Investing in condominiums is a great way of generating cash flow in real estate. Condos are especially popular with beginner real estate investors looking for investment properties that are easy to maintain. Even so, it’s important to ask “Are condos a good investment?” and to review the pros and cons of buying a condo. This will help you figure out if condos are a good investment for you.
In this guide, we’ll help you figure out just that. But first, a quick overview of condos:
What Is a Condo?
A condominium is basically a single unit that is part of a larger complex. Condos share common amenities with other units in the complex including pools, fitness centers, gyms, parks, and dog areas. To maintain these amenities in good condition, condo owners pay monthly homeowners association fees. Some HOAs may charge extra fees to cover costs such as unexpected building repairs.
The Pros and Cons of Buying a Condo
Just like single family homes, multi family homes and apartments, owning a condo comes with its share of advantages and disadvantages. Get familiar with the pros and cons of buying a condo before making a decision.
Let’s begin with the benefits of buying a condo.
- Amenities – A condo investment comes with amenities that are not accessible to the average tenant. Amenities such as a community clubhouse, fitness center or children’s playground will make your rental property more attractive to potential renters.
- Security – Most condos have locked or gated entries, and security personnel for residents. This will minimize the risk of insecurity for your tenants. In case there is an emergency, your tenants will have many people around to call on for help.
- Less maintenance – One of the main benefits of condominium investing is that you won’t have to worry about the maintenance of your income property. There will be people hired to shovel snow, fix the roof, maintain the grounds, and clean the premises. This will be a major benefit for you and your tenants if you don’t have the time or interest in handling all these chores.
- Proximity to major cities or towns – Condominiums are usually located near major towns and cities. This means that your tenants will be able to walk, take public transportation or cycle to work, thus saving them lots of money in car maintenance costs and fuel. In addition, living near a vibrant town will make it easy for your tenants to attend live shows, go shopping or visit restaurants. All of this will help keep your rental occupancy rate high.
- Appreciation – Due to their strategic location, condos usually appreciate much faster compared to other types of investment property.
- Affordability – Are condos expensive? Generally, condos are sold at a lower price compared to single family homes and multi family homes. This makes buying a condo for investment a good option for beginners in real estate.
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What are the downsides of buying a condo as a real estate investment?
- Lack of privacy – Living in a condo means that your tenants will have neighbors above and below them, or on either side of their walls. This will not be an ideal option for a tenant looking for some peace and quiet so your tenant pool may be smaller.
- Homeowners Association (HOA) fees – Besides your mortgage, you will need to pay condo fees for the maintenance of the amenities in the complex. HOA fees cover services such as sewer, water, exterior building maintenance, garbage, security, grounds maintenance, pool, a clubhouse, and more. Homeowners association fees vary greatly based on the quality, size, and location of your investment property. In the New York real estate market and other major cities, condo owners pay up to $1,500 per month in HOA fees. This can become increasingly burdensome as the fees continue rising annually due to inflation.
- Rental caps – A rental cap is basically a rule by the HOA or condo board that limits the number of condos that can be owner-occupied vs rented out. In some places, renting out a condo is not even allowed. Before investing in condos, do your research to discover if there is a rental cap.
- Litigation – Condominium associations and developers often face litigation due to different reasons. This includes construction defects, contract disputes, professional malpractice, implied warranties, deceptive trade practices, fraud, liens, and foreclosures. As a result, real estate investors might have to wait a long time before gaining full ownership of their homes. In extreme situations, investors could end up losing their properties. This is why due diligence is crucial before buying a condo for rent.
- Potential misappropriation of funds – Good HOAs usually have an operating account and a reserve account. The money in the operating account is meant for day-to-day maintenance costs such as snow shoveling, pool maintenance, and lawn mowing. The reserve funds are kept aside for long-term or major projects like building a new clubhouse, replacing the fence, or redoing the parking lot. If an HOA is not managed well, the funds could run out and you might be forced to pay additional fees when an unexpected expense arises.
- Excessive HOA rules – Owners and residents of condos must live by the rules of the homeowners association. Most HOAs have rules about noise, design changes, pets, trash, vehicles, landscaping, and even holiday decorations. If you or your tenants break any of these rules, you will receive a warning from the homeowners association and probably be required to pay a fine. Therefore, be sure to get familiar with all the HOA rules before investing in a condo.
- Difficulty selling – You might find it difficult to sell your condo for several reasons. First, not many people want to live in a condo. Young families want a home with a yard where their children can play freely and where they can keep multiple pets. Secondly, the HOA fees could be a hindrance when selling. High HOA fees will discourage people from buying your investment property.
Should I buy a condo? Weigh the pros and cons of buying a condo to figure out if it would be a good investment option for you. If you are buying a condo for the first time, you might want to consult a good real estate agent. When it comes to how to find a condo, tools such as the Property Finder and Real Estate Heatmap by Mashvisor can come in very handy.
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