If you have never purchased a condo (also known as a condominium), you may be shocked at the many factors to consider.
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Getting a condominium is not the same as purchasing a house. You’ll most likely share the same walls with your neighbors and other physical characteristics that differ from an independent house.
So, are condos a smart investment in real estate? In this article, we’ll look at how they vary from single-family houses and what you should know before buying one.
What Is a Condo?
Here is a simple explanation of the “condo meaning.” A condo, short for condominium, is a single unit inside a multi-unit structure, such as an apartment building, standalone house, or townhouse. It might be one of several units in a shared system, such as a tall building, or it can be one of three or four apartments in a much smaller building with no elevator.
If you’re considering buying a condo, you should know precisely what you’re getting. You own your particular unit regardless of the size of the building or land. You also own a pro-rata part of the community’s shared areas and facilities, including playgrounds, ponds, parks, gyms, dog-walking lanes, and other public locations. That covers the ground beneath the structure as well.
Condominium associations typically administer shared spaces of condos. Typically, the association acts as a supervisory board and employs a property management business to undertake maintenance, contact with residents, and other responsibilities.
What Is the Difference Between a Condo and an Apartment?
The most notable difference between a condo and an apartment is ownership. Apartments are leased accommodations that are frequently part of a larger residential structure. A condo is comparable to an apartment in construction—generally a unit within one larger residential complex—but condominiums are owned rather than rented.
When it comes to condo vs apartment, there is another big distinction. The owners (landlords) pay a condominium’s property taxes. Apartment tenants, on the other hand, must pay property taxes.
Since the structure of condominiums and apartment complexes is similar, their features and locations are frequently comparable. Both types of homes may have amenities such as a pool, garbage disposal, mowed green spaces, and shared gyms.
The distinction is that a condo owner generates capital, pays the full homeowners association (HOA) due amount, and is liable for all interior care. On the other hand, an apartment tenant pays rent every month, does not accumulate equity, and depends on the owner to solve maintenance problems.
Related: Is Investing in Small Apartment Buildings a Good Idea?
What Is the Difference Between a Condo and a Townhouse?
A condominium, like a flat, is a single unit that is part of a building or complex of buildings. However, unlike apartments, condominiums are owned by the resident rather than leased from a property owner.
On the other hand, a townhouse is a connected house that the owner also manages. A neighboring connected townhouse shares one or more walls. Basically, contemplate a rowhouse rather than an apartment, where you can anticipate somewhat more privacy than you would in a condominium.
In addition, condos and townhomes can be found in cities, villages, and suburbs. Both might be a single unit or a series of units. The main differences between the two are possession and expenses—what you own as well as how much you spend for it is at the core of the condo vs townhouse discussion and are frequently crucial factors in deciding whether one is a good match.
What Are FHA Approved Condos?
If you’re searching for a condominium mortgage, you need first to understand what it is and what it implies for you as an investor.
The Federal Housing Administration, or FHA, insures FHA loans. They are intended for first-time purchasers or individuals who have not purchased a house in the last three years. FHA approved condos are ones that can be acquired with an FHA loan.
Not all condominiums allow purchasers to fund them with an FHA condo approval. Some condo organizations are uninterested in luring owners who require a lower down payment to enroll. These associations may assume that this indicates that such landowners are more likely to lose money.
One small tip: Check whether your ideal condo is FHA-approved before buying. The listing of FHA-approved condominiums is available on the US Department of Housing and Urban Development (HUD) site. FHA-approved condos in your region can be found there.
Learn More: The Pros and Cons of Buying a Condo Investment
How to Buy a Condo? Everything You Need to Know
You’ve made the career choice to purchase a condominium. You’ve carefully analyzed the benefits and drawbacks, and now that you’ve decided, it’s time to learn about the technical parts of the purchase.
1. Understand Your Target Audience
The place where you can find your target market is an essential aspect in picking an investment property since every place has a unique market.
For example, if you buy a condominium complex in the Orlando, FL neighborhood, your target audience may be tourists. But if you invest in a San Diego, CA residential neighborhood, your target market could be younger couples or families with kids.
The placement of your property is critical because it affects both the stability of your rental revenue and you negotiating a higher monthly rate. A great location is one that provides easy access to your renters’ necessities, such as groceries, excellent restaurants, public transport, clinics, and schools.
2. Determine Your Investment Budget
After you’ve determined the location and target market, the following step is to decide how much money you’re willing to invest. The higher the amount spent, the bigger the expected return on investment.
If you want to obtain a good return on investment from your condominium, you must balance your budget with your anticipated rental revenue. Although you may use the current market rate in the region to estimate your rental income, there is no certainty that you will obtain it because renters usually bargain and compare your property to the other rivals in the building.
Moreover, it is always helpful to be able to reduce your investment budget. The smaller your investment cash expenditure, the better your chances of a favorable return on investment.
3. Calculate Your Return on Investment
If you are going to get a loan to invest in a condo rental property, you should generate at least as much as you are earning now.
If interest rates rise to 6%, you may expect a return on investment of a minimum of 8% or more, depending on the premium you choose. When purchasing a brand new condo, you should consider your estimated return on investment.
You can obtain a high return when you have a little investment expenditure. If purchasing a turnkey condominium does not match your requirements, you may want to try purchasing an older condo unit in a great location where you may bargain for lower prices.
4. Consider Your Leverage Alternatives
There is nothing bad with investing with your own money, but you may optimize your cash investment if you can borrow to purchase a condominium rental property. With financial power, you may be able to purchase two or three units for the price of one.
For instance, if your budget is $2 million and you want to buy a single condominium unit to lease out, you could buy two condo apartments by spending $1 million each as a 50% down payment and borrowing the rest from the bank.
You may also acquire three condos by putting down one-third of the purchase cost and borrowing the balance from a bank. When you borrow to purchase a condominium unit, the bank actually assists you in performing further due diligence to ensure that the ownership of the property you are purchasing is clear.
That is extremely useful when purchasing a used property, and you need to verify the ownership record.
5. Understand Your Loan’s Conditions
When you opt to fund your investment through borrowing, you may search for the best price. The perfect loan offer provides you with the lowest monthly repayment available.
The goal is for your monthly rent to be at least as much as your monthly loan payment, so you don’t have to take any money out. However, it would be best if your monthly rent was more than your monthly loan payment to use the extra money as your income.
Your monthly payment depends on how long the loan is and how much interest you pay. The amortization will be smaller if you have to pay back the loan over a more extended period and if the interest rate is lower.
Most banks will only lend money for a condominium complex for up to 15 years, and the interest rate can change every year or stay the same for a couple of years. You will need the bank to determine your monthly payments based on their terms. Then you can decide if you can afford to start investing in a condo.
6. Use Real Estate Platforms
Online real estate investment solutions have become a vital aspect of investing in this digital era. These days, knowledgeable investors use such tools to guide them through their investment journey.
Mashvisor is an online real estate software that provides real estate investors with accurate and up-to-date data to assist them in making sound investment decisions. It also provides access to rental comps, allowing you to view how other condominiums perform.
Let’s cover a few crucial Mashvisor tools that can help you when investing in a condominium.
Real Estate Heatmap
For starters, our Heatmap tool assists investors in identifying the finest neighborhoods to invest in inside a specific location. The heatmap employs visual cues to indicate the best areas based on property data and predictive analytics and algorithms.
Once you’ve located a lucrative neighborhood on the Heatmap, use the Property Finder to identify profitable rental houses. The program employs machine learning and AI technologies to present you with property listings that meet your search criteria as rapidly as possible.
Here are other Property Finder filters you can use:
- Property type
- Rental strategy
- Number of bedrooms and bathrooms
Learn More: The Ultimate Investment Property Search Tool
Rental Property Calculator
Following the Property Finder, you will have access to the Rental Property Calculator, which will allow you to assess the property further using return on investment criteria such as cap rate and cash on cash return.
Because of these tools, Mashvisor is the perfect platform for newbies seeking a condo for sale. You won’t have to put in nearly as much effort to discover off-market homes, and you’ll also have the opportunity to evaluate such properties thanks to these features.
Condos aren’t only for individuals with little cash or ambitions to sell in the immediate future; they may also be excellent long-term investment options. A condo can be used as a rental property, with renters signing yearly leases, or you can explore renting out a condominium through short-term services such as Airbnb.
A rental property may help you create passive income, but it comes with many concerns, such as how simple it is to locate a long-term renter and the expense of maintaining the home for renters and visitors. Tax benefits for rental units might help lessen some of those costs.
Moreover, condo prices will undoubtedly rise during 2022, no matter your ambition. In certain states, purchasing a condominium is as competitive as buying a house. Try to compare homes and be reasonable about must-haves. Consult an expert to help you navigate the market, safeguard your interests, and start your journey by leveraging real estate platforms like Mashvisor.
To get access to our real estate investment tools, click here to sign up for a 7-day free trial of Mashvisor today, followed by 15% off for life.