Everyone knows that investing in property is one of the best ways to earn some extra income, with condos being a popular investment option, especially for beginners.
These units are usually cheaper to buy and then rent out than single-family homes, and they are easier to maintain than a larger property.
But whether or not these units make a good investment depends on several factors. Here, we will be going through all of the pros and cons of investing in condos and giving you tips and tricks for how to make the most out of your investment.
What Is A Condo?
A condominium, often known as a condo, is a private home that is part of a larger structure or community.
They are usually found in a multi-story townhouse or could be a single condominium apartment in a high-rise structure with other condo units above and below.
As an investment property, a condo can be rented out to tenants. While this is similar to how apartments work, who owns what is the difference. Each condominium is owned by a single individual.
Apartments, on the other hand, are rented out by the owner of the building.
The owner of a condo unit purchases it and pays a monthly condo fee (in addition to the purchase price of the condo itself). This fee is used to maintain and repair common areas that are shared by all condo owners.
Do Condos Appreciate In Value?
This is the most important question you should be asking when investing in property. Compared to single-family homes, condos appreciate in value at a much slower rate.
In 2020, the median sales price of a condo was up nearly 10% year-over-year. While this is nothing to complain about, the median sales price of a single-family home was up by more than 15% in the same time frame.
While condos will appreciate in value slower, there are a few factors that could impact the speed of this appreciation. These include:
Local community amenities
High population growth
Location
Walkability to and from other areas of needs/interest (eg shops or parks)
How well the property is maintained
Higher demand for low-maintenance living situations
If any of these factors apply to the location of your condo, then the value of the property could rise faster.
How Hard Is It To Get Financing?
Condo financing isn’t always easy to come by.
Condo mortgage rates are often higher than those for single-family homes, and lenders may set additional restrictions before giving pre-approval, such as requiring a certain number of units in a community to be owner-occupied (i.e., there are more owners than renters).
You may be required to demonstrate excellent financial standing and submit a larger down payment when applying for a condo mortgage.
You may also need to have additional condominium community papers on hand. To try and save some money, you could try to find an FHA (Federal Housing Administration) condo to invest in. These units usually ask for a smaller down payment.
How To Calculate Your ROI
Before investing in a condo, you will want to figure out what your return on investment (ROI) will be. To do this, you will need to consider the financing costs of getting the condo, as well as any associated costs.
Here is an example.
Say you buy a condo for $250,000 and put down a 20% downpayment.
You would then finance $200,000 at 3.52% for the next 30 years (property investment takes years). This works out to $900 a month (or $10,800 a year) but does not include tax or fees.
If you rented that condo out for $1,200 a month, you would get a profit of $300 a month (or $3,600 a year).
Now you have all the figures, you can calculate your ROI. To do this, take your profit and divide it by the yearly amount you are paying for the mortgage, in this case, $10,800.
Then add the $50,000 downpayment. In this example, your ROI would work out to be around 6% per year ($3,600 divided by $60,800).
If this number seems a bit disappointing to you, then remember that you could also factor in how much the property will appreciate over time. As the value goes up, so will your ROI.
There are a few other factors you will have to consider when calculating your ROI, such as the condo fees, repairs and maintenance, insurance, and vacancies.
Is Investing In A Condo Worth It?
Here are the main pros and cons of investing in a condo.
According to the National Association of Realtors, the median sales price of a condo in April 2021 was $300,400, while the median sales price of a single-family home was $347,400.
As a result, you’ll be able to get started with this investment with less money.
More investors may consider condos as a desirable and cost-effective property option as home inventory is at an all-time low while prices continue to rise.
However, if you investing in a condo then make sure that the monthly rent you charge covers all of your ownership costs, including the condo fee. The cost of a condo is lower because homebuyers include the recurring fixed condo fee.
Condo Rules Can Protect Property’s Value
As an owner in a condo complex, there are usually extra rules you have to follow. You’ll need permission from the condo corporation to make changes to your condo unit, both inside and out.
You won’t be able to change the color of your front door, for example, without permission Condo rules are probably stricter than those that apply to similar residences that aren’t categorized as condos.
While this may seem annoying to you as an owner, this helps to prevent undesirable behavior that causes property depreciation.
Condo ordinances and limits are frequently what’s needed to keep the community clean and safe for everyone.
You won’t have to worry about your tenant growing herbs in pots on the patio, and you won’t have to worry about your neighbor’s patio turning into a trash can.
All properties in the area will be kept clean and tidy because of these rules, which not only will protect your property’s value but might make it rise faster.
Don’t Have To Pay For All Maintenance
One of the most appealing aspects of condo ownership is the lack of responsibility for external property maintenance. For example, you and your tenant are not responsible for shoveling snow or maintaining the lawn.
As a condo owner, you don’t have to budget for significant expenses like roof replacement.
The area within the condo is yours, but the construction of the building is not. All you have to do is keep the appliances and systems in your unit in good working order.
The condo association is responsible for the cost of maintaining the building and grounds. Each condominium association defines what is the obligation of the condo association and what is the responsibility of the owners.
So, before you buy a condo, make sure you read all of the documents carefully.
Cons
Condo Fees
Depending on the area, condo association fees can range from a few hundred dollars to a thousand dollars per month. In addition to monthly payments, you may be charged for a large one-time “special assessment”.
This is a fee charged to each property owner for a specific project, such as repaving the parking lot. Monthly condo fees can be high, increasing your payment and lowering your overall return on investment.
You may also find yourself unable to pay your condo fees or special assessments if you do not budget for escalating expenses.
Limited Freedom
Most condo complexes have a limit on the number of units that can be rented. If the maximum has already been surpassed, you won’t be able to rent out your property.
Furthermore, the condo association is likely to impose restrictions on the number of tenants, the lease duration, and other features of your condo use.
These limits prevent the land from becoming an apartment complex rather than an owner-occupied neighborhood, retaining the neighborhood atmosphere.
Make sure you can rent out a condo before you buy it, and that you and your tenants can follow the condo’s standards for leased property.
Should You Invest In A Condo?
Before buying a condo, think about your situation and financial goals, and weigh the advantages and disadvantages.
Read all of the governing documents very carefully before making an offer on a condo. Also, strike up a dialogue with a few of your neighbors. They’ll inform you about the condo association’s management of the neighborhood and what it’s like to live there.
Make sure the rent will cover the condo fee as well as all other expenses associated with owning and operating a rental unit, just like you would with any other real estate investment property.
If you can keep up with the bills and the restrictions don’t prevent you from renting the apartment, buying a condo might be a good financial investment decision for you.
Hi, my name is Matt Roberts, and I have been a financial analyst and advisor for the past 7 years.
While my job is based within the money industry, in my spare time I enjoy looking into potential new investment opportunities. From cryptocurrencies, to purchasing vintage cars, everything has the potential to gain you money if you are wise and make the correct investment decisions.
Through this site, I hope to educate others on investing in general, and hope to provide others with useful information that can benefit them and the opportunities they have. If you are not confident with finances, investing money can be a daunting step, however, it is a lot easier than many people are led to believe.
