If you’re contemplating investing in real estate, you might ask yourself: Is buying a condo for investment a smart deal?
A condo is like a hybrid between an apartment and a house. It is a property that a real estate investor can buy and own outright. Buying condos as investment properties is a debatable topic in the real estate business. Some property investors swear by them while others wish they invested in detached homes (like a single-family home for example). Thus, the only way to find out if buying a condo for investment is a smart move is to consider the pros and cons of these real estate properties.
Toying with the idea of investing in a condo? Here are the top four benefits and four drawbacks to factor into the decision-making process of buying a condo for investment.
Pros of Buying a Condo for Investment
#1 Condos Are Affordable
Generally speaking, it’s cheaper to buy a condo than other types of real estate, such as a single-family home. In certain real estate markets, the average single-family investment property is larger in size and, thus, is more expensive than a smaller-sized condo (either in terms of square feet or number of bedrooms). Of course, this doesn’t hold true in all markets – property investors should also consider property values in the neighborhood, the cost of living in the area, and HOA fees when comparing costs. Nonetheless, a real estate investor typically spends less on buying a condo for investment.
#2 Desirable Locations
Condos are popular in urban areas which are considered luxury locations in the real estate investing business. In general, these investment properties are in desirable locations that provide an attractive lifestyle. Buying a condo for investment instead of a detached home in such locations can bring you a better return on investment.
For example, let’s look at buying a condo for investment vs a single-family investment property in a popular ski town or beach location from a real estate investor’s point of view. Renting out a single-family home in such locations might cost you millions of dollars and, in order to make rental income, you’d need to charge a hefty amount for monthly rent which could turn away potential tenants. However, buying a condo for investment in the same location could cost half (or even one-third) of the price and, when setting the right amount for rent, will generate a good rental income.
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#3 Generate Monthly Rental Income
As mentioned in the previous point, condos as investment properties could yield a good return on investment because they generate monthly rental income. This is especially true if you’re investing in a real estate market with high demand for condos. For example, a beachfront condo may fetch thousands of dollars per week during the summer as a vacation rental! Buying a condo for investment in such markets can bring you rental income during the high rental season to cover a year’s worth of maintenance costs, giving the real estate investor free use of the investment property during the rest of the year.
One of the biggest perks of buying a condo for investment is that property investors are not directly responsible for maintaining the building, common areas, or grounds. You don’t have to worry about mowing the yard, fixing the roof, shoveling the snow, etc. – your monthly condo fees cover all maintenance expenses and other people will do the work for you.
For a first-time real estate investor that’s busy with work, likes to travel, or simply doesn’t want to deal with all that work, this is a major benefit of buying a condo for investment. Moreover, this actually creates a huge demand for renting condos because tenants themselves don’t need to worry about maintenance either!
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Cons of Buying a Condo for Investment
#1 Homeowners Association Fees
Condos offer residents amenities that are out of reach with other types of real estate properties like a swimming pool, fitness center, security system, etc. As great as having amenities is, not all property investors are willing to pay a price for them. Basically, a real estate investor has to pay in order to become a member of the community. HOA fees can range from under $100 to as much as $300 per month depending on the complex, location, and quality of your community. Adding these fees to the regular principal, interest, and tax payments on the mortgage, this may be a reason to opt against buying a condo for investment.
#2 Condos Are Harder To Finance
If you’re buying your first investment property, you’re most likely going to take a loan to finance the purchase. If you’re interested in buying a condo for investment, one thing to definitely keep in mind is that obtaining a mortgage is much harder for a condo than a detached single-family home.
For buying an investment property (whether a condo or any other type), lenders (AKA banks) typically require from property investors a 20-25% down payment. However, some lenders require the real estate investor to live in the condo for a year before renting it out. Plus, if your lender doesn’t require you to live in the investment property initially, then you might have to pay a larger down payment!
Moreover, not only do you have to qualify for a condo loan as the borrower but also the association as well. As a general rule, lenders won’t finance buying a condo for investment that is in a building currently undergoing litigation. As you can see, there are tighter requirements and restrictions for property investors to obtain a loan to finance a condo. This is mainly because lenders must adhere to guidelines set by the Federal Housing Administration (FHA) for condo mortgages.
#3 Slow Real Estate Appreciation
Even though buying a condo for investment is cheaper than buying a single-family investment property, condos appreciate in value at a much slower rate than detached homes. How come? When property investors buy condos as investment properties, they only own the inside of the unit (living space), and not the land on which it sits. In the real estate business, the land is a key factor that drives the increase of the investment property’s value.
#4 HOA’s Rules and Restrictions
HOAs have more power than you would think. Thus, before you consider buying a condo for investment, you need to be familiar with the HOA’s rules in the community you want to be a part of. As a real estate investor, you want to assure that the condo you’re buying can, in fact, be rented. Many HOAs have strict rules against renting and don’t allow it at all. Others have what is called a “Rental Cap” – this is a limit that restricts the number of condos that can be rented out vs the number of owner-occupants.
Besides rental policies, there are other rules like the color of exterior paint, where you can park, and if pets are allowed. Every HOA has its own set of rules that you, as a condo owner, must adhere to. So, make sure you know these common rules and restrictions, find out if there’s a Rental Cap and ask if it has been met before making an offer and buying a condo for investment.
So, Should You Invest in a Condo?
Overall, condos do make good investment properties – but, you must proceed with caution. Be a smart real estate investor and perform a comparative market analysis to evaluate the profitability of buying a condo for investment vs a detached home in your real estate market. Moreover, make sure to review the HOA’s rules and condo documents VERY carefully! Property investors also need to weigh the significant pros and cons before making any final investment decision.
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Do you own a condo or have owned one in the past? What was the overall experience like? Was it worth the investment, or will you never consider buying a condo for investment again? Let us know in the comments!
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