Excerpted from Every Landlord's Guide to Managing Property, by Michael Boyer (Nolo).
The conventional wisdom is that condominiums might not pencil out well as rentals, primarily because of the condominium association dues, management fees, and agency costs. However, many small landlords make condos work as rentals (nearly four million rental units are condos, according to recent Census data). To successfully rent out a condo, you must do your homework before buying, and understand the very unique traits of condos and the way they operate.
The story behind renting condos is more complex and nuanced than for other types of property. Renting a condo tends to mean less building maintenance for a landlord, but you'll be dealing with a more people-intensive and bureaucratic enterprise. You'll have to contend with a board of directors of the condo association and possibly even a property manager. Plus, you'll own the common areas in tandem with all the other owners.
But if you can live within these parameters, condos can be relatively worry-free rentals and marketable when you sell. Their monthly dues can eat away at cash flow, but in a well-run association, you should be getting a variety of services in return. These often include exterior maintenance, insurance, utilities, trash collection, and even some management of complaints, policies, and budget. A major factor in your success, however, will be finding the right condo and a strong association.
This article outlines key steps to successfully choosing and renting out a condo—assuming you've identified a good location, checked that the property pencils out in terms of positive cash flow, and done your homework in researching the prospective property and disclosures. The focus here is on renting out a condo to tenants under a month-to-month rental agreement or a fixed-term lease (not a short-term vacation or Airbnb rental).
It's crucial you check into the letter and spirit of the rules and regulations of a condo association (including the covenants, conditions, and restrictions, or "CC&Rs") before buying a condo you plan to rent out. It's especially important that you find out the condominium association's stance towards renters.
Any listing agent should be able to tell you whether renting is allowed. The answer might simply be "no." The more nuanced situation is when renting is allowed or conditional. Then you also have to look at the written and unwritten rules regarding renters, for example any extra fees, notice to the board about tenants, or limits on the term or type of lease. Also be sure to check any condo rules that may restrict your intended pool of tenants—for example, by prohibiting pets or limiting the types or size of pets a tenant may have.
If renting is allowed, first find out what percentage of condo units within that community are currently owner-occupied. Some state and federal loan programs require a set limit. For example, the Federal Housing Administration (FHA) requires over 35% of units in the association be owner occupied. The condo association might also mandate owner-occupant percentages in its rules. Renting might be allowed conditionally or more openly, depending on how many of the other owners are already renting.
An ideal ratio from your perspective is around 60%-70% owner-occupants and 30%-40% rentals. This way, renting is accepted and widely practiced, but not overwhelming and a potential cause of community friction. Owners who rent their units will also have some clout in the voting and administration of the association. If you see a predominance of rentals, this could also be a red flag that could impact the marketability of the unit when you sell, due to a lack of financing.
The primary benefit of investing in a condominium is that you don't have to do external maintenance and upkeep. A well-run association handles and manages the exterior of the complex and common areas. An additional benefit is that owners can pool resources and all chip in for larger repairs. You will get to split the costs for the roof or parking lot with a hundred other fellow owners, for example. Ideally, some or all of this money can come from reserves designated for larger capital projects. However, an association without monetary reserves is more likely to impose special assessments for larger repairs and projects, meaning you have to kick in more money more often for major repairs. Along with monthly dues, special assessments are a major culprit in preventing condos from producing positive cash flow for landlords.
Condominium boards and associations are like miniature democracies. Consider that a 100-unit complex might house several hundred people, roughly the size of a small village. All of the housing and living issues are handled by an elected group of directors. The politics can run from logical and lukewarm to angry and contested. Check the minutes of condo association meetings and bulletin boards, and ask residents about the tenor of the association's politics. You could find everything from cooperation to active lawsuits among members.
For detailed advice on best practices for choosing and managing a condo, including unique property maintenance issues, see Every Landlord's Guide to Managing Property, by Michael Boyer (Nolo).