Condos as an Investment - Is it a viable option?

Welcome to Canada's Property Management Podcast, your number one resource for investing, managing, and maximizing the value of your real estate assets. And now, here's your hosts, Carla Browne and Adrian Schulz, Canada's rental property experts.

Carla Browne (00:19):

In today's episode, we're going to talk about condo property management, so condominium property management, and why an investor would look at condos versus single family homes. Maybe not why they would look at it, but there's some differences, Adrian. So I want to dig in when investors come to me and they're looking at this property and they're looking at this property, one's a single family home, and one is a condo or a townhouse in a condo complex, there's some things that I need to really talk to them about those differences. So you, as an investor, what would you say is the key thing that you need to look at if you are kind of looking at those, comparing the two, whether it's going to be single family home? Because a lot of people think, "Well, condo's just going to be a lot more, less maintenance."

Adrian Schulz (01:02):

Yeah. I think it's the level of control, right? With a single family home, you have full control of the asset. With a condominium unit as an investment, you are, for lack of a better word, at the mercy of a condominium manager, but even more so, at the mercy of a elected board of directors whose responsibility it is to assure that the property is managed well, that the values maintain and increase, et cetera. And the board, they hire a condo management company, right? So you just have this different exposure than you do on a single family rental. One could argue that a condo could be safer because you've got a board and a condo manager, right? And others would argue that you want the level of control that you have in a single home.

Carla Browne (02:04):

I feel I could tell a couple stories here. I'm going to tell one that just recently we dealt with a property investor who was buying a condo in this beautiful project here in Saskatoon, and they were ready to pretty much sign on the dotted line and buy this property and they were going to have us manage it, and then they came back and said, "You know what? We've pulled out." And they're like, "What do you mean you've pulled out?" "Well, the condo board has a problem." And we said, "Well, what's the problem?" "They've been robbed. They have no money."

Carla Browne (02:36):

And this is really scary because in certain provinces, Saskatchewan being one of them, you don't need a property management license to manage. So you don't have a regulatory body that you're responding to. We have an act. So there's definitely regulations in place, but anyone essentially can do it. And what happened was this particular condo board had a board of directors. President's son somehow got access to signed checks and literally cleaned out the bank account. So I'm sure we're going to hear about in the news. It's definitely going through some legal proceedings, but you don't necessarily know everything about that board of directors and they're making decisions on your behalf as an owner. You do have some power, but you don't have a lot. So the control is definitely something that you need to be concerned about.

Adrian Schulz (03:22):

Just immediately, I want to point out that you can, in fact, when you're looking at a condo as an investment, check to see that the condominium management company that is managing that condominium corporation is in fact licensed, bonded, and insured. And even in jurisdictions where a license is not required, a board can certainly elect to work only with property management companies that are registered and licensed. [crosstalk 00:03:57]

Carla Browne (03:56):

100%.

Adrian Schulz (03:56):

And I think for safety, I would really, really put a yield sign up and say, "Check to assure who is the management company. Find out about them so that your asset is safe and secure."

Carla Browne (04:09):

Yeah. So when you buy a condo or a townhouse, when you buy the property, you're going to get what's called an estoppel package. So the estoppel package normally goes to your lawyer and your lawyer will go through this with you as a buyer, so that you understand all of the ins and outs. I would highly recommend that you also talk to a professional property manager at that point in time because if I was looking at a estoppel package, I could actually help guide them a little bit.

Carla Browne (04:38):

I can see certain red flags are there because there's two things. It's condo fees and insurance that are costs that are really out of your control once you buy this. So when you buy a property, you know what your mortgage is, you know what you've locked in. You're going to have some sense of security of what that cost looks like, but you don't necessarily know how much condo fees are going up and how much insurance might be going up. And if you have some experience in those areas, I think you would agree, Adrian, you can help give them a little bit of insight of what that future's going to look like.

Adrian Schulz (05:09):

Yeah. In some regions, there are different names for estoppels. It could be status and disclosure, form A, form B. And some people like me, because I'm simple minded, I just call them condominium documents, right? The ones that you're getting or that you're ordering prior to closing. And yeah, I think that most experienced realtors are able to provide insight on those documents. Most property managers would be able to provide the insight. And then last, but not least, is the lawyer. But I think something to keep in mind is that the lawyer's primary job isn't to read through those documents. Their job is to make sure that they're there. So I would strongly recommend that you, the purchaser, do your own due diligence in reviewing those documents and asking the questions of things that you're not sure about because there's a lot of terminology in those: short term, long term reserves, reserve funds studies, right? What type of insurance is currently in place? Are there any claims outstanding? Right? So ask the questions. [crosstalk 00:06:17]

Carla Browne (06:17):

The bylaws, the AGM minutes, all of those things are going to be included in that package. So I think the lawyer, like you said, they make sure it's all there, but they also kind of look at that reserve fund amount. Reserve fund studies are done in most provinces as well and there's some regulation there. So that's usually included in the package as well. It is usually a pretty hefty package to read through, but you'll want to read through it or get some help in doing that because there are some very pertinent information on what you're going to be dealing with in the future. So the insurance, let's just touch on that. I honestly think insurance could be a whole podcast when it comes to investment property, but insurance on condominiums is a little bit tricky. So, Adrian, I know you have a lot of experience in this area. So what advice would you give to somebody looking at investing in condos when they're looking at that insurance portion?

Adrian Schulz (07:11):

Yeah. So the first thing is that a condominium corporation or a condominium building/property will have its own insurance policy. And it covers the condominium corporation property as a whole, specifically the common elements: the exterior, the roof, the hallways, the entryways, the garage, et cetera. Right? And the condominium corporation also will have errors and omission insurance and directors and officer liability insurance in addition to the main property insurance for the condominium corporation. Okay? Now, that doesn't mean that you don't need your own insurance. You still are responsible to purchase, what in many places is called condominium unit insurance. Okay? And a component of that is of course, content insurance. But if you will be renting it out, if it is an investment, you also need tenant insurance and I would recommend that you have rental income insurance. And let's just dig through that for a moment.

Adrian Schulz (08:28):

Let's say that there is a leak into your unit from the unit above you. Okay? An element of that could certainly be condominium insurance, but the part that affects your unit could be your own insurance. But if that tenant has to move out while the repairs are happening, you are losing the rental income. You may be responsible for that tenant, that resident, that they have a place to live in the meantime for which you can buy insurance. Right? But there are several different layers that have to be taken into consideration. And I strongly recommend that you understand and evaluate who and how is responsible to pay the condominium corporation deductible if you are the one who created the claim, or if you are the recipient of the damage from another person's claim in the units around you. And it is not uncommon for insurers, insurance brokers, condominium managers, investment property managers, rental property managers, such as ourselves, to duke it out.

Adrian Schulz (09:38):

What's whose fault? Who's responsible for what? Okay. And unfortunately, even adjusters sometimes try to push the claim, the responsibility, one way or another; in many case, to the party that is most willing or able to lean or go with the flow. So not to scare people, I think we have good quality insurance products in Canada and we have good professionals at all levels, you just need to be aware and understand. And boy, oh boy, what better reason to assure that you've got a professional property manager? And in this case, I would argue for one that is with a national brand that has local expertise to assure that your interests are properly taken care of and protected.

Carla Browne (10:35):

Yeah. So we're getting a little long here, but I want to cover- [crosstalk 00:10:38].

Adrian Schulz (10:38):

Don't ask me questions.

Carla Browne (10:39):

Yeah. Sorry. I do want to cover... Yeah. I'm agreeing with you. Don't ask Adrian questions. Okay. Stopping asking you questions today.

Adrian Schulz (10:47):

The podcast where no one asks a question.

Carla Browne (10:49):

No questions allowed. I'm talking now, Adrian. It's my turn.

Adrian Schulz (10:54):

Cheers.

Carla Browne (10:56):

No, because I do want you to weigh in on this one as well. But when you buy a condo, if your property is professionally managed... And I should just tell everyone, all of our listeners, some of our offices do manage condominiums as well. We do have some offices that solely the niche or what they provide services for, it is just very different than the rental portion compared to that. But we do have some that do that as well. But if you are going in and you're getting professional property manager to manage your individual unit in a condominium, which also has a condo management company, they can really help you.

Carla Browne (11:31):

I'll tell you a story. We had a tenant who has a electrical plug, because now we're into winter, and her electrical plug at the condo wasn't working. So we rent the one unit. So she called us because she's our tenant. So she called us and she's like, "This isn't working." So we're like, "Oh, we have to get ahold of the condo management company because that's common area. So they need to fix that." So they weren't fixing it. They weren't fixing it. We're calling, we're calling. We are literally calling them every day. And now, they've got a temporary solution, which now this poor gal has a extension cord strung about a hundred feet around the building to plug in her vehicle because they haven't fixed it yet.

Carla Browne (12:09):

So we have now gone to the condo management company and now we've gone to the board of directors and said, "Hey, board of directors. This particular owner is not going to be able to retain this tenant because they are not getting any service from your condo management company." So in this case, we just kept pushing and pushing and pushing. So we can help do that pushing when a condo management company necessarily isn't doing what they really should to sure that the property is looked after. Now, there might be reasons for it, but they haven't given us any reason. So that's why we're pushing so hard. So we can help advocate for you,, as an investor, to make sure that you are being looked after in that particular complex. So I'll let you speak now, Adrian. Did you want to add something? [crosstalk 00:12:50]

Adrian Schulz (12:50):

No, no. I think you made the point. I think by hiring a professional manner, drew you then have an advocate to protect your interest in the property and someone who can advocate on your behalf to both the condo board and the property management company that's taking care of the condo. I think it's important to know that I think that condos can be a great investment If it's the right property. And I think one of the real positives about investing in a condo as a rental property is you can actually reduce your exposure to risk because you are part of a much larger entity, the condominium corporation. Whereas if you're in a single family home, it's just you and something goes wrong and it's all on you. And with a condo, it is a proportionate share of the problem if it has a common element problem. So I think there are great benefits to owning a condo. And I think sometimes the entry point to get into the real estate game- [crosstalk 00:13:52]

Carla Browne (13:52):

That's what I was going to say. Yeah.

Adrian Schulz (13:53):

... is more affordable.

Carla Browne (13:54):

We don't definitely see the first time investors kind of looking there from a price point perspective, for sure, and it makes sense and they are not all bad. I will tell you, we manage hundreds and hundreds of them, but you just have to be careful and there's things that you need to watch for versus single family. Got to watch things on the single family side as well. So that's another podcast altogether.

Adrian Schulz (14:13):

Do we have time for a secret?

Carla Browne (14:15):

Yeah, of course.

Adrian Schulz (14:16):

So one of the great things about condos is they make a great candidate for what is called the second home program. So there is actually... and there are insured mortgage products available that allow you to buy a second home with as little as 5% down payment. So if you're looking at getting into the real estate investment game, for lack of a better word, like monopoly, but it's real, you can actually look at a condo in another location, get a professional property manager and you can do it if you qualify with as little as 5% down. Just a little secret advice.

Carla Browne (15:01):

Yeah. That's an awesome, awesome little tidbit to share with everybody. So if you are new to this investment game and you're wanting to maybe start out, that is a good place to really look at. You could probably get in a lot while you can. You can get in a lot less. [crosstalk 00:15:16]

Adrian Schulz (15:16):

So talk to your local mortgage broker and property Manager.

Carla Browne (15:21):

Yes. Okay. That's going to be a wrap. So that is definitely real property management.

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