Wish You Owned the Condo You Lived In? Think Again

Many rental properties are not corporate-owned apartment buildings, but rather are individually owned units in a common interest development. These units could also be co-operative buildings, lofts, or town homes. Many of these individually owned properties are nice quality properties where you might enjoy living due to the higher end features of the residence. You might even believe that it would be good to own the property. But don't be deceived by your fixed monthly housing rental payment because while your rental rate is negotiated based off current market rental rates, the owner of the property is likely getting clobbered with much higher costs than you may realize.

The mathematics are pretty easy to understand. If the market rent for your unit is $1,500 per month based on comparable nearby rentals, you can negotiate a contract with the owner for a one-year term that is fixed at that rate. But the expenses the landlord pays to own the unit might be higher, like $2,000 per month or more! This means the landlord has negative cash flows during his or her ownership, and that is not a smart way to invest. This negative cash flow could be due to several different issues:

The biggest issue first time or small landlords have is their inability to pencil out a real estate deal when looking for property. They go and look at investment properties and comparable market prices and find what they think is a fair deal. However, the vast majority of individual real estate buyers do not know how to and/or fail to put pencil to paper and see if they will actually have positive cash flow on the unit. Then, they purchase the unit and rent it out and find out the rent does not cover the mortgage, or that it can take a decade before they become positive on some properties. You as a renter wouldn’t be aware of the fact that your landlord gets mad at himself every month when he writes a check to cover the negative.

Even if they do have the ability to pencil out their real estate deal, many do not do the hard work to properly estimate the monthly rent and expenses. As a result, they estimate some sky-high rental rate they hope to achieve and very low or minimal expenses they are sure they can control. That is a recipe for disaster because then when they actually get it rented the rental rate is well below what they anticipated and the expenses are well above what they estimated, they don't know what to do. And that equals negative cash flow again. You don’t know this of course, but your landlord could be financially hurting even though your cost is fixed.

Another issue with common interest development properties is the financial condition of the homeowners associations (HOA). An owner of a unit doesn’t just own their individual unit and pay expenses for that residence — they also own part of the larger entity that pays for items like the building repairs, roofs, streets, mechanical equipment, painting the building, uninsured water issues, etc. There is a board of directors of the HOA that sets the fees that owners pay to the HOA so that the HOA can pay for those big repairs. If the fee that is set does not cover all the expenses, they'll tell the owners to chip in more. What this means is that your landlord may have properly estimated the expenses for your unit, rented it to you, and been positive on cash flow, but then the HOA will suddenly require a “special assessment” of $3,000 from the owner. Again, this doesn’t impact you personally, but it can certainly make your landlord unhappy about his investment in that condo.

All in all, having a fixed monthly rental housing payment is one of the luxuries of being a renter, but not necessarily of being an owner. A less informed person might wish they owned that condo unit, but many owners wish they did not after years of ownership! So before you go questioning your landlord about possibly buying your condo, take the time to do more research to really understand the financial picture of the property. Remember, these issues are real and when you are ready to buy down the road, know that being the owner of a condominium unit isn’t just collecting a rent check and calling it a day.