CONDO VS CO-OP

26 Apr CONDO VS CO-OP

There are two major forms of ownership in New York: Condominiums and cooperatives (“co-ops”).

For investment purposes and renting out your apartment, it’s best to have a condominium. Avoid co-ops, “condops” and buildings that do not own the land on which they are built (“landlease” buildings).

Why are condos the preferred form of ownership?

With a condo you own a specific apartment outright and have full power over it, including use and disposition, a right also known as “fee simple” or “freehold.” You also own a percentage of the common areas and of the land on which the building is built. This is very important because a large part of the appreciation actually comes from the land (which is scarce).

When you buy a co-op you buy shares of the company that owns the building, which in turn gives you a proprietary lease for a specific apartment. You never become owner of actual real estate, or what is called “real property.” What you buy instead is shares in a corporation for which you receive a certificate like a stock certificate.

How come co-ops generally do not work well for investment purposes?

There are significant restrictions of ownership attached to co-ops.

For starters, you cannot rent out your co-op apartment unless the building’s board grants you permission. Also, if you want to resell your apartment you may only do so if you find a buyer who is acceptable to the board of directors of the co-op building.

If the board declines your buyer, you have to find a new one and you are not entitled to any compensation for your extra work in doing so. The reason or reasons for the rejection do not have to be disclosed and rarely are. It happens quite often that several buyers are declined, which makes selling a co-op a frustrating and lengthy process. A condominium, on the other hand, can be resold at any time and without any restriction.

Are co-ops cheaper than condos?

Many co-ops appear to be cheaper than condos, but in reality most are not: The company from which you buy shares typically has acquired the building with a mortgage. You repay a percentage of this mortgage with your monthly charges because part of the debt is attached to your shares. When the mortgage on the building is increased or refinanced, your monthly maintenance can increase further. In financial jargon you are acquiring the shares of a heavily leveraged company.

What’s a land lease?

Luckily, most new buildings in Manhattan are proper condominiums and therefore an excellent investment.

A few buildings in Manhattan, most notably those in the area of Battery Park City, do not own the land on which they are built. This results in lower acquisition costs but significantly higher costs for upkeep, as the land lease is an additional expense for the building. Such apartments are much harder to resell and tend to appreciate less. While they may be great places to live, they would not be my first choice as an investment.