When you’re looking to buy an investment property, you’ll find plenty of options available – one of them is a condo. In a previous blog, we broke down The 6 Steps of Buying an Investment Property, in which we focused on single-family and multi-family homes. Buying condos for sale is somewhat similar, but requires some additional steps. For a beginner real estate investor, this might be an intimidating experience, which is why we’re here to help you learn the steps that go into buying and owning a condo as a rental property.
Work with People Who Know Condos
Working with a real estate agent will make the process of buying condos for sale much easier, but a wrong fit will cost you a lot of time. Real estate agents and realtors come with different experiences and specializations. Closing a real estate deal which involves a single-family home is different than closing a condo deal. These are very different types of real estate, and each involves different steps, legal documents, and questions to ask about the property.
You don’t want to end up making some very costly mistakes because you relied on someone who isn’t aware of or doesn’t pay attention to these details. Thus, it’s important that, before searching for condos for sale, a real estate investor hires a professional realtor who has a lot of experience with this type of real estate property.
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Searching for Condos for Sale in the Right Locations
Property investors are well-aware of the key role that location plays in a successful real estate investing career. Among the things that the location will determine, the best type of rental property is one of them. If you’re planning on renting out your condo, the location will also determine your optimal rental strategy- traditional (renting out to a long-term tenant) or Airbnb (renting out to short-term tenants as a vacation rental).
So, just like when buying any other type of real estate property, property investors are required to perform a real estate market analysis to determine if buying condos for sale will give them the returns they desire in their location of choice. In general, condos are popular in urban areas that are luxurious and provide an attractive lifestyle, like in a ski town or a beachside area.
Tip: Property investors should spend some time to scope out the area of the condos for sale. Pay close attention to traffic patterns, proximity to major attractions, grocery stores and any other factors that could appeal to or push away potential tenants.
Evaluate the Condos for Sale
After finding condos for sale in a good location, you need to analyze them to assure their profitability as investment properties. This is something any real estate investor must do before buying any type of rental property. Since your main goal is to make money in real estate investing, your rental property must generate a good rental income and create positive cash flow.
Cash flow is the difference between rental income and rental expenses. When renting out a condo, your rental expenses would include HOA fees, monthly mortgage payments, repair costs, etc. To receive a good return on investment, the condo has to generate a rental income that is enough to cover these rental expenses and still generate profits. If a real estate investor bought condos for sale only to find out his/her rental expenses are exceeding the rental income (negative cash flow), he/she will start to lose money!
Therefore, conducting an investment property analysis is an important step when buying condos for sale. This will help you determine how profitable your rental property is by computing its potential rental income, cash on cash return, and cap rate. All of these are important metrics for calculating your return on investment as a real estate investor.
To effectively perform an investment property analysis, use Mashvisor’s investment property calculator. This tool gives readily calculated projections of investment properties in any city and neighborhood in the US housing market. It also allows property investors to make their own calculations on their rental property of choice on the platform. Thus, property investors can easily compare different properties and identify the best and most profitable one!
To analyze investment properties in your city and neighborhood of choice, click here.
Meet the Homeowner’s Association
One thing that all shared buildings have in common is a homeowner’s association. Once you find condos for sale that you’re interested in buying, it’s a good idea to meet with the president of the HOA, sit in on one of their meetings, or get a copy of the last six months’ minutes of meetings. This will help you understand exactly what you’re getting into. In addition, this will give you an insight into how the association handles issues that come up and what it’ll be like to live under their rules.
Property investors should ask about what type of condo fees are associated with the complex building, how often HOA fees are increased, and why. “See how much is in the HOA’s reserve fund and if any special assessments for repairs are planned” – Redfin. Moreover, if you come across a current resident, it’s a good idea to ask them about their satisfaction with the association.
Get a Mortgage Loan
After making sure that you’ve found the right condos for sale, it’s time to take a trip to the bank and get a mortgage loan to finance your purchase. As a real estate investor, you must know that obtaining a mortgage can be harder for a condo than a detached single-family home. You are still required to put a 20-25% down payment when buying condos for sale, just like when buying any other type of real estate property. However, some lenders will require property investors to first live in the condo (for at least a year) before they can rent it out as an investment property.
Moreover, not only do you have to qualify, but mortgage lenders will take a look at the homeowners’ association as well to assess whether or not to give you a loan. Some of the things they look at include the amount of insurance coverage the complex building has, the number of renters, fee delinquencies, cash reserves, and any lawsuits the HOA may be engaged in. In addition, lenders won’t finance buying condos for sale if the building is currently undergoing litigation. Thus, as a real estate investor, make sure the HOA meets your lender’s requirements or you may not get a mortgage loan.
Know Your Closing Costs
Closing costs are an important figure to estimate when buying investment properties. Closing costs on condos for sale include a land transfer tax, a bank appraisal fee, legal fees, filing fees, title work, and escrow fees, among others. These can add roughly 1.5% – 4% to the purchase price of your rental property. Thus, property investors should pick a price that is not too low nor too high and negotiate closing costs as part of the offer. Once you and the seller agree on a price, both parties will sign a contract for sale. You’ll also need to hire a real estate lawyer to review the contract and approve it.
Are You Ready to Buy Condos For Sale?
In real estate investing, buying condos for sale as investment properties (whether for the long-term or as vacation short-term rentals) is a good way to make money. Condos aren’t necessarily better or worse than other types of real estate properties, but the process of buying one does require a little bit more. Carefully take the steps in our guide and you’re ready to close on your first condo!
So, what are you waiting for? Sign up with Mashvisor and use our Property Finder and Investment Property Calculator to analyze and find the best investment properties in any city and neighborhood in the US housing market. To start out your 14-day free trial with Mashvisor, click here.
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