Are Condos a Good Investment?
There are many different ways to invest in real estate. Though not as popular as single-family or multifamily homes, condos are a great way to capitalize on today’s market. Condominiums may award savvy investors with plenty of upside, which begs the question: Are condos a good investment?
The answer is simple: yes. Condos can be a great investment under the right circumstances. However, it is worth noting that the right circumstances will vary from investor to investor and from market to market. Therefore, investors and home buyers should refer to the following to determine whether condos are a good investment for their particular situation.
Condos are a great investment for those looking to capitalize on healthy markets with plenty of demand. However, not unlike every other exit strategy, condo investing serves a particular purpose. As buy-and-hold assets, they can be great for generating cash flow. Sometimes their HOA fees offer investors more than they bargained for, but it’s entirely possible to offset both the mortgage and the fees with a proper exit strategy.
Whether or not buying a condo for investment makes for a good strategy is entirely dependent upon your goals, financial circumstances, as well as what type of exit strategy you choose to pursue. For example, while turning a condo into a rental property might make perfect sense in one market, perhaps a fix-and-flip strategy would work better in another. Deciding whether or not a condo is a good investment is completely up to the investor and their ability to conduct proper market research, mind their due diligence, and execute the most profitable strategy possible.
Do Condos Appreciate In Value?
Condos do appreciate in value, albeit at a slower pace than their single-family home counterparts. Single-family homes typically enjoy higher appreciation rates because of more competition. In today’s real estate landscape, in particular, there aren’t nearly enough single-family homes to keep up with demand, which has resulted in a seller’s market. Most homes receive several offers, enabling homeowners to increase prices in accordance with competition. More often than not, buyers will actually increase their offers to compete in today’s market, adding more fuel to the fire.
Pros of Condo Investing
Low maintenance: With a condominium, you need to think about your target market. This market is typically made up of first-time buyers who aren’t ready for a home or older buyers who are looking to downsize. Either way, one of the main selling points for a condo is the convenience that comes with low maintenance. The owner does not have to cut the grass or shovel the driveway. They can still take care of minor landscaping, like bushes and plants, but don’t need to worry about much else. This may not seem like a huge concern; however, in areas where extreme weather is a factor, this alone can create demand.
Amenities: All condos feature amenities in one shape or another. They can range from a pool to 24 hour security. The better the amenities, the easier it is to justify paying the monthly common charges. There are many owners who like swimming, but don’t want to own a pool.
Price: Generally speaking, condominiums are offered at a lower price point than your average single-family property. Some exceptions depend on the market, but for the most part, they are lower in price. This makes it easier when it is time to sell.
Cash Flow: Although some investors may argue that single family homes offer better odds of appreciation over time, condominium investors often get to enjoy a great rent to purchase price ratio. Because of their location, condo owners can usually charge a higher rental rate (especially for vacation rentals) even though they paid a relatively low purchase price. Because of this, condominium units have the potential to offer strong cash flow.
Variety: There are many markets where all properties look primarily the same. With condominiums, there can be some stark differences. The common perception is that condos are cookie-cutter and look alike. In reality, many complexes pride themselves on the fact that each condo offers something a little unique. This holds a level of appeal to certain buyers.
Cons of Condo Investing
Here are some of the most common cons investors can expect to encounter throughout a condo investment:
Rental policies: Before you consider a condo for an investment, you need to be familiar with the rental policies. Many associations have strict rules against renting. They don’t want to dilute the number of owner-occupants in the complex. In addition to rental policies, there may be rules regarding exterior paint color, whether or not a deck is allowed, and where you can park. Every complex and association can enforce its own set of rules. Before you make any offer, you need to read the bylaws for the complex.
Comparable sales: One of the problems with getting the biggest bang for your buck when you resell a condo is that you are being judged against other units in the complex. Listing a property is all about looking at the comparable sales and listings in your area. When selling a condo, every other sale in the complex is comparable. If your condo’s bedroom and bath count is the same as the others around it, it will be difficult to raise the price much higher than what the comps dictate. Even if you make improvements, it may not correlate to a higher sales price on your end.
How To Invest In Condos
Determine if a condo investment is right for you: Take the time to determine whether or not investing in condos will help you meet your ultimate goal. There’s no point investing in condos if it doesn’t produce the results you were hoping for.
Research the local market: Mind due diligence and research everything you can about the market you want to invest in. Pay close attention to its current health and future prospects. The idea is to invest in a market with potential.
Figure out your financing: Look for ways to finance your impending deal before you even look for a property. Line up a private or hard money lender before you look, as the access to funding will help you choose a property.
Ask about homeowner association (HOA) rules and fees: Pay special considerations to HOA fees and rules before making any decisions. HOA fees can add up and really eat into an investor’s bottom-line.
Mind your due diligence: Every investment comes with an inherent degree of risk, but those who can reduce their exposure to precarious situations will be better off.
Identify a property with the best potential and make your offer: At this point you’ll want to narrow your search down to a single property and make an offer. Account for each number and choose the property that fits your plans the best, then make an offer.
Schedule a property inspection: Have the property inspected before you close on it to determine if it’s in the condition the owner suggests.
Close on your new property!
Condo As A First Home
Those looking to buy a condo as a first home should also consider the purchase as an investment. Unlike a rental property, those paying down a mortgage are simultaneously building equity in a physical real estate asset. Instead of throwing money away each month in the form of rent, paying down a mortgage is more akin to a forced savings account. While interest rates will certainly detract from many owners’ ability to save, the equity they manage to accumulate is a great way to accumulate wealth. If that wasn’t enough, real estate tends to appreciate in value more often than not. That isn’t to say a condo is guaranteed to increase in value, but rather that there’s an increased likelihood that the condo will be worth more in the future.
Condo As A Rental Property
Investors looking to buy a condo in order to generate passive income will treat the asset a lot like a single-family home. That said, some differences must be considered. First and foremost, investors need to confirm whether or not they can even rent the condo out. Some HOAs and condo associations don’t even allow owners to rent their units, so make sure there are no limitations preventing you from leasing the unit.
In the event there are no rules preventing the owner from renting the unit out, investing in a condo is a lot like investing in a detached home. Investors will need confirm the numbers work out. More importantly, will the cash flow generated be enough to cover the mortgage, fees, and make the investment worthwhile?
There is no right or wrong answer when it comes to condominium investing. If you see value in a unit and the market is on the upswing, then it is definitely something to consider. You need to know exactly what you are getting into with a condo before you get too far. Ask your real estate agent for a copy of the condo resale package. This will include any rules and regulations that you need to know. The more you know about an investment, the more confident you will be. Investing in condos is no different.
If you have more questions about investing in condos, schedule a free consultation today!