Condo, co-op policies protect your investment

Not only are D.C. resident nomads less likely to buy a home, but they sometimes are apprehensive of homes’ rental policies in anticipation that they need to lease out their place, particularly a condo. (Photo by Bigstock)

By SAMMY DWECK

With a homeownership rate at 45 percent, Washington is home to fewer homeowners than any of the 50 states, even New York, which has a homeownership rate of 54 percent. Not only are D.C. resident nomads less likely to buy a home, but they sometimes are apprehensive of homes’ rental policies in anticipation that they need to lease out their place, particularly a condo.

Rental policies exist in some buildings and govern how long you can rent your unit and how many units in a building can be rented at once. Buyers often imagine keeping a property for decades as an investment, but they sometimes neglect to consider that their next investment will likely require the equity (and profit) from their first home.

The rental restrictions some buyers reel against actually protect their investments. Lower “investor ratios,” meaning more owner-occupants usually come with the substantial perk of a well-maintained building and keep financing flowing to the building. Last week, my client and I stumbled upon a darling property near Logan Circle but we both noticed that the dozen-unit building seemed well overdue for a facelift. As it turns out, 75 percent of the units in the building were leased. Absentee owners typically don’t have a vested interest in spending on maintenance and improvements until the roof starts caving in. My client decided to pass on this property in favor of one in a building that was better cared for.

Condos have traditionally provided more rental flexibility than cooperatives, but this is changing as condo boards smarten up in response to the challenges of today’s tighter financing climate as well as complaints from owners’ occupants about unruly tenants and neglected hallways. Limiting the search to condos ignores the inventory and options that come with a whole segment of the market. Co-ops can make a great home for first-time buyers. For some, a co-op evokes the idea of a fussy, restrictive Old New York institution that excludes people and controls the way you live — oh, and you can’t rent it. This is a misperception, particularly in Washington.

Some agents are not as well-versed in co-ops as they are in condos and choose to direct clients away from them rather than explaining the merits of a different kind of ownership. In fact, before condos ever existed in D.C. in the early 1970s, co-ops were the only way to own an apartment unit in Washington. Co-ops tend to have rental restrictions to preserve the cooperative character of the building but also to protect owners’ mortgage interest tax deductions and D.C. Homestead Exemptions.

Co-ops can be fabulous homes and wonderfully advantageous tax vehicles for the right purchasers. In addition to generally coming with much lower property taxes resulting in a reduced overall monthly cost of ownership, compared to condos, you’ll usually get a lot more square footage in a co-op for the same price as a condo in the same neighborhood. And you can generally rent them – regulations vary from building to building but you can be assured that tenants will be more qualified and sometimes better behaved than condo tenants. The cooperative board’s requirement for approval adds a layer that results in a lower overall incidence of short sales and foreclosures in a building, which help protect the value of other units. Fewer delinquencies in payment of maintenance charges balance the building’s budget. Closing costs are lower as individual shareholders in cooperatives do not have to buy title insurance (about 1 percent of the purchase price).

So, buyers, whether condo or co-op, don’t write off buildings just because of leasing policies. Those policies can do wonders to protect the quality of life and financials of your building and when you move up, you are probably going to want your cash anyway.

Sammy Dweck of The Amber & Sammy Group with Evers & Co. Real Estate, Inc., is a licensed real estate agent specializing in townhouse, condo and co-op sales inside the Beltway. Reach him at Group@AmberAndSammy.com or 202-716-0400.