Investing in Condos: Pros, Cons, and Considerations
April 13, 2022 (Investorideas.com Newswire) Choosing the right type of real estate investment can be challenging. It's essential to find an investment opportunity that suits your existing financial resources, your long-term goals, and your bandwidth as a property owner.
Many property investors are exploring condominiums as an alternative to single-family or multi-family dwellings. Here are the pros and cons of taking this approach, so you can get the best possible return on your investment.
Pros of Condos as Investment Properties
From a purely financial standpoint, there are several advantages to investing in condos. Here are the primary benefits of using a condo as your investment property.
Affordable Investment Option
Condos are typically more affordable than single-family dwellings of comparable sizes and locations. As condos are typically viewed as a hybrid between a house and a rental apartment, they tend to have unique market pricing. Condos are ideal for those who want to own their home and build equity but don't want to deal with the costs and work associated with home maintenance. This feature makes them an ideal investment for rehabbing and flipping.
Of course, it's important to look at the price of condos in growing locations. Take some time to assess the market and look for areas that are trending upward. Just because a condo is incredibly affordable in a declining area doesn't make it a good investment.
Cheaper to Insure
It's important to protect your property and have insurance for your condo. There's often confusion over what HOA insurance does and does not cover. HOA and Condo Association insurance cover the exterior building and common areas, not individual dwellings (depending on the situation). When you buy a condo, you still need insurance to cover your personal belongings and individual assets.
Even so, condos are much cheaper to insure than single-family dwellings. This factor will help you minimize your costs as you work to upgrade the property.
Fewer Maintenance Costs
If your goal is to rent your condo to a tenant, you'll experience the benefit of having fewer maintenance costs. Things like snow removal, lawn care, and general upkeep are covered by the condo fees that residents must contribute. You can cover condo fees in your rental price and minimize your out-of-pocket property maintenance costs. It's like having a property manager without dealing with the sourcing, vetting, and hiring process.
It's also worth considering the opportunity cost of having an HOA at your disposal. If you're a fairly new investor who doesn't have the resources to outsource landscaping, etc., you can focus on other revenue-generating tasks while the condo association handles broader property maintenance.
Appeal to Financially Stable Market
The majority of condo owners are in the Baby Boomer generation. This style of living is appealing for several reasons. Moving to a condo allows aging homeowners to maintain their equity and financial independence while eliminating the need for home maintenance. Additionally, living in a condo setting can create a sense of community. Many of these life-long homeowners are also able to cut their costs and make a profit when selling their single-family home, which could mean living mortgage-free.
Condo living has become more popular since the pandemic, especially within this age group. As an investor, this holds promise for flipping your property without worrying about financing issues.
Tend to Be in Desirable Locations
Many condos tend to be in desirable locations, built with proximity to great amenities in mind. Many condos also have attractive amenities within the complex, such as a gym or pool. These features can improve the attractiveness of your unit when you wish to rent or sell.
Cons on Condos as Investment Properties
While there are several benefits to purchasing a condo as an investment property, there are nuances to this type of environment. Here are some of the cons of investing in a condo.
Slower Appreciation than Single-Family Units
While condos do appreciate in value over time, it tends to happen slower than with a single-family unit. If you have a short-term investment goal or you're looking for a single long-term investment property, this may not be the option for you. Of course, this isn't always the case. In some areas (like Florida) and some years, condos appreciate faster.
Even so, your investment is still growing. If you rent out your condo, you can cover the costs while you wait for the property to appreciate. In other words, don't let this one consideration deter you.
Harder to Sell
From a high-level overview, condos are no more difficult to sell than a duplex or single-family home. There's enough demand in the current market to attract buyers, especially in areas where single-family units are becoming unattainable.
The challenge with a condo is securing financing. Buyers face more hurdles in getting a mortgage for a condo than a house. The FHA and many conventional mortgages offered by banks won't cover a condo, especially if the ratio of renters to buyers is skewed. This can lead to frustration in finding a buyer who can secure the financing and isn't deterred by the red tape. You should consider the long-term implications of this issue even if you plan to rent out your unit.
Condo Fees Impact Profits
Depending on how you structure your rental agreement, your profit margins may be negatively impacted. It's integral to look at the fine print regarding HOA fees in the condo to assess the following information:
- How much is being collected?
- What are the bills?
- Is there transparency in the spending process?
- Are there regulations around price increases?
- Is there a policy for necessary overages?
Investing in a place with lower condo fees isn't always the best choice. It is important, however, to ensure the HOA is being well-run and transparent about maintenance upkeep. If HOA fees rise before your renter's lease is up, it could cost you dearly.
Rental Limitations and Restrictions
Another critical risk is that many condo associations have limitations surrounding rentals. Some forbid renting out your unit entirely, while others require that you personally occupy your condo for a specified period before renting. It's integral to understand the covenants and restrictions before investing.
When investing in a condo, take the time to research everything, ask questions, and create a detailed long-term plan. Finding the right property is everything when choosing this alternative real estate investment strategy.
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