Purchasing property from the real estate market for the first time can be an overwhelming experience.
But this is even more true if you plan to buy a condo, and that too for earning rental income. Many people are confused about what a condo is, how it differs from single-family homes, and are condos a good investment.
In this guide, I’ll be answering all those questions in detail.
What Is A Condo?
Table of Contents
- What Is A Condo?
- Is It Possible To Rent Out Your Condo?
- Is A Condo A Worthwhile Investment?
- Benefits Of Investing In A Condominium
- Downsides Of Investing In A Condominium
- What Is The Purpose Of Buying A Condo?
- Should You Invest In Pre-Construction Condos?
- Are Condos A Good Investment Final Thoughts
A condominium or condo, as it is more commonly known, is a residential structure within a larger building complex. Condos can be attached or detached and may be present as a single unit in a tower block or a townhouse having multiple stories. Detached condos do not have shared walls, while attached ones are connected to other similar units.
However, condos should not be confused with apartments since, in the former case, each unit is owned by a separate individual. In contrast, apartments are rented out by the owner of the entire building.
Condo owners have to pay a monthly condo fee for the maintenance of areas shared with others in the condo complex. This fee is paid to the homeowners association or HOA, which helps maintain attractive amenities, like dog parks and swimming pools.
Thus, they can be an excellent investment, and there are several reasons for that, the first being their cost. The property value of a condo is less than houses built for single families. Also, the location of most condos is appealing since they are usually situated near city centers.
Condos are also suitable investment properties or rental properties for military personnel and their families as they do not stay in one place long. This is because such personnel can get a VA loan to pay for a condo.
Is It Possible To Rent Out Your Condo?
As I mentioned, condos are different from apartments since each unit has a separate owner. Despite that, just like an apartment, it is possible to rent out a condo, which is why many people choose to invest in them for extra income.
But how worthwhile such an investment is depends on certain factors, like the current state of the housing market and the location of the condo. If you are planning to rent out your condo, make sure that the rent earned can cover the condo fee, home insurance, and mortgage payment.
In some cases, you can even include the cost of utilities in the rent charged, and the rental property can help you earn a monthly profit. This amount can either be saved for contingencies like rental repairs and vacancies or invested in other ways.
However, whether condo owners can rent out their property is often controlled by the HOA. Some condo associations do not allow renting out condos in the community, while others may allow long-term rentals but not short-term ones. There may also be other rules, such as a restriction on the number or type of rentals allowed.
Such rules are stated in the bylaws of the condo association, and you should go through them before investing in a condo.
Is A Condo A Worthwhile Investment?
Since condos are available at a lower price than single-family homes, they can be a good investment. They are especially suitable for a young investor looking to enter the real estate market as a homeowner or landlord. But for that, the condo should be situated in a good location and have regular tenants.
Also, like any real estate investment property, the return on investment or ROI should match your investment goals. Ultimately, before undertaking condominium investing, you need to consider the advantages and disadvantages of such an investment.
Benefits Of Investing In A Condominium
1. Condos Are Low-Maintenance Properties
Condos are low-maintenance in the sense that the condo association takes care of all maintenance activities, unlike in a leasehold estate. This means you or your tenant do not have to worry about exterior maintenance, such as snow removal or lawn cleaning, and only the interior needs to be taken care of.
So, things like replacing the roof, which can result in a significant expenditure, are not your concern. But keep in mind that there is no standard rule regarding this, as the condo association will determine what the condo owners are responsible for. That is why I advise going through the rules of the condo association before investing.
2. They Are Affordable
If you are planning to invest in real estate, a condo can be a wise investment compared to single-family detached homes or townhouses. This is because they are more affordable, and for people who may not have a lot of cash, entering the condo market is the perfect option.
Since the condo owner has to pay monthly HOA fees for maintenance and upkeep, the purchase price is lower. Also, for such investments, different services are available that can make it easy to pay for repairs and renovations.
You can find the most suitable condo to invest in by getting in touch with a reliable real estate agent. But ensure that the rent earned from the condo is enough to finance the cost of ownership, monthly fee, and tax.
3. Availability Of Several Amenities
Another reason condos are such a good investment is the availability of multiple amenities. These can include a fitness room, pool, and even a club room. Such facilities are great whether you plan to occupy the condo or rent it out to tenants, who are often willing to pay more for them.
Thus, it is easier to keep a condo unit rented most of the time compared to any other rental property. And even when a tenant moves out, a quick turnover is possible, ensuring short vacancies.
4. Ownership Pride
Condos tend to have a high owner-occupancy rate, but in most communities, only a percentage of owners are allowed to rent out their condo units. This encourages condo owners to take care of their property and keep it in good condition, which helps instill a sense of pride.
Besides taking care of their property, owners use the shared community resources more responsibly than those renting a property.
5. Better Security
One reason why investing in a condo is a great idea, whether for renting or as a primary residence, is better security. The building usually requires a key for access before you can get to the front door of the unit. Also, each unit has an intercom that allows the resident to provide entry to approved visitors.
This helps provide a feeling of safety and is effective in keeping out trespassers, a feature many tenants are willing to pay for.
6. Preservation Of The Value Of The Property
A condo owner has to follow various rules to ensure the property remains in good condition. Any changes to the unit, whether exterior or interior, have to be approved by the condo association.
So, changes that may result in lowering the value of the property, such as altering the color of the front door, may not be possible. Similarly, you may not be allowed to undertake any business activities from your condo, though remote work can be an exception. Such rules guarantee that the value of the property does not depreciate.
If the condo community is in good shape, it proves beneficial for everyone residing there. Thanks to the condo rules, owners will not be able to neglect their properties and will avoid engaging in unwanted behavior. Hence, the property remains attractive for both rental and selling purposes.
Downsides Of Investing In A Condominium
1. Misbehavior Of Neighbours
Like in other communities, many people live together in a condo community. Sometimes, it may happen that you or your tenant may have neighbors who can make it quite difficult to reside there. When tenants face such problems, the unit will face a high rate of vacancies and quick tenant turnover.
Since you are the owner, dealing with such unwanted neighbors is your job. This can be quite time-consuming, and there is no guarantee that the issues will be resolved.
2. Special Assessments And Condo Fees
One of the biggest disadvantages of condo investing is the constantly rising price. With rising inflation, condo fees tend to increase periodically, including the one-time assessment, which can be quite expensive.
Such additional fees are levied on all condo owners in the community for special projects, such as the repaving of the parking lot. Without proper budgeting, you may not be able to afford the assessment expense, property tax, insurance, and condo fees.
3. Mismanagement Of Finances Is Possible
Condos are governed by the condo association board, which can include condo owners who are elected or volunteer for the job. In most cases, the condo buildings are owned by a group of investors, who hire a property management company to manage the community and collect the condo association fees.
The law requires these bodies to create and adhere to proper rules for managing the community, such as articles of incorporation and bylaws. But the possibility of mismanagement of funds is quite high, and the association can even become insolvent.
4. Restriction Of Freedom
As I mentioned, the condo association has to put various rules in place to ensure that the value of the property remains intact and shared resources are properly utilized. However, such rules can limit the amount of freedom you can enjoy.
For instance, condo communities often restrict the number of units that can be rented out. This means you will be unable to use the property for rental income if the limit has already been reached.
There may also be other restrictions on the number of occupants, the lease period, etc. Because of these reasons, it is important to check the bylaws and learn whether you will be able to comply with them before real estate investing.
What Is The Purpose Of Buying A Condo?
The benefits and drawbacks of investing in a condo building can vary significantly, depending on the purpose for which you are buying it. You will need to let the estate agent know whether the condo will be used as a primary residence, rental property, or vacation home.
1. As A Place Of Residence
If you plan to use a condo for residential purposes, there are two options available – you can either purchase the condo or rent it. Renting a condo is more affordable for those unwilling to invest in real estate while buying one can be a long-term investment that ensures good returns.
Unlike when you are renting a property, buying a condo allows building up equity. And when compared to the cost of a single-family home, the purchase price is quite affordable. This makes condos an excellent option for first-time buyers.
But I would like to point out that the reason for the lower price of condos is due to the space being more limited compared to a detached house. Moreover, in addition to the purchase price, you will need to pay monthly HOA fees.
2. As Rental Property
Having a rental property is one of the best ways if you are looking to generate higher net income, which is why it is so popular among real estate investors. And the increasing demand for short-term rentals, like Airbnb, is leading to more and more travelers seeking such accommodations instead of hotels.
The reason why such travelers find condos a better option is that, for them, the property’s location is more important than the square footage. So, even with their smaller size, condos can be an attractive investment and you only need to check the community bylaw since these can vary among communities.
3. As A Vacation Home
For those paying a mortgage on their primary residence, getting a vacation home in a desirable location can help save money. You may also want to invest in a condo as a second home or as a holiday cottage.
But it is important to consider the amount of time that will be spent in a vacation home. If you are only going to use it for a few weeks in the entire year, it will result in another mortgage loan while the property just sits there. In such cases, it might be better to rent out the condo to cover the monthly fees and mortgage costs.
Again, I recommend consulting with the HOA to know whether short-term rentals are allowed.
Should You Invest In Pre-Construction Condos?
There are two types of condos you can invest in, which include an existing or resale condo and a pre-construction condo. A pre-construction condo has an even lower price tag than resale ones, and its value will appreciate after it is constructed. Additionally, you can customize its furnishings if the condominium is to be used for generating more wealth.
On the flip side, renting out such a condo immediately is impossible, and it can take several years after procurement before it gets constructed. So, consider this factor when investing in pre-construction condos.
One important thing to keep in mind is that the value of a condo will appreciate faster if it is situated in a desirable location. That said, the appreciation rate remains slower than that of single-family homes. To speed up this rate of appreciation, proper maintenance is crucial, and civic amenities should be easily available.
Are Condos A Good Investment Final Thoughts
Hope you have the answer to the question, ‘Are condos a good investment? If you want to generate passive income, a condo investment can be a great way to do so.
However, since condos require monthly payments and you need to follow the regulations established by the condo association, it may not be ideal for everybody. For those looking to enter the real estate market but searching for a safer option with lesser risk, crowdfunding might be more suitable.
In any case, make sure to check the ROI before making the final decision.