Condominiums may appear to be the ideal way to purchase rental property, as their price is often lower than the price for a single family home. You may find a condominium unit which is in an ideal location, located near schools, work, and public transportation. The unit may be in “move-in” condition with terrific views. There is one important safeguard you will need to watch for when buying a condominium for investment and rental purposes.
Condominiums are governed by a set of Condominium Documents or CC & R's, and a Homeowners Association sees that the rules set down in these documents are followed. Contained in these homeowner rules may be a stipulation that rentals are permitted only one time per year. This may not be a problem, as you may find a tenant for an annual rental, but be careful that you feel confident that you would not want to rent the unit out more often than once per year.
When you initially make your offer to purchase a condominium unit, you will normally be given a limited amount of time in which to review and approve the condominium documents. Be sure to ask for these well in advance of your closing date. If you are represented by a REALTOR, your agent will normally get these documents for you. If you are represented by an attorney, be sure to show the documents to your legal counsel as soon as possible.
The condominium documents are often lengthy and cumbersome to read. You would want to find any objectionable details as soon as possible, before you have incurred expenses such as a title search, loan application fees, or home inspection. Besides looking for the rental provision in these “condo docs”, there are other safeguards which are important to look for.
The two most important details to look at are the budget and the amount set aside for reserves by the homeowner's association. Ask if any special assessments are planned for the near future. A well-run homeowners association should be run like any good company or corporation, with a balanced budget and adequate allowances for reserves for repairs, such as roof, air-conditioning, paving, painting, or pool upkeep.
You wouldn't want to purchase a condominium for rental purposes, set a rental amount, only to find you will be assessed a large amount for a new roof. Most condominium budgets spell out the useful remaining life of the major systems in the building or property. You can look at this and determine how many years are left before the building needs to be painted, the roof replaced, the air-conditioning or generator repaired or replaced, the driveway resealed, or the pool heater replaced.
You may think that these concerns can be dealt with later, when they come up, but taking a close look now could prepare you for unexpected expenses and you can then determine the amount you will need to charge for renting out your investment unit to cover all your costs. Condominium units can be great investment rental properties, as they are often located in resort areas. Properties located in popular resort areas may be better rented out as a “seasonal rental,” when the rents charged are typically higher than other times of the year. If this is the case, you would then want to look carefully at the rental restriction rules outlined in the condominium documents.
Be sure to let your Realtor, attorney, or escrow officer know that you would like to review the condominium documents as soon as possible after escrow is opened. Being well prepared when purchasing a condominium for rental investment purposes will save you money and help the closing go smoothly and quickly.
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