Are Condos a Good Investment?
You’re looking into real estate and trying to find the best possible investment. You begin exploring condominiums.
But are condos a good investment? Or would you be better off investing in single-family homes or apartment buildings?
Let’s take a look.
What is a Condo?
A condo is a building or complex made up of many single-family units. In most cases, they are joined or grouped together with multiple units in the same area. You typically get a unit all to yourself, along with a shared parking lot and common areas that may include grasses or picnic spaces, swimming pools, a clubhouse, or a gym, among other amenities.
Generally speaking, the more of these kinds of features there are in your complex, the higher the association fees you can expect to pay.
When you buy a unit in a condo, you retain full ownership over your individual unit. However, there are typically strict rules governing what you are allowed to do with your property. These rules are outlined and enforced by the condo’s housing association, which we’ll explain more about in a bit.
How to Invest in a Condo
If you want to become a condo owner, you have to go through the home-buying process just like you would when you buy a regular house. This requires finding a real estate agent, shopping for a mortgage, going through the approval and inspection process, and closing the deal.
Generally speaking, there are two ways to invest in a condo.
1. Buying a Condo to Live In
One option is to buy a condo to live in it. Oftentimes, people buy condos because they like the social aspect of being surrounded by neighbors or because they don’t want the hassle of maintaining a property. A condo is a lot less work than owning a home, and it’s also very convenient if you don’t mind sacrificing some personal space.
From an investment standpoint, condos generally appreciate in value over time. However, it’s important to inspect the community where you’re thinking of buying to make sure that it’s properly managed and in good financial standing.
2. Buying a Condo as an Investment Property
The other option is to view the transaction as a condo investment either by flipping the condo unit quickly or by using it as a rental property. Keep in mind that some condos allow for easy long-term renting, or short-term renting to people on Airbnb. However, others are more strict and require special permission. And some don’t allow any subletting whatsoever.
If you’re thinking of renting out your condo purchase, be sure to understand your association’s rules before putting any money down.
Are Condos a Good Investment?
Buying a condo has pros and cons from an investment standpoint.
Pros of Investing in Condos
When you own a condo, you are responsible for taking care of the inside of your property, along with a patio and possibly a driveway. Almost all external maintenance — like mowing, plowing, and landscaping upkeep — will be taken care of by the condo association, which you pay for in your monthly homeowner’s association (HOA) dues.
This means you never have to worry about cutting the grass, planting flowers, cleaning the gutters, or removing trash. All of this will be taken care of for you by management and paid for in your monthly condo fees.
Condos are generally much more affordable than a house. You still have to come up with a standard down payment (which will be determined by your credit score and financial situation), secure a loan, and deal with closing costs along with a monthly mortgage.
However, it’s generally a lot more affordable than buying a standalone house. And property taxes tend to be lower, too.
Condos often come with amenities — like inground pools and fitness centers. In fact, some units may have multiple pools or centers, along with other amenities like tennis or basketball courts.
While you have to share them with other tenants and guests, it’s still a lot more affordable than buying them outright for a private house. Plus, these types of amenities are very attractive to renters. Offering them in an online listing can help ensure a steady cash flow and boost your rental income.
Cons of Investing in Condos
Limited Opportunities for Growth
When you buy a condo, you typically have to request special clearance to perform any construction. Most places give you control over how you want to decorate the interior of the house, allowing you to customize your kitchen (to an extent), or put in new flooring.
However, major structural changes are almost always out of the question. As a result, you’re typically stuck with what you get in terms of the interior and exterior space. For example, you most likely won’t be able to build a shed in your backyard or expand your deck, unless you have an extremely accommodating condo association.
Rules and Regulations
Condos have strict rules and regulations that need to be followed at all times. This can range from noise limitations to the number of guests allowed inside of a home.
This can become an issue if you buy a place expecting to rent to vacationers only to learn that the condo has rules governing how many people are allowed to stay in a place at one time — also known as an occupancy rate. Some places also require you to hold a condo for a certain length of time to discourage flipping and reduce vacancy rates.
Condos may also come with high fees that you need to watch out for — particularly in the HOA agreement, which can cost hundreds or even thousands of dollars per month depending on your location and the real estate market.
Tips for Real Estate Investing with Condos
Watch Out for Special Assessments
Condos can require a lot of work — especially in large complexes where there is a lot of infrastructure to maintain. A special assessment tax is a tax that’s given to property owners to pay for projects like roofing, sidewalks, or other large-scale repairs. Special assessments are based on the home’s value. They can amount to tens of thousands of dollars in maintenance costs.
Before buying a unit, ask when the last special assessment was conducted. If it’s been several years, it could be a sign that another one is right around the corner — meaning you’ll need to have extra cash on hand to pay for it. You don’t want to get blindsided by a special assessment.
Find a Great Real Estate Agent
The realtor that you select is vital to securing a great condo. Be picky about the real estate agent that you work with and remember that the individual will ultimately be working for you. You’re essentially paying them to find you a great property and help close the deal.
Don’t be afraid to walk away from an agent if you don’t think they are capable of doing a great job.
Diversify Your Real Estate Portfolio
Owning a condo can open the door to additional investment opportunities. For example, you can do a 1031 exchange to diversify your real estate investments and put your money in your pocket.
Frequently Asked Questions
What is a Homeowner’s Association (HOA)?
An HOA is a governing organization in a condo that serves to maintain and promote the community. HOAs generally work in the unit owner’s favor by keeping the condo well maintained and enforcing rules. If you don’t like the sight of garbage on the lawn or people parking in your private space, an HOA can be a great service.
There’s just one issue: HOAs can be very expensive — especially if you are renting your unit and need the help of a property manager for the inside of the unit. If you’re not careful, you could wind up paying for internal management and a separate HOA fee. Unless you charge sky-high rates, this could potentially negate any income that you make from renting your unit.
What is a multifamily home?
A multifamily home is much different than a condo. In this case, an investor will buy a home and make different floors or units available to renters. For example, a three-story house may have three families living in it — one on each floor.
From an investment standpoint, a multifamily home is a great option because you will be able to charge three different families for rent. However, you’ll have to deal with three different tenants — which can be a nightmare.
If you purchase a multifamily home, you should strongly consider working with a property management company to oversee operations on your behalf. It’s much easier and less time-consuming.
Can you put a condo on Airbnb?
It all depends on the rules of your condo complex. Some condos allow for flexible Airbnb usage while others restrict guests and short-term tenants. Check with your condo’s governing body to make sure that renting is allowed before you buy a unit.
Is a condo a better investment than a townhouse?
A townhouse is similar to a condo, as you can own your own unit. However, a townhouse gives you a bit more privacy and control over a condo. For example, a townhouse may share some structural components with other units. Still, it’s more like owning a standard home.
From an investment standpoint, it largely depends on how much control you want over your unit. A townhouse typically provides more freedom and privacy. However, it usually lacks the amenities that you’ll find in a condo complex.
The Bottom Line
Buying a condo can be a great investment. It can also be a financial disaster. It all depends on the place that you’re buying, your financial situation, the HOA, and the location and surrounding amenities, among other things. Suffice it to say that there are a lot of important factors to consider when buying a condo.
If you’re thinking about buying a condo, one of the best things you can do is spend some time on the property without the real estate agent. Go for a walk on your own and talk to some of the locals.
Try and meet your would-be neighbors, too, if you can. Ask them questions about the property and try to dig for information that can help you make an informed choice. Oftentimes, you’ll learn things that a real estate agent either doesn’t know or doesn’t want you to know.
For example, you may learn that the HOA company is hard to deal with and a stickler for annoying rules. Or you may find that the condo does a bad job keeping pests and garbage at bay. These are things you need to know before you sign an agreement.
Ultimately, as a real estate investor, you have to think like a private investigator. Dig for information and approach every unit with skepticism. And don’t sign any agreements until you’re 100% sure that it’s a positive investment that will yield a healthy cash flow.
Here’s to growing your real estate investment portfolio one property at a time!