co-op condo for investment - to be avoided or not? - Posted by Michael Ellenby

Posted by David Krulac on January 16, 2002 at 14:08:16:

Red,

if there are too many rentals in a condo complex it may be difficult to get financing. some banks/mortgage companies don’t like complexes with too many rentals, I think the figure is around 28%. apparently their studies show that the more rentals the greater the foreclosure rate.

  1. if there are more rentals many complexes won’t spend the money to keep the place looking sharp. the non o/o want to keep the expenses down and vote against any association fee increase. but the result is that the complex gets worn on the edges and doesn’t look its best.

Just as with SFH I want to be the only, or one of only a few rentals in a predominately owner occupied community.

David Krulac

co-op condo for investment - to be avoided or not? - Posted by Michael Ellenby

Posted by Michael Ellenby on January 16, 2002 at 08:14:18:

Folks - I am looking at a co-op 1 br condo in Connecticut - price is $125k (down from $139k), currently tenanted on a lease for $1200, common fees $149 / month, annual taxes $2230 - so the numbers work, giving me free cash flow. I want to buy this as a long term rental investment. There are about 6 condos in the complex.

This is a co-op, and I have no knowledge or information on what are the pros and cons of co-op condos for investment. Are they difficult to work with? What should I look out for or should I just avoid them all together? My realtor talks about people avoiding them… should I avoid co-ops in general also, or are they a good investment vehicle?

Need your feedback please. Thanks … Michael

I avoid Co-ops - Posted by Frank Chin

Posted by Frank Chin on January 19, 2002 at 08:56:48:

Hi Michael:

I avoid coops, even if the numbers work.

You got some good answers already, so I’ll add a few thoughts of my own.

First, if you’re allowed to purchase one for rental, coop boards are notorious for being picky in approving your tenants.

Just give you a story from my expereince. My usual practice in showing and renting to new tenants is I show on the weekend, and make a quick decision on a Monday.

This one time, I selected a tenant that was also being considered at a very nice coop. Unfortunately, it won’t be till three weeks away when the board meets. So this tenant decide to rent from me rather than wait weeks for a decision.

This tenant told me later that the owner of the coop was getting desparate as it was taking forever for the board to approve tenants, and when he thought he had a live one, the prospects go somewhere else, he’ll have to wait yet another month for the approval.

Imagine a vacant coop for several months??

Second, coop loans which are secured by shares are higher (about 1%) than comparable condo loans secured by a first mortgage on the condo deed.

Third, the coop board has more control over you as your right to the coop unit is by way of a lease, which they can cancel if you have too many infractions. In the case of a condo, they write you nasty letters and fine you, but that’s about it. As you have a deed, there’s not much they can do as long as you’re paying the carrying charges.

Fourth, the the case of some unstable coops, there is a possibilty of the underlying mortgage being foreclosed. But based on the numbers you presented here, there does not appear to the case.

Frank Chin

Re: co-op condo for investment - to be avoided? - Posted by Dan B.

Posted by Dan B. on January 16, 2002 at 17:26:42:

Michael:
I just went through looking at a co-op for sale, with the intention of flipping. Here are a couple points:

  1. As mentioned earlier, mortgages can be a little tricky…depending on the lender, they will look for rental %. The one I looked at, the sales agent said they are below 10% rental, and want to keep it that way. Some allow more. I think there are FHA regs, which many lenders use for all underwriting.

  2. Co-op board has to approve you, potential renter and the person you sell to. This can be tricky, because even if you hold the note for the buyer, they still have to pass muster with the board. If the common charges are significant, the board will want to know that the buyer can handle the mortgage, the common charges, and have a cushion.

  3. The board is usually pretty political. By that, I mean that this is sometimes the place (read ONLY place) where they have some power over others. An ex-mate of mine went through a terrible time because one board member “sponsored” her, and another was warring with the board member…phew, what a mess.

  4. Some co-ops have “flip” taxes. This is a fee assessed per each share sold, payable to the co-op corp. It is just a revenue source, but it will cut into profits. They have a huge range, but it should be spelled out in the by-laws.

  5. Other restrictions in the by-laws. Watch out for restrictions on when work can be performed, and who can do it. Also, there are usually insurance requirements, be sure they are not prohibitively expensive.

  6. Try to assess the financial stability of the co-op corp., especially if you are holding the property. I believe they put out financials to their “shareholders”. Worst case is they go belly up, and you are screwed. Even if this doesn’t happen, if they become unstable, it will be tough to sell.

Hope this helps…I will still buy the deal I am working, if the pricing works. Small enough risk, in my case.

Dan B.

co-op condo for investment - to be avoided or not? - Posted by David Krulac

Posted by David Krulac on January 16, 2002 at 10:47:53:

I’ve bought, sold, and rented several condos, like every other investment there are good ones and bad ones. some make sence others do not.

I’ve never bought a co-op and understand that mortgages are more difficult to get.

I want to know, how many are rentals, how many owner occupied. what kinds of tennats rent there, what is the competetition? what are the prospects for growth?
what anemities? pool, tennis courts clubhouse etc. gated community?

with a 1 bedroom your most likely tennat is one person, sometimes couples find 1 bedroom too small and usually are too small for even a kid. What unit size mix is there?

David Krulac

Re: co-op condo for investment - Posted by Redline

Posted by Redline on January 16, 2002 at 11:44:03:

Offhand I would think more rentals in the complex would be a GOOD thing, because there’d be less people there caring about the fact that yours is rented as well. Of course, the flip side is added competition.

RL