There are many different types of real estate investments, and not all of them involve buying normal houses. In the current economy, your money might be better spent elsewhere, such as buying a condo instead. Popular with all kinds of crowds, condos can be highly attractive to a variety of renters and buyers, from students starting out to young families, retirees, and more. Some condos are catered to long-term living, while others are directed at holiday-goers and short-term lets.
But is purchasing a condo instead of a normal house really the best investment move to make right now? The answer is yes, depending on a few key factors that will impact the profitability of your purchase. You’ll need to look at the current real estate market, interest rates, and your ultimate goal for the condo, and if all the stars align you could have a great deal on your hands. Narrowing down a condo to buy is not necessarily as straightforward as it seems, and current economic conditions can make predictions more difficult.
It’s worth bearing in mind that like all types of real estate, buying a condo will come with pros and cons that the investor will need to weigh before making the decision to put in an offer on one. The same characteristics that dictate success in other types of real estate will still apply here – location, supply and demand, and major demographics can cause different levels of investment success.
We’ve put together everything you need to know about owning a condo in today’s investment market. Keep reading to learn more about whether condos are a good investment and everything else you need to know before buying.
Table of Contents
How Does A Condo Differ From A House?
Investing in condos is slightly different from investing in normal homes and townhouses, although there is some crossover. Condos are typically buildings that have been divided into multiple units, which are sold to individual owners. Every condo comes with a title or deed, and common areas like lobbies, pools, and parking lots are shared between the unit owners with each owner covering a portion of the maintenance financially.
Common areas in condos are managed by a condominium association which is elected to take care of the building and handle the decisions that will affect all units. The unit owners usually pay some sort of monthly or annual fee to assist with these expenses and pay for service delivery. The members of this association are usually elected by vote.
The thing that differentiates condos from normal homes, even more, has to do with the land they are built on. Since the properties on the land are owned by multiple owners, when the land appreciates in value then so do all of the properties located on it. On the flip side, the opposite is true if the land value decreases. The only way to escape from this potential scenario is to make sure you have found a good neighborhood that performs consistently, even during times when the market may be unstable.
Stable Investments In Unstable Markets
2020 has seen the real estate market soften in locations around the country, and while housing prices have been relatively stable, emotional selling has kept sales volumes moving. For the investors that have funds available now is a good time to buy, but since real estate is a relatively illiquid asset they also need to be particularly cautious regarding where, and how they buy.
While the remainder of 2020 is likely to have slow transaction volumes, now is the time that motivated sellers will be looking for offers. Motivated sellers are more likely to accept offers that are below the market value of the property they are selling. It’s important to come in under value because it’s possible to increase your offer but much more difficult to decrease without losing the deal.
Condos And Rental Income
One of the best ways to earn consistent passive income is by renting out your condos to tenants over the short or long term.
For investors that want to follow this strategy, there are several things that need to be considered before buying any condo. The cost of the loan repayments per month, along with maintenance costs and condo association fees will all play a determining role in how successful the condo will be as an investment for you. Part of covering these costs will come down to setting the right rental price and finding tenants that are willing to move in the long-term.
If the average rental price in the neighborhood that you’re considering is not high enough to cover your costs, then the condo won’t be worth your time and money. The other potential risk is buying a condo in a neighborhood that has low demand, causing the property to incur costs associated with extended vacancy. When setting the rental price the investor needs to look carefully at other comparable properties in the same area and make sure that what they are asking will still be attractive to tenants.
One of the ways to ensure that you have a property worth closing on is by looking at condos that are for sale under their real market value, or that are sold off-the-market. As long as you have carefully vetted the condo’s condition and assessed the general neighborhood, you could turn it into a profitable investment with some basic renovations. The key is to understand the expenses you will be responsible for and to budget for them accordingly.
Common Condo Expenses
There are set expenses that every condo investor should be aware of if they are to manage the property effectively and make a good investment.
The first major expense you’ll need to plan for is the actual purchase price of the condo. Instead of buying the first property that you come across, you’ll want to do some research about the best places to buy condos, what the average cost will be to acquire one, and whether you’ll need a loan to acquire one This process will include looking for lenders that specialize in that type of real estate and can provide you with the most favorable interest rates and terms.
Finding a lender that you like is essential if you are planning to invest in more than one condo in the future. Some lenders will provide return borrowers with special discounts or other deals that can sweeten the pot, so really take the time to find the right fit if you want to grow your portfolio even further.
Following the purchase price, the next big expense you will want to prepare for is the cost of renovation. If your new condo is a turnkey property you will not need to make major changes beyond repainting, but if you purchase an older condo that is under market value you can improve the amount you will earn from the condo by renovating it first. Certain lenders like hard money lenders specialize in loans made for property rehabs. Working with this type of lender can be beneficial because they are able to fund investors within short time frames and provide them with connections to professionals like appraisers and contractors that are essential.
The renovation cost will ultimately depend on the condition of the condo and the scale of work that has to be done. Labor-intensive projects will be more expensive than things that you can DIY, and with older condos, there is always the chance of coming across an unexpected and costly issue that pushes you over budget.
The next cost you will be responsible for is the condo association fee. This is a mandatory fee paid by all condo owners in one particular location to the elected board that manages the units. These fees can be highly variable depending on where the condos are located, but you can expect to spend upwards of $200 at a minimum. These fees are used to maintain the shared areas of the condos, deal with landscaping costs, and settle trash removal.
Lastly, you’ll want to look at projections for the future. You want to ensure the condo you buy will appreciate year-on-year while you own it. As a condo owner, you need to think about where the neighborhood is going, what the demand for rentals will be like, and how your condo will grow in value
Is A Condo Or A House A Better Investment?
Owning a condo and owning a normal house is much more similar than you would expect. The costs associated with owning a condo are similar to the fees charged by homeowners associations and will have a similar role and impact.
Both kinds of property have their own pros and cons, some of which will overlap. The biggest difference between the two comes down to what you own and what you don’t. When you purchase a normal property, you own the physical structure and the land that it is built on. With a condo, you will own the unit you have purchased but you won’t have a claim to the land the collective condos are built on or the shared spaces.
This differentiator also has an effect on the insurance you use. As a homeowner, you are responsible for covering all of your own insurance needs, while a condo might get additional coverage through the condo association, such as roofing insurance. It’s worth mentioning that condos will often have lower out of pocket expenses than normal properties at the same value.
A condo may be a good investment option for you depending on what your goals are. To figure it out, you’ll need to sit down and crunch the numbers, comparing what you can earn to your overall costs. Owning a condo is similar to owning a normal home, but there are a few important differences that could have an effect on your choice to buy one.
Your goals will have a significant impact on the type of condo you invest in and where it is located. A condo can be a stable investment that provides you with consistent passive income, not a bad idea considering how unpredictable the economy has proven to be in 2020 so far.
Is buying a condo a good idea?
Yes, provided you have taken a close look at all the factors that make for a successful real estate investment, like location and income vs expenses.
Are rental condos a good investment?
Owning a rental condo is a good investment due to the potential for largely passive income earned on a consistent basis.