L.A. Condos As an Investment
[LOS ANGELES, CA]
By: Ron DeGenova
In my opinion, the L.A. condominium is the best investment if you are thinking of purchasing real estate for rental income purposes. The great thing about renting out a condo, as opposed to a house, is that the grounds are professionally maintained by the HOA (Homeowner's Association). You don't have to worry about negotiating with your tenants to mow a lawn, pull weeds, prune bushes or clean a pool. In addition, it is easier to find renters for a condo than for a house simply because there are more such renters in the marketplace. However, there are a few key facts that you as an investor should know before you sign the condominium purchase contract if you are intending to rent it out.
Many condo buyers fall in love with their location, the view, and the top-notch features and facilities, but never ask about the monthly HOA dues, special assessments, possible pending litigation against the HOA and, most importantly, how many units in the complex are already rented. However, these are the first things mortgage company underwriters find out from appraisers. And they typically factor such items into your mortgage, insurance and property tax calculations, increasing the chances for a loan denial should the risks turn out to be too great.
Some complexes have experienced huge increases in monthly dues or special assessments, say if a roof needs to be replaced or the building needs retrofitting (as happened in many cases following the Northridge Earthquake). Moreover, as the going rate for repairs, cleaning services and licensed contractors increase, so will HOA dues.
If the HOA is facing litigation, red flags go up in clear view of mortgage companies. Underwriters will ask what the litigation is all about. Most of the time it something minor such as what is referred to as a "slip and fall"-someone slips in the stairwell, falls, then gets up and heads for a lawyer's office to sue the HOA. Underwriters do not take these kinds of cases seriously. However, if the case is due to someone's getting sick due to mold in the walls, there is a very strong likelihood the loan will be denied.
One of the most important questions, which sadly nearly no investor thinks to ask, is how many units in the complex are already rented? Unfortunately this is not officially disclosed until you are already in escrow and feel you are no longer in a position to bow out of the deal gracefully. But the fact is that many CC&Rs (Covenants, Conditions and Reservations) clearly outline how many units may be rented at any given time, commonly expressed in a percentage. For instance, in the 11-unit Sherman Oaks complex I lived in, the figure was "no more than 1/3"-which rounded down to 3 units. Even if the rules permit, however, when a complex starts reaching 40% , underwriters get nervous due to the fact that the upkeep suffers in direct proportion to the number of renters. So, if you are making a non-owner occupied condo purchase in a complex half-filled with tenants and you are doing 100% financing with zero down, it is guaranteed that the underwriter will deny your loan.
So do your homework! Ask these very important questions before you sign on the dotted line and your condo investment should provide you strong returns.
Los Angeles Condos
By: Ron DeGenova
In my opinion, the L.A. condominium is the best investment if you are thinking of purchasing real estate for rental income purposes. The great thing about renting out a condo, as opposed to a house, is that the grounds are professionally maintained by the HOA (Homeowner's Association). You don't have to worry about negotiating with your tenants to mow a lawn, pull weeds, prune bushes or clean a pool. In addition, it is easier to find renters for a condo than for a house simply because there are more such renters in the marketplace. However, there are a few key facts that you as an investor should know before you sign the condominium purchase contract if you are intending to rent it out.
Many condo buyers fall in love with their location, the view, and the top-notch features and facilities, but never ask about the monthly HOA dues, special assessments, possible pending litigation against the HOA and, most importantly, how many units in the complex are already rented. However, these are the first things mortgage company underwriters find out from appraisers. And they typically factor such items into your mortgage, insurance and property tax calculations, increasing the chances for a loan denial should the risks turn out to be too great.
Some complexes have experienced huge increases in monthly dues or special assessments, say if a roof needs to be replaced or the building needs retrofitting (as happened in many cases following the Northridge Earthquake). Moreover, as the going rate for repairs, cleaning services and licensed contractors increase, so will HOA dues.
If the HOA is facing litigation, red flags go up in clear view of mortgage companies. Underwriters will ask what the litigation is all about. Most of the time it something minor such as what is referred to as a "slip and fall"-someone slips in the stairwell, falls, then gets up and heads for a lawyer's office to sue the HOA. Underwriters do not take these kinds of cases seriously. However, if the case is due to someone's getting sick due to mold in the walls, there is a very strong likelihood the loan will be denied.
One of the most important questions, which sadly nearly no investor thinks to ask, is how many units in the complex are already rented? Unfortunately this is not officially disclosed until you are already in escrow and feel you are no longer in a position to bow out of the deal gracefully. But the fact is that many CC&Rs (Covenants, Conditions and Reservations) clearly outline how many units may be rented at any given time, commonly expressed in a percentage. For instance, in the 11-unit Sherman Oaks complex I lived in, the figure was "no more than 1/3"-which rounded down to 3 units. Even if the rules permit, however, when a complex starts reaching 40% , underwriters get nervous due to the fact that the upkeep suffers in direct proportion to the number of renters. So, if you are making a non-owner occupied condo purchase in a complex half-filled with tenants and you are doing 100% financing with zero down, it is guaranteed that the underwriter will deny your loan.
So do your homework! Ask these very important questions before you sign on the dotted line and your condo investment should provide you strong returns.
Los Angeles Condos
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