Be Careful When Buying a Condo as a Rental Property
Posted May 3, 2012on:
Two months ago, we bought another investment property.
The condo with two bedrooms and two baths was being sold through a short sale. The asking price was only $80,000. We did our research; the condo could rent for $1,300 per month in the market. So it’s a no-brainer.
At the time, there were four other bidders. We decide to be aggressive and employ an escalation clause. We would bid $80,000, but if someone bid higher than us, we would increase the bid by $500 increments, up to limit of $95,000.
In the end, we won the bidding for a price of $88,500. The next aggressive bidder was only willing to pay up to $88,000.
With condo fees less than $2,000 and taxes less than $1,000, the cash-on-cash return on this property is over 14%. Where are you going to find such a good investment in today’s world where 10-year Treasury bonds are yielding less than 1%.
All was hunky-dory until one day we decided to stroll the neighborhood where the condo was located. We bumped into a gentleman who happened to be the president of the condo association. He told us that the association has a 30% rental cap imposed on owners of the units. In other words, no more than 30% of the units can be rented out at one time. Condo owners who want to rent their unit need to get approval from the association, then wait until the percentage of rental units dips below 30% and a rental slot opens up. As a new condo owner, I can expect to wait for years (if ever) before a rental slot is available.
If the condo can’t be rented, it has no value to us. For whatever reason, the seller did not disclose this key information. Armed with this new information, we decided to void the contract. The seller threatened to sue us.
He has absolutely no ground because he is liable for incomplete disclosure. I am writing up this experience to serve as a cautionary tale to all condo investors – check the condo documents to make sure there is no rental cap provision before you sign the contract.
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