properties to flip or rent, since you won’t be living there yourself. But you still need to make sure that prospective buyers or tenants will be willing to pay a premium for the conveniences provided by the condo association.
First and foremost, compare the monthly maintenance fees for this condo to other nearby comparable properties (comps). How much are the maintenance fees for a condo across the street compared to this one? What amenities are included with each? If all else is equal, and one condo includes a gym covered by their condo maintenance fees, why would buyers pay equal maintenance fees for fewer amenities?
Use comps to analyze property values and get a sense for local monthly maintenance fees across many condo communities. And remember to always ask exactly what the condo maintenance fees include, when comparing different condominiums.
How Maintenance Fees Impact Real Estate Investors
Condo maintenance fees will affect you differently, depending on whether you’re a landlord or a house flipping investor. Here’s what you need to know depending on your real estate investing strategy.
Condo Maintenance Fees for Flipping Investors
As a condo flipper, you aren’t going to own the condo for very long. Your first question should be “Will buyers scoff at the monthly maintenance fees, or are they reasonable and similar to nearby comps?”
It helps if the fees cover visible amenities, such as a gym, pool, or security guard. They make the flat maintenance fees easier to swallow for buyers, which in turn, helps the condo fix and flip sell faster.
Remember, you will need to pay the maintenance fee every month that you own the property. It adds to your soft costs and should be accounted for when determining how much it costs to flip a house.
Because the owner isn’t responsible for exterior repairs or groundskeeping, there will be less in the way of renovations for you to tackle as an investor. That can make flipping a condo easier than a large single-family house, but it may also leave the profit margins slimmer.
Read our complete guide to flipping condos for a broad overview of what you need to know before making an offer on a condo.
As a final note, some condo associations charge quarterly, annual, or special assessments, in addition to monthly maintenance fees. The last thing you want as a house flipper is to get stuck with a $5,000 special assessment to replace a roof. Talk to the condo association before buying, to get a sense for any upcoming assessments.
Landlord’s Take on Maintenance Fees
Unlike house flippers, landlords are stuck with condo maintenance fees for the long haul.
When the unit suffers a vacancy, the landlord not only has to keep paying the mortgage, but they also have to keep paying the condo fees. That makes vacancies even costlier for landlords and must be taken into account when calculating cash flow and expenses for rental properties.
Likewise condo maintenance fees must be included with rental investors’ cap rate calculations. It’s an ongoing expense and can’t be ignored.
Recurring or special assessments pose a larger risk for landlords than for flippers. Be sure to ask the condo association how often they charge assessments, whether it’s regular or only charged on rare occasions, and ask for a list of the last ten assessments charged.
Your options for financing condos depend on whether you flip or buy and hold.
LendingHome provides bridge loans and hard loans for buying, renovating, and either flipping or refinancing condos. As with single-family houses, LendingHome covers up to 90% of the purchase price, and 100% of the renovation costs.
Landlords need long-term financing, rather than short-term hard money loans. While they can still use hard money loans for the initial purchase and renovation, upon completion landlords must refinance for a long-term mortgage. The most common options for long-term mortgages include conventional lenders, local community banks, and online portfolio lenders.
As always, keep your financing house flipping or rental costs in mind as soft costs whenever you invest in real estate!
The Bottom Line
Condos are a viable option for both house flipping profit and long-term rentals. But monthly maintenance fees do represent an additional cost that investors need to incorporate in their calculations.
Compare a unit’s condo maintenance fees to other local comps, to make sure the fees are in line with the local market. Get very clear on what’s included, what’s not included, and the frequency and typical amounts for any assessments.
If possible, talk to local residents in the condo community. Ask their opinions on whether the condo fees are worth the cost.
Most of all, make sure the fees won’t serve as a deterrent to prospective buyers, or you may find your flip sitting on the market for six months with no movement. If you’re looking for any assistance on house (condo) flipping and hard loans, our team at LendingHome is here to help your real estate investment business!
Disclaimer: The above is provided for informational purposes only and should not be considered tax, savings, financial, or legal advice. Please consult your tax advisor. All calculations and information shown here are for illustrative purposes only. All third parties listed above are for demonstration purposes only and are not affiliated with LendingHome. All views and opinions expressed in this post are the author’s own. NMLS ID: 1125207 Terms, Privacy & Disclosures. Copyright LendingHome Corporation 2019.