Back in the mid-1960s, when condominiums were born, condos were meant to be an affordable alternative to traditional homes. Many renters aspired for better living arrangements and bought a condo.
Over time, particularly from 2000 onward, the construction and sale of condos increased exponentially, fueled by low-interest rates. The industry, composed of too many condo units, caused two major economic crashes in recent history, one in 1989/90, which affected the U.S. and Canada, and the other in 2006/08, which affected mainly the U.S.
Beware of Condo Complexes with Many Units Rented Out
By Dan S. Barnabic
During each crash, the values of condominiums plummeted up to 50 percent or more. Many condo owners experienced a great loss of equity – in fact, many lost their condo units to foreclosure. They couldn’t afford them, either because they hadn’t made a sufficient down payment or were not financially strong enough to maintain their unit’s carrying costs.
As the markets became saturated and condo units became too expensive, the pool of available buyers decreased. The massive fallout of condo owners placed the condo complexes in the precarious position of having too many empty units, which therefore were not contributing to the monthly maintenance dues. The rules had to be relaxed for the complex to survive. The empty units were eventually rented out.
Consequently, many complexes became a mixture of condo owner-residents and renters.
In the condo ownership arrangement, all unit owners strive to ensure that the condo complex is run properly, with common element areas kept clean and presentable. Such common care is supposed to create a better quality of life and living conditions compared to ordinary apartment living.
In contrast, a renter doesn’t have a personal stake in the ownership of the building and may not be committed to looking after the complex to the same degree as the unit owner. Renters are far more likely to break condo rules regarding noise and upkeep, resulting in the degradation of the complex.
A complex that is heavily rented out becomes unappealing to potential buyers.
In fact, many financial institutions judge a condo complex to be risky if more than 25 percent of the units are rented out and therefore refuse financing to new buyers. As a result, such condo complexes may become desperate. To attract buyers, they may start selling the vacant units at bargain prices, adversely affecting the value of the other units. As a complex makes the transition from mostly owner-occupied to mostly rented, it enters a very dangerous stage: it may turn to private financing, known as common loans, to maintain its very existence – passing the costs along to the condo owners, of course.
Avoid such risks by making sure you check the condominium complex thoroughly before you buy.
Ascertain how many condo units are being rented out. You can do so by visiting the complex itself and talking to the occupants and owners of condos in the complex.
If 25 percent or more of its units are rented, stay clear of the complex. It very well may have a dark future.
- Do not buy into a condo complex that has rented out more than 25 percent of its units
- The exception to this rule may be condo complexes located in tourist resort areas with high rental demands