Co-ops as rentals
As you research co-ops as investments, consider how many will even allow the renting of your unit in their by-laws. Usually, rentals are permitted after a certain period of time where the primary owner has already lived there (usually 1 to 3 years at a minimum). Then an owner would be allowed to rent the unit out after this period. Still, some co-ops will allow renting from the outset. But you need to check with your Realtor and /or the co-op’s by-laws to make sure about this before you even waste your time looking at the unit.
The current major problem
Of late, a greater problem exists when considering purchasing a co-op. With prices having fallen so drastically over the last few years, co-op boards have been turning down applicants who are in contract to purchase units in their co-ops. Of course, as closed corporations, one can never know exactly why an applicant is being turned down. Certainly, many are for valid reasons, such as credit levels not meeting the co-op’s standards.
However, these co-op boards may be rejecting applicants for the simple reason that they don’t want to devalue the shares of the co-op. With prices having fallen anywhere between 25 to 40 percent over the last three years, co-ops are trying to protect their corporations and the value of current association owners. This then creates an environment where existing unit owners are trapped – slaves to this protectionist policy. And while owners that want to get out (or worse, need to get out), and want to sell their unit at current market prices so that they can move on with their lives, find they are being blocked from selling out because their boards are effectively preventing their ability to do so. Naturally, this creates a real dissatisfaction and antagonism between current co-op sellers (who need to sell at a loss and get out) with their co-op boards. A very bad situation indeed.
Do your homework first
So if you’re trying to make a steal of a deal on a co-op, beware that you might find yourself going deep into the process, doing all your searching and locating work, preparing offers, negotiating on a unit, and being successful in arranging a deal, as well as then signing contracts and lining up your mortgage, only to be rejected by a protectionist co-op board. Likewise, if you already own co-ops that you’re currently renting out, you may be blocked from selling them as well, especially if you need to sell at a discount.
Co-ops versus condos
So when considering a co-op versus a condominium purchase for income purposes, right now it really is best to stick with condos. First, most will allow renting. Also, most don’t require the greater formality and strictness that co-op boards represent. In addition, condo boards are much more understanding of market fluctuations, and the need for owners in these current economic times to sell at a loss. As such, they currently represent a better form of rental than the much more restrictive co-ops. So they make for a safer bet in these volatile economic times.
photos courtesy of warrenlewis.com, bcecoop.com, theapplepeeled.com, mortgageloanv.com, atlanticbeachrealty.net