Many people turn to investment properties for extra income. Having others pay you rent each month on the properties you own is a great way to help cover your own mortgage or other expenses. Here's what you need to know before buying a condo and how to decide if investing in a condominium is worth it.
Table of Contents
What Are Condos?
Pros of Investing in a Condo
Cons of Investing in a Condo
Reasons for Investing in a Condo
Things to Consider Before Investing In a Condo
Are Condos Worth It?
Condo Investing Bottom Line
What Are Condos?
Condos are short for condominiums. They are individual units that are privately owned within a building with many other units. Typically found in high-rise buildings, they are similar to a hotel-style layout and are confused with high-rise apartment buildings. Some "detached" condos exist in some markets with a different layout. When you own a condo, you typically wind up sharing a wall or two with neighbors.
Condos are sometimes confused with townhouses. It should be noted that townhouses are a construction style, not the type of management that the structure falls under. Townhouses are similar to condos in many ways, and some townhouses are also condominiums.
Condominiums vary in size. They can be small, studio-style units or large three or four-bedroom units.
Pros of Investing In a Condo
- Lower Costs
- Great Amenities
- Lots of Choices
- Desirable Locations
1. Lower Costs
Typically, condos are a cheaper option to invest in compared to homes. Maintenance on condominiums is little to none. You are looking at no yard or lawn maintenance. This low-maintenance perk is great. For this reason, many investors set their eyes on condos.
Along with a cheaper price tag, condos also come with less expensive homeowners' insurance. Condominium owners only need insurance that covers the inside of their homes.
2. Great Amenities
Condos offer an assortment of amenities that homes do not, ranging from security to pools. Many times, they have clubhouses, gyms, and many common areas. Because condos tend to be centrally located in more densely populated areas, many investors believe that they can get away with charging a higher rent charge. Many renters are interested in being located in the middle of everything for a convenience factor.
3. Lots of Choices
Although some will disagree, there is a wide variety of different kinds of condos to choose from when looking for an investment property, raising the appeal for both renters and buyers as they have many choices to discern between.
4. Desirable Locations
Another benefit of investing in condos is that they are often located in urban areas or desirable neighborhoods where single-family homes may be prohibitively expensive. Being in a prime location is great as your condo will be easier to rent out and has more potential to appreciate in price. There is always strong demand for condos from renters who prefer the great location and amenities offered by condos.
Cons of Investing In a Condo
- Monthly Condo Fees
- Rules and Regulations
- Can Be Tougher to Sell
1. Monthly Condo Fees
In some cases, a condo may come along with a monthly fee that may go up at any time. Keep in mind that the amenities that condos offer sometimes come along with an association fee. You'll want to make sure the condo building or community has good financials so that common fees don't increase too often.
2. Rules and Regulations
Condominiums often have rules and rental policies that you'll have to abide by, so this is certainly something to look out for if you're used to investing in houses. You'll want to pay close attention to any rental rules and regulations that may impact your ability to find tenants for your investment property. It’s essential to thoroughly understand the condos regulations before investing.
3. Can Be Tougher to Sell
Condos bring a limited market for purchase and rentals. A condo requires the right buyer, someone who is looking specifically for a condo. Condos can also be a bit more difficult to secure financing for as well.
Reasons For Investing In a Condo
There are many reasons you might be considering buying a condo, and the pros and cons of investing in a condo will depend on why you're purchasing one.
1. Buying a Condo Instead of Renting
Buying a condo can be a great investment if you use it as your primary residence. Rather than paying monthly rent, you'll be building equity with each mortgage payment. Condos are also relatively low-maintenance, so they are a great option for first-time homebuyers. Another perk of investing in a condo is that the property will likely appreciate in price over time.
2. Is Buying a Condo As a Rental Property a Good Investment?
If you're interested in purchasing a property to use as a rental or Airbnb that will generate passive income, a condo can be a great choice. Due to their ease of maintenance and smaller size, investing in a condo is great as they're easy to manage, and can bring handsome returns. The main things to keep in mind when investing in a condo you plan to rent out are the location, price, and projected rent. You'll also want to make sure the condo doesn't have any policies restricting your ability to rent out the property.
3. Buying a Condo As a Second Home or Vacation Home
If you're buying a condo as a second home or vacation home, you'll want to consider its potential to appreciate in price, as well as how much it will cost you compared to renting. If it's for a vacation home in a beachfront destination, it might have a lot of room to appreciate, making the condo a great investment. On the other hand, if you plan on using the condo as a second home in the country, you might be better off renting rather than buying.
Things to Consider Before Investing In a Condo
Here are some key things you'll want to think about before deciding if investing in a condo is right for you.
1. Mindset
Asking yourself if you are mentally prepared to take on an investment of this kind will assist you in bringing up scenarios in your mind of problems and hiccups you may experience during the process. Taking a look at your financial situation, time availability, and assistance available to you are three main components of determining your current ability to make the first move.
2. Commitment
Do you have commitment issues? Owning a condo for investment, like owning your primary residence, is a commitment. This property is YOURS to take care of. If you are renting it out, this means that you will be trusting your tenants with your property, and you will be responsible for damages and messes. If something breaks, it is your responsibility to get it fixed.
3. Finances
Evaluating your personal financial situation in depth is paramount. There is no magic number that you need to take on an investment like this. It will depend on many factors. Documenting and mapping out the many pieces that will impact your investment is a great way to get an idea of where you will need to be comfortable. As always, it takes money to make money.
4. Consider Resale
Considering your exit strategy is also important when investing in a condo. Understand the resale market for condos in your area and how easily you could sell the property if needed. By working with a realtor, you can gain some great insight into the resale value of the condo. In doing so, you will get a great idea of what the property is worth now and what it could be worth with certain upgrades. If renting the property out does not work out the way you had intended for it to, reselling is always an option, and it is important to know that value.
When it comes to comparable sales for condos and selling the property for a profit, other units in the complex impact this. When properties are listed, the comps are taken into consideration and can dictate the pricing of your listing.
Are Condos Worth It?
There is not a clear-cut "yes" or "no" answer to whether or not condominium investing will be worth it. If you determine that there is a true value in the purchase and investment, then considering going all-in is worth it. Buying a condo can be a great investment and it has the potential to be the best decision that you've made.
Condo Investing Bottom Line
Investing in condos makes a lot of sense if you want to start investing in real estate and earning passive income. Condos are great investments because of their compact size, which makes them less expensive and easier to maintain while offering higher returns on your investment. Buying a condo is the ideal choice for those just starting out with investment properties.
Condos offer lower maintenance responsibilities and can be more affordable than single-family homes, but it's essential to consider HOA fees, rules, and potential resale challenges. As with any real estate investment, thorough research and a clear understanding of the financial implications are crucial for making a sound decision.