Here Is What You Should Take Into Consideration Before Buying a Condo for Rent

When buying an investment property, real estate investors have different options to consider. One option that some real estate investors turn away from is a condo for rent. A condo for rent isn’t viewed as the best investment property by many real estate investors.

With diligent investment property analysis, however, a condo for rent can turn out to be a great choice when buying an investment property. There are a few differences real estate investors will find when investing in a condo for rent, and you need to take them into consideration before buying a condo.

Financing a Condo for Rent

Real estate investors have different options for financing rental properties. For a condo for rent, lenders can be a bit stricter. Some may require the real estate investor to live in the condo for up to a year before actually financing the condo for rent. When buying an investment property, lenders require a typical down payment of 20%-30%. For a condo for rent, if they don’t require you to live there beforehand, lenders will ask for a larger down payment. With the help of an investment property calculator, you will have to work in this larger down payment into your budget. Check out Mashvisor’s investment property calculator to make things easier when factoring in all the expenses that come with investing in real estate.

Not only will the real estate investor’s financial health be taken into consideration, but the lenders will also look at that of the condo association. This is out of the control of the real estate investors. Lenders will only approve a mortgage for a condo for rent if the condo association meets the following requirements:

• The condo for rent must have decent insurance in place.
• The condo association should have adequate budget reserves.
• The condo for rent shouldn’t be under any litigation.
• There should be no anticipated special assessments.
• 85% of the HOA fees for the condo should be paid on time.

During the investment property analysis, ask to see all documents related to these points to ensure the condo for rent will be financed.

Rental Policies and Rules for the Condo for Rent

Many condo associations have rules that you have to be aware of as a real estate investor. If you plan on renting out in order to see a return on investment, check to see if the condo for rent has a rental cap. Many condos allow only a certain percentage of units to be rented, and others don’t allow renting at all. Condo associations try to keep the owner-occupancy rates high. If there is a rental cap, check to see if it has been met and if it’s possible to rent out when buying a condo.

There are other rules real estate investors have to consider when buying a condo. Some condo associations have strict rules about exterior colors or improvements to the condo. If a real estate investor was looking to improve a condo for rent to increase return on investment, he/she may not be allowed to do so. Check all of the rules and regulations and make sure you can abide by them.

The Budget for a Condo for Rent

Homeowners Association Fees

Real estate investors have to create a budget when buying an investment property. Different types of investment properties require different budgets, especially a condo for rent. One expense with this kind of investment property is the Homeowners Association (HOA) fees. At times, they can be very high because they cover a few different things: exterior maintenance, security, amenities like a pool, landscaping, common area maintenance, utilities, etc. If the condo for rent is larger or has a better view of the location than the other units in the complex, it will have a higher HOA fee. An investment property calculator can help you figure this into your expenses to see how it will affect your budget. Sometimes, real estate investors choose to add this to the rent of their tenants. This is preferred to having the tenants pay directly to the Homeowners Association.

Budget Reserves

Part of your monthly rental income will go to budget reserves of the HOA. This is to make sure there are sufficient funds for any repairs that pop up for the condo buildings. With an investment property calculator, determine how these fees will lower your return on investment. While they may be high, real estate investors should think of them as a way of saving for maintenance, so as not to be caught off guard when repairs come up. If the budget reserves are low, real estate investors will have to pay special assessment fees.

Special Assessment Fees

When buying a condo, real estate investors will become responsible for paying the fees of any major repairs for the condo buildings. For example, a new roof or any kind of major upgrades or repairs will require a mandatory fee from the real estate investor. The HOA generally performs inspections of the condo buildings. Request the information on these inspections to see if there are any upcoming special assessments you’ll have to factor into your budget.

A thorough investment property analysis will ensure that you aren’t surprised by any of the fees after buying a condo for rent.

Related: How to Budget for an Investment Property and Cash Flow

Occupancy Rate and Turnover

Real estate investors must always look at occupancy rates and turnover when buying an investment property. A condo for rent tends to have a higher turnover of tenants than, say, a single-family home. With high turnover and vacancy rates, real estate investors end up losing rental income and get an overall lower return on investment from rental properties.

Other investment properties in the location may have good occupancy rates, but condos tend to differ. Investigate the occupancy rates of the condos in the same property, condos in similar locations, and apartments as well to make sure they are high. A booming rental market in certain locations doesn’t always mean a condo for rent will do well in terms of keeping its tenants.

Real Estate Market Analysis for a Condo for Rent

When attempting to buy or sell a condo for rent, as with all other investment properties, a real estate market analysis must be done. The real estate comps for a condo for rent must include the other condos in the complex. This means if a real estate investor is trying to raise the price of a condo for rent to increase return on investment, it may be difficult. Even with enhancements to the investment property, the price will greatly rely on the other real estate comps in the complex.

Related: Here is Everything You Need to Know about Real Estate Property Market Analysis

Limited Market for a Condo for Rent

Not all buyers and tenants will be interested in a condo for rent. There are various reasons this investment property has a limited rental market. For one, limited parking for tenants looking to entertain many guests can be an issue. Living in close proximity to others can be a privacy concern for others. Real estate investors shy away from condos, even though it’s a great way to diversify a real estate investment portfolio. The extra fees of the HOA can drive home buyers and real estate investors away. Because of these reasons, you may have trouble marketing and selling the investment property. Take this into consideration, especially if you don’t plan on holding on to real estate as an investment strategy.

Related: What are the Best Ways to Market Your Investment Properties for Sale?

There are many things to think about before investing in a condo for rent. But don’t ignore the upside. Buying a condo can be cheaper than other forms of investment properties (depending on the state of the local housing market) and there is a variety in amenities to choose from that can help you sell or rent out the condo faster. So, in many ways, a condo for rent can be the best investment property for investing in real estate. As long as the real estate investor does an investment property analysis and a real estate market analysis, a condo for rent could give a great return on investment.

For buying a wide range of investment properties, you can rely on Mashvisor’s investment property calculator and property search engine.