Renting out a condo can be a great way of generating extra income, but the process is a bit different from renting out an apartment or home.
What is a Condo?
A condo, short for “condominium,” refers to a residence owned by a family or individual located in a community building. Condos are different from apartments because they offer a variety of special amenities, such as gyms, parking garages, spas, pools, yards and sometimes even shops. While some apartment complexes do have these kinds of features, the ones in condos are usually a bit higher-end and are maintained by condo owners through dues paid to an elected condo board.
These fees are reserved for the necessary repairs and upkeep of common areas; they do not apply the maintenance performed on respective rental units. Other fees will be incurred for any maintenance needed inside the condo, like fixing a leaky faucet or replacing a broken appliance.
It’s also important to note that condos are different from townhouses, despite the fact that they look similar. The word “townhouse” mainly refers to the style of a building. In other words, it means a tall, narrow, traditional row house, that generally has two or more floors.
A townhouse can be considered a condo, but it usually isn’t since the common areas are not typically jointly owned. Condos belong to homeowner’s associations and have rules that regulate the common areas shared with other residents in the development. A townhouse can belong to an association, but it is not assumed since it only refers to the style of construction.
Keep in mind that all condos are different, and each community lot has its own set of unique rules and regulations.
Buying a Condo
When looking to purchase a condo, you need to do some research on the properties in your desired location. You want to know if the condo is in a Homeowner’s Association (HOA) and what the specific rules are. The HOA rules will be able to give you an idea of how to rent out the condo and how profitable you can be. Remember, every condo has its own outline of rules and regulations, so make sure to carefully read through them and ask yourself important questions before buying them.
Can You Rent Out the Condo?
While looking over the condo documents, check to see if you are allowed to rent out the unit. Not all condos allow for landlords to rent them out. These rules can vary from condo to condo, even when they are located in the same complex. Just because someone else is renting out a condo in the community doesn’t necessarily mean that you can too.
You should also make yourself aware of any leasing or renting restrictions. There are two potential lease restrictions that the condominium can have:
- A limit on the total number of leased residences in the complex. For example, the community may only allow for 20 condos to be rented out at a time.
- A requirement for all new owners to reside in the condo for a specific period of time. For example, the complex may require owners to live in the condo for one year before being able to rent it out.
That being said, pay close attention to the restrictions outlined in the condo documents — they can make your rental business a bit tricky if you’re not aware.
What is the Mortgage Rate?
Typically, the mortgage rates for condos are higher than those for other types of properties. This is largely due to condos’ varying states of warrantability. A condo can either be warrantable or non-warrantable. When a condo is identified as a non-warrantable that means it does not meet the conventional guidelines outlined by Fannie Mae and Freddie Mac. “Fannie Mae and Freddie Mac” refers to the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, respectively. A non-warrantable condo means that Fannie Mae and Freddie Mac will not buy the loan. Consequently, most banks will consider the non-warrantable condo a riskier investment for mortgage financing.
A condo is considered warrantable if:
- No single entity owns more than 10% of the units in a project, including the developer.
- At least 51% of the units are owner-occupied.
- Fewer than 15% of the units are late on their association dues.
- There is no litigation in which the homeowner’s association (HOA) is named.
- Commercial space accounts for 25% or less of the total building square footage.
A condo is non-warrantable if:
- It is in a development which has yet to be completed.
- The complex allows for short-term rentals.
- One person or entity owns more than 10% of all units.
- 50% of the occupants in a complex are the owners.
- The development is involved in litigation of any kind, regardless of whether the building is the plaintiff or defendant.
Common non-warrantable properties include condotels, timeshares, fractional ownership properties, and other projects which require owners to join an organization, such as a golf club. Manufactured housing projects and other developments which are not legally considered real estate are also excluded from warrantability.
A warrantable condo typically gets you lower mortgage rates than a non-warrantable condo. Warrantable condos create lower risk for the bank. So, be very careful when choosing a condo to purchase.
What are the HOA Fees?
When thinking about renting out a condo, profitability should definitely be one of your main priorities. Most condos are in a homeowner’s association (HOA), meaning there will be extra fees incurred. You want to know what those fees are going to be ahead of time since they will greatly affect how much profit you can make. For instance, if the HOA fees are $500 a month, a big chunk of your profits is going to get eaten up.
Additionally, you’ll want to consider whether or not the HOA fees are tax-deductible. Generally speaking, if the condo is a rental, then you can deduct the HOA fees as a rental expense. If the condo is a personal residence, then you cannot deduct the HOA fees.
HOA fees take care of the maintenance in the complex, so you’ll have less to worry about in that regard. The added features in condo developments also make the properties very alluring for potential renters. However, you’re still going to have to factor in the costs of maintenance for inside the condo.
Are the Condo Reserves Adequate?
You want to make sure you know if the condo’s association has adequate reserves. Reserves are money set aside to cover emergency or major repairs. If the community is compliant with Fanny Mae’s guidelines, then the reserves will exceed 10% of the operating budget. When you pay HOA fees each month, some of that money goes into reserves while the rest is used for regular maintenance in the development.
In special cases, when there are big expenses and the condo’s association does not have enough money in reserves, residents will be required to pay a “special assessment.” Depending on the project, residents may have to pay as much as a few thousand dollars each. This is why you need to make sure the condo’s association has adequate reserves.
Every few years, condo associations should be conducting reserve studies where experts come in to look at the property and determine how much they should have in reserve. You can request the results of the property’s latest reserve study and ask for details about the reserve fund to make an informed decision.
Screening Tenants for a Condo
Once you’ve settled on a condo and understand all of its rules, regulations, and restrictions, it’s time to look for potential tenants. The screening process is one of the most important steps in renting out a property, so make sure you are careful and thorough. You can easily screen potential tenants by asking for a completed rental application, conducting a background check and credit check, contacting references, and interviewing them in person.
Another detail to consider is the fact that condos tend to attract an older demographic. For tips on renting to the elderly, refer to this guide. Some condo developments may even be senior housing communities. In this scenario, you should familiarize yourself with the basic standards set forth by the community and apply them when screening tenants. For instance, if your condo’s HOA rules indicate that this is a 55 and older community your renter needs to meet this age standard.
Senior housing communities are designated by the Department of Housing and Urban Development (HUD) and must have one of the following:
- 80% of the units have at least one tenant that is older than 55.
- All occupants are 62 or older.
- HUD established the housing development as a senior housing community under a federal, state, or local government program.
You can be accused of discrimination if you deny someone tenancy based on their age; however, this is not the case with senior housing communities.
A Final Word
Condos can offer residents with luxurious living and a lively community and landlords can enjoy great profit by renting them out. However, it’s important that landlords are aware of condos’ unique rules and regulations. Condos are markedly different from apartments and renting them out can be a bit tricky if you aren’t in the know. Make sure to do extensive research and prepare yourself for the ins and outs of condo renting before purchasing a property. After thoroughly screening tenants and accepting an application, you should go over all of the lease terms and condo rules with your tenant. To guarantee that renters understand their obligation, you should include a special clause in your lease reinforcing the condo association’s rules