Whether buying a coop is a wise financial move, with prospects for short-term income or a high return when you sell, depends on what you are looking to do with it. Are you planning to rent the coop out and treat it purely as an investment? Or are you planning to live in the coop for many years to come? Or maybe a combination of both?
If you are buying a coop with the intention of using it strictly as a rental property, then its investment value may be undercut by various common rules or policies.
First, coop boards tend to impose strict subletting policies. It is wise to review all the details of these policies, which vary from building to building. One rule is, however, pretty standard across the board: The owner must live in the unit for a minimum period of time, typically one to three years.
Coop buildings, particularly in places like New York City (where they are prevalent—in fact, most properties you find there are coops) tend to be relatively old, often built in the early 1900s. Many are showing signs of wear and tear.
If you would want to renovate the unit before renting it out or to increase its value to sell it a premium, think twice. This is another area over which coop boards tend to govern strictly. You can expect to face limits on the amount and type of renovation you may do. When the board does permit renovation, it typically imposes a lengthy application and approval process on the owner.
Coop boards also charge numerous fees that you wouldn't face if you owned another type of property. Aside from these being expensive (and possibly over and above your mortgage payments), some of these fees are not tax deductible. Contrast this with owning a condominium or townhouse, in which you own actual real property, rather than just a legal share of the building. That means you pay property taxes directly to the tax collector and the tax bill becomes an itemized deduction on your tax return. In the case of a coop, you deduct only your pro rata share, which is based on your percentage ownership in the building.
Purchasing a coop in order to live in may not be a bad investment, so long as you intend to stay there over the long term.
Short-term ownership of a coop is rarely a sensible financial move. In order to preserve the continuity of the community (after all, the board took the time to carefully select you), the coop generally takes steps to promote long-term ownership. It will likely impose what is known as a “flip tax,” or-an additional fee, if you sell within the first couple of years after purchasing the coop.
But as long as you are willing to hold onto the property for longer than a few years, there are a few advantages to owning and living in a coop.
For one thing, you have a carefully selected community of neighbors. If you are one who does not want a noisy environment, neighbors who don’t keep a tidy living space, or many pets wandering around—any of which can lead to inconvenient and even expensive disputes—a coop can be a good choice. Boards carefully screen for neighbors who will fit in well with existing residents.
Coops are also a great option for people who don’t want to be bothered with handling, or hiring people to handle, tasks like mowing lawns, fixing broken hot water heaters, and all the other typical repairs that come with home ownership. A management company takes care of most of this for you, although you are still responsible for maintenance and repairs within your unit. This maintenance comes at a price, but if you would otherwise hire someone to do these things for you, then it might balance out.
If you decide to buy a coop and own it for a while, you may at some point want or need to rent it out (perhaps if you relocate for business or get married). This is when the owning a coop becomes less appealing.
First, in order to rent, you will likely have to have lived in the unit for a few years. Coop boards ordinarily require one to three years of owner occupancy before a renter can move in. After that, you can rent your unit out, but you will probably need to obtain the board's approval of your tenant.
What's more, the board can reject a tenant without providing a reason. A board is looking out for the best interests of the other residents when reviewing a prospective tenant’s credentials, so if it feels that it would not be a good business decision to approve your tenant, it won’t. The board’s use of business judgment during the application process preserves the integrity of the building's community and finances.
Just as you had to go through an extensive screening process, so will your tenant. This process takes time. People looking to rent usually don’t have a lot of time for deliberation, and the longer they must wait for approval, the less willing they will be to pay a premium amount in rent.
Even when the board approves the tenant, the lease will be limited in duration, and renewal will be subject to board approval. Once again, there are no guarantees, and you could wind up having to find a new tenant, plus lose rent during an intervening vacancy, sooner than expected.
The process of transferring the shares of your coop will take longer than a typical property sale because of the board approval process. It is wise to prescreen prospective buyers and prepare them for the arduous application process.
Also, coop boards typically try to limit the price for which a coop sells. They don’t want the sales price to go so high that other units appear less affordable to future buyers. Coops are often considered a form of affordable living, and boards want their building to keep that accessible reputation.
If you are looking to live somewhere for the long term, have no plans to sublet, and are aware of all of the potential issues that may arise with coop ownership, this type of property can offer affordable, low-maintenance living. That said, make sure you read all of the board rules and regulations carefully, and perhaps meet with a lawyer or a financial/tax adviser to figure out how these will impact your plans and overall financial situation.