There are many different ways to invest in real estate. Exit strategies will vary widely based on individual market indicators and each investor’s own penchant for risk. Of the many ways to invest in real estate, however, one appears more under appreciated than its counterparts: investing in condominiums.
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 should refer to the following to determine whether condos are a good investment for their particular situation.
What Is A Condo?
A condo is an individually owned unit that creates a larger commercial complex when combined with other similar units. The complex is usually owned by a home-builder or larger corporation that sells each unit to subsequent homeowners. The sum of all the parts creates a community, complete with shareable common areas like walkways, pools, and communal parks.
To maintain common areas, and the entire complex itself, each owner will be expected to pay condo fees (not unlike a homeowners association). The fees will be dedicated to the upkeep and maintenance of the entire condominium. Though an added cost, the fees act to improve the owners’ quality of life and preserve home values. With that in mind, are condos a good investment? Let’s take a deeper dive to find out if investing in condos is right for you.
Are Condos A Good Investment?
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. That said, whether or not condos are worth the investment depends on one’s own intentions. Before you ask yourself “are condos a good investment,” be sure to identify what it is you hope to accomplish with an impending purchase.
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.
Although the demand for condos fell during the COVID-19 pandemic, demand and thus values are rebounding as buyers return to highly populated areas.
According to TheMReport.com, the average condo is currently selling for $319,000, which is a 22.7% increase from the beginning of the pandemic and a 14.6% increase from last year.
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.
Condos, on the other hand, aren’t as in demand as single-family homes, which helps explain their slower rate of appreciation. In addition to a lack of demand, however, the added costs associated with owning a condo can detract from future appreciation.
While history has taught us that condos do not appreciate as fast s single-family homes, the new market created in the wake of COVID-19 may disrupt long-term trends. At the very least, the supply and demand crisis increasing home values across the country is spilling over into the condo market. Again, there aren’t enough homes to keep up with demand. As a result, more people are turning to condos, which is inevitably increasing appreciation rates.
Condo Investing Pros
The advantages of every condominium investment are directly correlated to the work investors put in beforehand and throughout the investment. Consequently, investors will get out of their condo investment what they put in. With that in mind, there are many pros investors can expect to realize over the life of their own condo investment:
- No 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. The obvious problem is that a pool is a seasonal item and may not be enough to move the needle alone.
- 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: Condominiums tends to be located in denser areas, such as city centers, university neighborhoods as well as tourism destinations. 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.
Condo Investing Cons
Not unlike every other exit strategy, investing in condos comes with inherent disadvantages. 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.
- Fees: As great as having amenities are, not every owner is willing to pay a price for them. Depending on the complex, association fees can range from under $100 to as much as $300 a month. This is addition to the regular principal, interest, and tax payments on the mortgage. This can push certain buyers over their magic number and make it more difficult to sell the property.
- 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.
- Limited market: A condo holds certain appeal but only for the right buyer. This means you need to do everything right to market to these groups. It also means that you may not be able to produce a bidding war for your property. Investors feel the same way the buyer pool does about condos. The more limited your market, the more difficult it can be to sell.
- Parking: A common complaint from condo owners is the lack of parking space. This makes it difficult to entertain any more than a handful of people. There are always complexes that have more space or larger driveways but the space between condos can become an issue. One of the reasons that buyers move away from renting is for privacy and space. With most every condo, extra parking becomes a focus sooner or later.
How To Invest In Condominiums
Investing in a condo is different from investing in a single-family home. Therefore, instead of adhering to a more traditional investment strategy, aspiring condo owners should follow these simple steps:
- 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.
- Work with an agent to search through listings in your area: While they cost more money, real estate agents are a wise investment that can actually save you time (and even money). If for nothing else, a good agent will know the market a lot better than you and will be able to mitigate risk.
- 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: As always, mind due diligence to mitigate risk. 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!
Before diving into the search for the perfect condo listing, it is important to take a step back and determine whether or not investing in condos is the right fit for you. The condo investment process is quite different from investing in detached single-family properties, with its own unique set of rewards and challenges.
Buying A Condo For Investment: Will You Try It?
Deciding to start investing in condos is arguably similar to making any other type of investing decision. This includes asking yourself whether you have the right mindset, bandwidth, and commitment, as well as whether or not you can align a particular investing strategy with your personal and financial goals.
Because the purchase price for a condo is typically lower than a single-family home in many markets, condominium investing offers a lower barrier to entry for many investors. However, it is important to ask yourself whether or not condo investing is the right fit for you and weigh the pros and cons.
Prior determining whether or not buying a condo is right for you, you’ll need to know what you are going to do with it. For example, how does owning a condo change if you are going to:
- own it?
- rent it?
- use it as a vacation rental?
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?
Condo As A Vacation Home
Anyone fortunate enough to buy a condo as a rental property may also have the opportunity to turn it into a vacation rental. Of course, the dynamics of the investment will change from a vacation rental to a traditional rental. As a result, investors will need to reevaluate everything from the location of the home to the numbers supporting the deal.
For starters, investors will need to buy a condo in a desirable location; one where they are sure there will be seasonal demand. It is important to note that demand for rental properties is volatile; some have demand all year, whereas others may only be in demand in summer or winter months. As a result, investors will need to account for demand, and perhaps even the months they expect the property to sit vacant.
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.
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