Are Condos a Good Investment?

A condominium in a desirable location can seem like a highly attractive investment, especially if it includes attractive amenities that draw in tenants.

While it’s possible to pick a great investment that will draw in a steady rental income, your ability to generate a good monthly profit depends greatly on the specific real estate market, the specifics of the property, and your salesmanship in attracting new tenants. 

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What is a condo?

The easiest way to explain a condominium is that it is like an apartment unit you own instead of rent. A condominium is built within a condo community, made up of individual, separately owned units that share communal space. They’re often located in city centers where space is at a premium and will have monthly fees for a condominium association that handles maintenance.

Understanding Condominiums

While the condo market is smaller than that for single-family properties, it is often considered a good investment for certain demographics. First-time homebuyers and older downsizing property owners often like these because of their low maintenance, as most landscaping and exterior repair needs are handled by a management company.

While rent is often higher for condos to offset the landlord’s HOA fees, tenants appreciate that they gain access to various amenities that might not be available in the typical apartment building. They are also typically placed in highly attractive locations, such as downtown. 

Do condos increase in value?

Yes, condos appreciate in value, but it is generally at a lower percentage than single-home values. Condos generally appreciate between 2% and 5% per year, compared to 2% per month for a single-family home.

The average condo owner using it as investment property will need to hold onto the property much longer than they would another investment to see a good return, as the real estate market for this property type is smaller.  

Condo community

Though you are buying a single property, it will generally be one unit within a larger building, much like an apartment complex. You’ll have an HOA fee to pay for maintenance, and your tenants will gain access to things like a gym, parking lot, and sometimes even a daycare or playground for their children.

While this is great for your renters, more owners mean more problems. You will have less say over the upkeep and vision of the property and will need to contend with other residents, who can dictate some uses of your property, such as paint colors and exterior decorations. 

Condo as a rental property vs. vacation home

When buying a condo, it’s important to know that these rental properties tend to do better for long-term use than for short-term rentals like vacation homes.

Condos may have passcodes and other entry measures that can make them frustrating for Airbnb renters, and the amenities may not appeal to vacationers who intend to see the city sights. The condo association might also forbid short-term use to protect the property value and the rights of other owners. 

Pros of Investing in Condos

As investment properties go, condos can be quite attractive for long-term rentals, especially first-time homebuyers, thanks to their lower cost and better management.  

Lower purchase price

In many markets, condos have a lower median sales price than single-family properties, which can make the tradeoff with their other costs well worth it. You can buy more total units and thus boost your revenue stream significantly more than if you bought just one investment property. 

Minimal maintenance

You’ll enjoy less maintenance on your property, as this is typically taken care of by a condo association’s preferred maintenance company. No need to pay for landscapers, snow plows, or a roofing company — this is all taken care of for you. While you may be responsible for interior repairs, the lower burden for things like rekeying locks, resurfacing walkways, and trimming trees can save you a great deal over time.

Amenities for renters

One of the greatest benefits when you start investing in condos is that tenants are likely willing to pay more than they would for single-family homes because of the greater amenities available. Condos might have attached pools, gyms, outdoor gathering areas, and playgrounds, all paid for by condo fees. Plus, they are typically in more high-value locations where tenants have easy access to shopping and dining options. For the right tenant, they may be more than willing to accept higher rent in order to enjoy these.

Higher cash flow

You can make more money with condos for several reasons. Firstly, they tend to have lower property taxes, ensuring that the government takes less of your yearly income. The lower median price is paired with the fact that tenants may be more willing to pay more thanks to the amenities. Plus, you will have lower maintenance costs to contend with every year.

Cons of Investing in Condos

When considering the issue of “Are condos a good investment?” we must also look carefully at the cons. This includes things like greater restrictions, more fees, and more difficulty in getting tenants. 

Association restriction

Not all condo associations will accept rentals of the property, as they expect that condo owners will use it as a primary residence. It’s highly unlikely that the condo’s HOA will look kindly on using the space as a short-term rental, though they may accept long-term renters.

You will need to be transparent about your goals in condo ownership and ensure that you vet long-term tenants carefully so as to avoid causing strife with the owners of other units.

Investing in a condo also means that you’ll be limited in the amount of renovations you can do. Generally, you will not be able to make many (or any) changes to the interior, and you may also be highly restricted in how you can renovate the space inside. There will also likely be restrictions on noise levels and work times during renovations to satisfy other owner-occupants. 

Increased condo fees

Most condos have condo association fees as part of your operating expenses. Like the homeowners association supervising single-family homes, a condo HOA restricts what condo owners can do with their property.

However, this is often coupled with a third-party management company that helps support exterior maintenance like snow removal and landscaping. Your condo fee can range anywhere from just $50 to over $1,000 a month, depending on the quality of the condominium. 

Limited market appeal

Not everyone wants to live in a smaller unit, especially if it charges more for amenities they may not even use. Families prefer single-family homes where they have more space to spread out, while young professionals who are always on the go might be willing to forgo some perks in order to save on rent.

This may mean you’re stuck paying HOA fees for a unit you can’t rent out, reducing your passive income potential. 

Lack of parking space

Another serious concern for many is the lack of parking space. While many condos will have a private lot, each owner will likely only get one spot and will have to apply for a guest pass. This can be unsatisfying for two-car tenants or those who enjoy entertaining on a regular basis, especially in a big city where street parking is expensive or limited.

Condo Investing Tips

If you’ve read through the pros and cons and decided to answer yes to “Are condos a good investment,” it’s time to get to work finding the right rental property for your needs. Let’s review what makes a given condo a good investment for your financial goals. 

Location and market

Location is critical for condos because your tenants want to be close to the important sites in the city. Work with a real estate agent who is deeply familiar with the marketplace, as they can help explain which condos will suit you.

You’ll also need to check out the condo companies in the area to find the best associations for your needs. Think like a tenant and consider what they would want in a long-term rental, as this will help you market appropriately.

Financing options

You have an array of options for financing your condo purchase, though there are some specialized qualification criteria.

Condominium loans generally work a little differently than those for single-family homes. There will typically be some investigation into the condominium itself, including its business structure and the general maintenance of the property.

The amenities available to residents and the overall value of the entire condo community, in comparison to your single unit, will be factored in as well.

If you’re going for a conventional mortgage, expect to offer more paperwork showing the viability of your venture. Should you work with Visio Lending, we’ll guide you through what types of documentation we need to get started on your condominium loan. 
 

Homeowners’ Association (HOA) rules and regulations

As with a single-family home in a HOA, you will need to contend with homeowners association fees and regulations. It’s important to discuss these with the condominium owner and read through the rules carefully so that you don’t get hit with fees for failure to abide by the rules.

Ask questions about their rental policies, such as whether they allow short-term rentals or whether you need to give them notice before moving in a new tenant. 

Calculating ROI on condos

While condos can be a good investment property, you need to calculate their ROI just as you would with other types of properties, such as duplexes. Look at the average rental income, deduct your mortgage payment and association fees, and then identify how much profit you’ll have after accounting for your expenses.

We have a variety of helpful rental property calculators that can help you identify whether condos will fit well in your portfolio or if you should consider another property type. 

Should you invest in condos?

This depends greatly on the specific condominium and your goals for its use. Just as with single-family homes, you will need to assess both the investment property and the overall market before making your decision.

Condo markets tend to be smaller than the overall real estate market in your area, so it may take some digging to find comparable properties and ascertain just how much profit you’ll be making from your new investment.

The positives of a condominium include lower maintenance fees, a sense of community for tenants, and amenities that would be very difficult to provide on your own property. Many tenants will appreciate the sense of community that a condo provides.

On the downside, you must maintain good communication with other condo owners in the community, pay association dues, and respect the limitations on renovations inherent to a condominium.

Speaking to a good real estate agent before purchasing can help you avoid the potential pitfalls of buying a condo, so lean on your professional network throughout the process.

If you’re ready to boost your investment portfolio through this property class, contact us for more information on our excellent mortgage options. Visio Lending offers rental loans with competitive rates, low documentation requirements, fast turnaround, and stellar service. Get in touch today to begin your journey toward passive income by buying a condo with a rental loan.