‘Is buying a co-op a good investment?’
‘Is buying a condo a good investment?’
‘What is the difference between a condo and a co-op?’
‘How much cheaper is a co-op?’
These are questions commonly asked by real estate investors torn between a condo vs co-op property. Before buying an investment property, it is crucial that you first understand what you are getting into. We can help you weigh the opportunities and risks presented by condo vs co-op rentals to determine which would be a good real estate investment for you.
What Is a Co-op?
A co-op (housing cooperative) is basically a complex of residential buildings that is owned by a corporation. When you buy a residential unit in a co-op building, you are purchasing shares in the corporation. This means that you are not actually purchasing real estate, but the exclusive right to reside in that specific unit as a shareholder. The larger and more costly the apartment, the more shares of the co-op you own.
Co-ops are especially popular in cities in New York and New Jersey. For example, about 75% of all the residential properties in NYC are co-ops. Some of the most well-known co-ops in New York include The Dakota, 839 Fifth Avenue, The Beresford, and 720 Park Avenue.
Types of Co-ops
The types of co-ops vary depending on where they are located. The most popular types in Canada and the US housing market include:
- Leasing co-ops – The housing cooperative leases the property and does not own it. This means there is no equity.
- Limited equity co-ops – The co-op sets restrictions on the price at which shares may be sold or purchased.
- Market rate co-ops – Members of the housing cooperative can sell and buy shares at whatever rate the market will accept.
What Is a Condo?
A condominium is a privately owned unit within a complex of other residential units. Residents of condos share common areas such as gyms, elevators, swimming pools, yards, tennis courts, and garages.
Related: Is Buying a Condo a Good Real Estate Investment?
The Main Differences Between a Condo vs Co-op Investment
Condo vs Co-op: Ownership
Buying a condominium is similar to buying a single family home or multi family home. At closing, you will receive a deed that makes the investment property legally yours. You can do what you wish with the property, as long as you abide by the county or state laws. In addition, buying a condo allows you to enjoy the shared amenities provided.
As mentioned earlier, buying a co-op unit does not make you the legal owner. The housing cooperative still owns the whole complex. At closing, you will get a corporation stock certificate which allows you to occupy a specific unit within the complex.
Looking for a condo or a co-op for sale to invest in? Start your investment property search now.
Condo vs Co-op: The Board Approval Process
The approval process when buying a condo is simple and straight-forward. All you need to do is get pre-approved for a mortgage and prove that you have enough money to pay other charges such as association fees and taxes.
On the other hand, purchasing a co-op involves a long and arduous approval process. You will first be required to submit lots of paperwork when submitting an application. Afterward, you will attend an interview where the co-op board will ask questions based on the information you have submitted. The board can reject your application for any reason that doesn’t violate the fair housing laws.
Condo vs Co-op: Subletting
Condos are the best option for real estate investors that want to rent out their property. However, you must ensure that the property is located in an area where renting out a condo is allowed. Co-op boards have very stringent rules when it comes to subletting, especially renting out on Airbnb. For example, some co-ops only allow you to rent out your unit after you have lived in it for a specific length of time. Usually, you might be required to pay a fee for renting out a co-op. Tenants are also likely to go through a board approval process before moving into the rental property.
Condo vs Co-op: Amenities
While co-ops are usually old pre-war buildings, condos are modern structures that boast luxury amenities such as fitness studios, steam rooms or saunas, tennis courts, grills, private cabanas, and fire pits. Condominiums are also likely to have environmentally friendly features such as LED light bulbs, low-flow water fixtures, carbon monoxide sensors, efficient cooling and heating systems, and windows that minimize heat loss. This means you may be able to attract tenants more easily by renting out a condo.
Condo vs Co-op: Purchase Price
Generally, condos are more expensive than co-ops. Buying a condo also means paying higher closing costs since you will have to buy title insurance and pay mortgage tax. However, when it comes to loans, condos offer more flexible alternatives when it comes to the down payment. Many co-op boards demand a high down payment, plus a year or two of maintenance charges. In addition, some co-op apartments charge a flip tax of up to 3% of the purchase price.
Related: Buying a Condo to Rent in 7 Easy Steps
Condo vs Co-op: Maintenance Fees
Owners of both co-ops and condos are required to pay a monthly fee for the maintenance and operation of the property’s shared areas. Co-op and condo fees will vary depending on the number of amenities and the size of the property. In addition, both types of property charge special assessments for development such as building a new clubhouse or fence. The main difference is that condo owners pay property tax to the government, while co-op owners’ property tax is included in the maintenance fees.
Buying a co-op vs a condo: which is better? Ultimately, your choice of the best real estate investment is up to you. However, your decision between a condo vs co-op should be determined by the return on investment you can expect. Mashvisor’s property finder tool will help you identify the best cash flow properties in the US housing market. With the click of a button, this real estate investment software will help you find condos and co-ops and compare them based on metrics such as cash flow, cash on cash return, cap rate, occupancy rate, and rental income. You’ll also be able to choose a high return investment property based on your rental strategy of choice: traditional or Airbnb rental property.
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Related: The Best Investment Property Deal Finder for 2020