When you are considering a condo purchase you need to think of many issues that you might not have contemplated before. Will you live at the condo? If you answer yes, then consider that you may live there a minimum of 5 years. This is not a set in stone sort of rule but one that will surely keep you safe in that if you live there for a shorter period of time, you may not realize enough appreciation to offset costs involved with the subsequent sale of your condo. So plan on keeping your condo for five years and you should have a decent investment. If you answered no, what is your plan? Do you plan on renting the unit out? Make sure you know the policy of the HOA before you purchase. Many times in the efforts to keep standards and values high–the HOA will limit or ban the rental of units. However, in the down market we have been experiencing, the trend is to have more rental units than normal. This can be tricky as policies can and do change. Another consideration even if you are not going to seek FHA financing is whether or not the development qualifies for FHA financing. If it does not, then these buyers that could potentially purchase is automatically subtracted from the pool. Why is FHA financing attractive? A buyer only has to have 3.5% down and the rates tend to be better. This can really limit potential buyers. FHA sets limits to the percentage of units in any given building that can be rented. They do this so as to help the development set higher standards. Really they are just protecting their investment as they do not want to be the mortgagor on a property that is nothing but a crazy frathouse rental factory. FHA constantly changes this percentage as well. It has been as high as 49% rental was accepted and as low as 25%. Be sure to check on this before you buy.
Homeowner Associations usually try to safeguard their FHA eligibility so that they do not lose that status. When they get worried about the percentage of rentals is when they limit the rentals or start a rental moratorium. On one hand this seems to be a great idea, however, in this market the reality is that many people that may have originally lived there and had no plans to rent the unit may HAVE to rent the unit to keep it from being foreclosed upon. Maybe they lost their high paying job or got married or simply moved on to another lifestyle. Or possibly they planned on renting it originally and selling after a year or so and realizing a profit. In the current market, it is exceedingly difficult to sell a unit and not bring money to the table unless you put a substantial amount down at the original closing. Many people cannot sell and are having to hold on. At some point, people may not be able to hold on and if that becomes the case, the unit could be foreclosed upon. So while I applaud HOA’s trying to safeguard their owners’ values by limiting rentals and thereby saving the coveted FHA approval, these sort of policies could ultimately be damaging to owners if by not allowing rentals it creates conditions where units begin to be foreclosed on.

One more issue to also keep in mind. If you are planning to purchase a condo as an “investment”. Never lose sight of the fact that you want it to be an investment and not a drain. Do your research and go with the lower estimate of what you believe you can receive in rent. You might be able to get the higher rent-but maybe not. Look at the homeowner’s fee and be savvy to the possibility that this fee could increase as it usually does. It can go up by 5% a year and this is normal. What will your mortgage payment be? How much will your insurance be? If the rent will not cover these costs you will want to put down more money until the unit at least pays for itself. If the unit does not pay for itself, no matter if you think it will appreciate, it is not a good investment. There are some good deals out there, just be careful and do your homework before you leap.