If you are considering buying a condo to rent out, then you need to learn all about condominium fees. And when you get into and find out just how many fees you’ll be responsible for as the rental property owner, you’ll probably wonder “Are condos a good investment?” Here, we will help you understand what condo fees you’ll have to cover and how to make sure you still end up with a profitable real estate investment worthy of your time and money.
Related: What Investors Need to Know About Buying a Condo for Investment
What Are Condominium Fees?
Condominium fees, or condo fees, are a certain amount of money the home owner’s association for condos charges a property owner for the upkeep of the condominium complex.
Before we move on to the types of fees that arise and how much you’ll have to pay, it is essential we address a misconception about condo fees. Many real estate investors think that the condo owner’s association that collects the fees makes a profit from them. But, that is not true. All of the associations are non-profit and under the obligation to use the fees for maintenance purposes only. So, this partly answers the question of whether or not condo fees are worth it. Yes, they can be since they are going toward the maintenance of your rental property.
How Much Will You Pay for Condominium Fees?
Condominium fees are different from one complex to another. In most cases, it depends on the neighborhood, the size of the condominium, as well as the services included. Condo fees can actually range anywhere from $100 to $700 a month or even a few thousand dollars if we’re talking about luxury real estate in a high-end neighborhood.
Most condominiums bare the standard package of maintenance which is the minimum required by the law. These include the following fees:
1. Water and sewer
2. Cable TV and internet
3. Snow removal and landscaping
4. Caretakers
5. Security which could be guards standing by the gate or security cameras around the complex
6. Professional property management
7. Parking services
8. Electricity and heat
9. Reserve funds for any unexpected expenses– they could also cover expected costs which occur less frequently
These are a few of the standard services that the condominium fees cover. However, there are other options such as insurance for the shared exterior space and some aspects of exterior maintenance which could result in a higher condo fee. So, before you start wondering why are condo fees so high, look at the maintenance package that comes with it. If you are new to the condo investment strategy, ask your real estate agent to check it out for you.
Related: The 6 Hidden Costs of Owning Rental Property
Are Condo Fees Worth It?
$700 sounds like a lot and you might feel like it’s more than the typical rental property costs of say a single-family home. But in order to really determine whether condominium fees are worth the investment, you must look at the following criteria:
1. Location
Location is the most critical aspect of buying an investment property. So, before you start looking for condos for sale, search the real estate market for the most profitable locations for rental properties. You can do that with real estate market analysis which means you conduct a study of the housing market. This study includes the latest market trends, the rental demand in certain areas as well as appreciation rates. Follow this up with a thorough neighborhood analysis.
Essentially, if you end up buying a condo for investment in a great location, you will make enough money to cover any extra condominium fees for sure. This will make the costs worth it.
Related: The 15 Best Places to Buy a Condo for Investment in the US
2. Rental Income and Cash Flow
A condo investment is obviously for rental purposes. So, your entire real estate investment and your ability to cover the condo fees rely on your rental income. This means you need to have an idea of how much rental income you’ll be making with the condo investment and how much you can charge for rent. For this, you need reliable rental data for any condo investment properties you’re looking at. Various real estate investing websites can provide this for you.
When you figure out the expected rental income, you’ll want to make sure the condominium fees are less than the rental income. That way, your rental property will generate positive cash flow and the real estate investment will be worth it, despite any extra fees.
3. Return on Investment Metrics
Successful real estate investors implementing the condo investment strategy don’t just buy the first property they stumble upon that seems to promise positive cash flow. There is more to owning a rental property than that. This is where investment property analysis and the discovery of the potential return on investment come in. The higher the rate of return, the more profitable the investment property is. So, besides analyzing the location and the potential rental income (which play a huge role in the rental property’s rate of return), you must calculate the following:
The Cash on Cash Return (CoC): This real estate metric is important to calculate the rate of return of the down payment and any other cash you pay out of pocket to acquire ownership of the investment property. To estimate the cash on cash return, you must divide the net operating income (annual cash flow) by the total cash investment.
The Capitalization Rate (Cap Rate): Similar to the CoC, the cap rate also calculates the rate of return for the property. However, instead of dividing the net operating income by the actual amount of money paid from pocket, you divide it by the overall property price including any money that came from external financing strategies.
How Do You Do All of That?
With Mashvisor’s tools of course! Here’s what our real estate investing tools can do to help you make sure that every penny spent on condominium fees is worth the investment:
#1. Finding the best place to invest in real estate: Using the Heatmap Analysis Tool, you can choose a city and compare key metrics for the different neighborhoods like listing price, cash on cash return, and average Airbnb occupancy rates.
#2. Using the rental data provided by Mashvisor’s Investment Property Calculator: Thanks to predictive real estate analytics, the comparable rental income is available for every real estate listing on the platform so you don’t have to go digging for this info by yourself!
#3. Calculating ROI metrics to find top performing investment properties: Calculate cash flow, cash on cash return, and cap rate all in one place using the investment calculator. The calculator also allows you to enter in different fees, including any condo fees, to make sure you find a positive cash flow investment property before making a purchase.
Mashvisor’s Investment Property Calculator
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