A condo, or condominium, is a private residence within a larger building or community. It is a high-rise townhouse or a single unit, with other condos above and below it.
Condos are a great investment, especially in the current housing market, as individuals can receive a steady flow of rental income by leasing out a condo. Additionally, condo investing is a good strategy for those that want to start investing, but are not ready to buy a house just yet.
To start off in an area with a median price, many investors begin by putting money in smaller properties, especially condos. In this article, I’ll discuss with you all you need to know before making a condo investment, so you can understand if this is the right choice for you.
Why Is Purchasing A Condo Valuable?
Condos can be an attractive investment opportunity. They often cost less and have fewer maintenance issues to worry about than similar single-family or multi-family homes on the market. On the other hand, there are some drawbacks to consider. First, condominiums often have condo association fees, HOA fees, and other monthly fees that can grow significantly and unpredictably.
Regardless, a condo is a good investment in the right circumstances. Like any other property, it is extremely important to conduct thorough research and make the right decisions. This is a similar thought process to go through when compared to deciding about a vacation rental or something you want to rent out to a family member.
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Advantages Of Investing In A Condo
Choosing a condominium as an investment property has both positive and negative aspects. Here are a few reasons you might want to consider a condominium as your next investment property.
Low Cost
In many real estate markets, condos are, on average, much cheaper than single-family homes. You can find rental apartments in the market for around $60,000, but you'll need at least $120,000 to purchase a single-family rental. The rental cost is the biggest barrier to investing in real estate, and condominiums may be the cheapest way to start and dip your toes in the market to achieve your long-term money goals.
Desired Location
Condos are often in areas where single-family homes and multi-family homes are scarce. For example, many urban and recreational areas are full of condos and few single-family homes. Next time you are driving by a condo building, notice how many shopping malls and convenient stores are nearby.
Lower Maintenance Costs
Condos incur additional costs (more on that in a moment) but tend to be significantly less expensive to maintain than single-family or multi-family investment properties. The best thing to do is to find a balance and see where you would like to spend your money.
Individual Cost Savings
Condominium costs are usually a fraction of what you would normally pay on a house. Depending on the condominium building, included rates and services may include building insurance, cables, garbage collection, water, pest control, and more.
Amenities
A big advantage of living in a condominium is the availability of quality communal facilities. Often there are club rooms, pools and exercise rooms. These facilities are very attractive to many tenants and will help you find quality tenants.
Properties with attractive furniture are often in great demand. This may mean that you won’t need to wait too long to find the next tenant when one moves out. When it comes to managing cash flow, short-term vacancies are an investor's best friend.
Pride Of Ownership
Most condominiums have a high ownership rate. The articles of incorporation often state that only some of the owners are allowed to rent out a unit. This usually leads to pride in the property that encourages the community and the responsible use of the property. Owners tend to have better control over their assets and community resources than tenants. That means a more attractive investment for you.
Security
Most condos have increased security. Normally, you will need a key to enter the building before you reach the front unit’s front door. Each unit is equipped with an intercom system that residents can use to approve authorized guests and visitors. The added security allows residents to feel safer and these types of features are why some tenants are even willing to pay extra.
Condo Laws Help With Investment Property Value
There are usually rules that need to be followed as an owner/tenant of a condominium property. For example, you may not be able to change the color of your front door. To do this, you would need permission.
Overall, condo rules can be stricter than similar non-condo properties. This helps prevent unwanted activity that causes the value of the property to decline.
Secure Rules And Regulations
Condo rules and regulations are often necessary to maintain an organized community that benefits all owners. The condo association acts as a police force to prevent owners from ignoring and neglecting their property and/or preventing bad behavior. This allows owners to maintain the property’s value and make it more attractive. This is important regardless of whether you are looking for a new tenant or want to sell your property.
Disadvantages Of Investing In A Condo
While there are many positive aspects of having a condo investment, the disadvantages cannot be ignored. Here are the cons of investing in a condo:
Bad Neighborhood
Every community has neighbors. You can have neighbors above, next to, and below you. If you purchase a condo in a bad neighborhood, it can lead to unnecessary vacancies and constant tenant fluctuations. And as an owner, you probably have to deal with complaints which can be frustrating and time-consuming.
Condo Society Fee/Homeowners Association Fee
Condos are managed by the Association Board, which often includes volunteers or elected community condominium owners. Usually, a group of investors own a condominium building, manage the collection of condominium fees, and hire a property management company to manage the community.
This society can be very strict, and sometimes limit you in certain areas of your freedom. Additionally, there are also fees to pay them, which may add up in the long-run.
Limitations Of Rental properties
Most condos limit the number of units that can be rented out. If you have already reached the limit, you will not be able to rent the property. Housing associations may also limit how you use your apartments, such as the number of residents allowed and the rental periods.
These guidelines maintain a sense of community and prevent the property from becoming an apartment building rather than a shared apartment. Before buying a condo, make sure you can rent it out, and your tenant can meet the requirements.
Keep in mind that certain condo buildings are completely banned from renting, while others have certain rental restrictions. For example, this may include needing to live in the condo for a year before being able to rent it out.
Slow Selling Of Rental property
Condos tend to be suitable for income-seeking investors. As a rule, they gain value more slowly than comparable single-family homes and apartments.
There may be fewer groups of condo buyers than single-family home buyers. Therefore, when it is time to sell, the number of days your condo is in the market can be longer than you’d like. However, this depends on the location as some areas are more desirable than others.
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Investing In A Condo - FAQ
There are different strategies you could use to find these properties. One of the most popular ways is by looking at new construction condominiums that are still for sale. That's how many investors got started in the past and it's still one of the best ways to get deals on fresh condos that haven't been used yet.
Another way is by finding resale condos that are already built but not sold. Some investors buy these to fix them up and sell them for a higher price or use them as rentals to generate income. I recommend building your own strategy around what you like doing more (fixing or flipping).
Yes, but only if the tenants pay rent on time and aren't delinquent in their payments - otherwise, it will create problems when trying to take over the lease. It's best to get the owner to sign a new contract that would include your name and then buy the property just like any other investment deal. However, dealing with a tenant that you did not choose yourself is not the easiest job. Ensure you speak with the tenants before and discuss the contract.
The best way to determine how many properties you could handle is by figuring your total expenses per year, dividing it by the cash flow per property and seeing what you'll come up with.
For example: If you're able to cover all your costs and keep the cash flow at $1,000 per month, you could afford to invest in 2 properties.
If you're only able to afford $500 per month, then it's best if you stick with one condo. You can always start small and work your way up.
Condos offer a lot of advantages over regular homes if low-interest rates are available to make it work for your budget. Otherwise, stick with one or two properties to start with and work your way up from there.
There is no single answer to this question. A condominium building with stable connections that generates the right cash flow can certainly be a good investment in the right circumstances, but before making a decision, evaluate all the potential positives and negatives.
Conclusion
Before making any investments, ensure you read all relevant documents carefully. Before even submitting an offer, it’s also a good idea to talk to a couple of neighbors. This will help you get a sense of the community and obtain internal knowledge of what it's like to live in the building.
And like any other real estate investment, consider and run your numbers to make sure that the rent covers the monthly condo costs and any other costs associated with owning and managing the rental property. Happy condo hunting!
As an alternative to the above, here are the steps to buying a home if this makes more financial sense than investing in a condo.
Moreover, if you prefer to read the shorter version, check out this home buying checklist to get started.
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