Why I invest in condos and why you should too
Investing in a condo can yield stellar returns if done right. As with any investment, various factors influence your particular outcome.
The location and market conditions in your area are some of the top determinants.
But overall, condos are beginner-friendly for new real estate investors. That’s because:
You are typically buying new, so less repairs.
You pay condo fees, so you’re not responsible for maintenance and upkeep.
Urbanization is increasing, which means condos are in high demand.
Millennials and younger generations love living in the city.
Small spaces are becoming much more accepted in the renter community.
Condos typically offer a range of stellar amenities that attract renters — pool, gym, spa, etc.
You’re more liquid because resale demand for condos is high, which gives investors good exit strategy if they need to sell.
Condos are typically cheaper than single-family homes, so barrier to entry is lower.
New development condos typically have a generous deposit structure, so you don’t need to put down 20% immediately.
Your interests are looked after by the elected condo board, who help guide the day-to-day management of your building.
And the list goes on.
For investors looking for an entry-level investment, or more experienced investors looking to take advantage of demographic changes, condos are a great investment.
Advantages of condo investing
Condo investing comes with some advantages over single-family homes. These make them ideal for savvy investors seeking a higher rate of return and an easy time managing their properties.
Some of these advantages include:
Renters have a shared sense of community
The purchase price is lower than for single family homes
Equity and tax advantages
You can fetch a premium resell price or monthly rental for your condo unit
Renting out your condo is cheaper due to shared building maintenance costs
The rules governing condos benefit landlords and limit tenant bad behavior
Homeowner rules also make managing condo properties easier for investors
Disadvantages of condos as investments
It's also worth noting that condos also pose potential downsides. For example:
It can be more difficult to get bank financing
The condo association finances could be unstable
Condos usually appreciate at a lower rate than single-family homes in some markets
Questions to ask Before Investing in a Condo
Location isn't the only thing you should consider when investing in a condo. It's best to ask yourself some fundamental questions before you commit your money to the investment. Here are a few:
How long do you plan on keeping the condo?
Is the building you are considering currently under any litigation?
What are the lender financing requirements?
Is your condo in an area with a high rental demand such as near a college?
Is the location you are considering getting more popular or unpopular?
What is the typical annual rent you can expect to get from your condo?
Why Condos Make Great Investments
I get it; most potential condo investors run for the hills because of Homeowner Association (HOA) fees typically charged on condo investments. And yes, they can seem expensive at times. I think it's best to question the fees and what they cover before ruling out a condo as a lousy investment. Some of the things that HOA fees in the condos I've invested in include:
Roof and pool maintenance
Exterior maintenance and repairs
These are costs you'd have to bear yourself for single family homes in most cases.
As an investor, know your rights before signing on the dotted line. Most new condo investors make mistakes that end up costing them in the long. These are mistakes you can easily avoid by doing due diligence.
Here's a typical example of why I prefer investing in a condo over single-family homes. Let's run through some numbers. For the sake of keeping it simple, let's assume that I buy both properties in cash and that I manage my properties.
Let's assume a three bedroom condo with two baths listed for a price of $100,000.
Assuming that the typical rent in my area works out to about $1200 a month, and factoring in other expenses; repairs reserve ($1000 per year), property taxes ($1000 a year), insurance ($200 a year), vacancy allowance ($120 a month), condo HOA fees ($200 a month), I can comfortably net around $8360 per year giving me a ROI of about 8.36% or thereabouts. Quite a decent figure.
Single Family Home
Let's assume a three bedroom, two bath single family home with a listing price of about $150,000.
Local rent in my area remains the same at about $1200 a month. Factor in the expenses: Property taxes ($1500 a year), insurance ($500 a year). And since you are solely responsible for the maintenance, you have to set aside a $2000 reserve each year. The reserve goes into repairs like roofing etc. Other expenses include garbage removal ($30 a month), landscaping ($100 a month), monthly vacancy allowance ($120 a month).
Net return works out to about $7400 per year for a yield of about 4.93%
Now, I know that some of those numbers are over-simplified. But, depending on the location and other factors, you can still come out ahead with a condo investment while enjoying some peace of mind as a property manager.
I usually don't have to worry about coordinating landscaping, or maintenance calls. All I have to do in most cases is just make a phone call to the HOA manager and inform them.
Additionally, depending on the HOA rules of in your building, you could rent out your condo by the room significantly boosting the income from your property.
This is why I invest in condos. I'm not telling you to go out and buy one, all am saying is that it's worth considering as an investment given the factors above.
Do your due diligence before committing money. In the long run, it might work out for you too depending on your market.