Condos can be amongst the most attractive opportunities for investing. They usually come at low prices and the owner doesn’t have to worry much about many maintenance issues. However, some drawbacks need to be taken into consideration as well. For example, condos can have some monthly fees that usually increase significantly and unpredictably. Also, financing for condos can be difficult to obtain. This article is based on the Rental Return Analysis for acquiring a condo and then renting it.
At the right time and in a perfect setting, condos can make very good investments. But before investing, you need to know what you’re getting yourself into. Below is a guide that can help you determine if buying a condo could be the right choice for you.
Why Are Condos Amongst the Best Investment Properties?
As mentioned, there are both positive and negative factors to investing in a condo property. Reasons to invest include –
On most real estate markets, the prices of condos are much lower than the prices of single-family properties. You can find a rentable condo at about $60,000, whereas a rentable single-family place would cost $120,000. When it comes to real estate investments, you need to cross the first cost barrier, and buying a condo is one of the most affordable ways to get you started.
Most of the time, condos are found in those areas where there is a shortage of multifamily and single-family rentals. Vacation destinations and downtown locations have many condos and fewer freestanding properties for residents. When doing your Rental Return Analysis, make sure to consider which locations provide the most value.
Condos usually come with some additional fees. However, they don’t have as many maintenance expenses as multifamily and single-family investment units.
Fewer Individual Expenses
The fees for a condo usually cover the expenses that need to be paid. Depending on where the unit is located, the fees or services might include garbage collection, pest control, building insurance, and other expenses.
What Are the Drawbacks to Investing in a Condo?
A Rental Return Analysis must include the negatives too, as every investment involves risk. Buying a condo is no exception to this rule. Many investors can’t see that sometimes, the potential drawbacks outweigh the positives of investing. Here are some negatives:
Fees for condo association
Most condos are enrolled in a homeowners association (HOA). This association assesses fees per month, which can often be quite high. For example, condos in beach towns could have an $825 monthly association fee. Such fees can be appropriate, but only when they cover something important. Large fees can shock the buyer, who might think they have covered all expenses, after renting the unit. If there is a major renovation in the plan, such as new windows, the condo association might impose a special assessment for covering. This is aside from the usual fees.
Difficulties with financing
Getting a mortgage on your condo can be much more difficult than financing multifamily or single-family properties. For instance, conventional lenders usually lend on condition the building is occupied at the 50% minimum capacity. Also, possible conditions for lending include the property’s homeowner’s association having no litigation role, and the property having a low delinquency rate. Some condos come at the lowest prices because it’s very difficult or impossible to get financing on them.
If you have decided to buy a condo, ensure that you can afterward rent it out in the way you intend. In some condos, renting is not allowed at all, whereas others come with some restrictions on renting. For example, some buildings allow rental of condos to begin a minimum of one year after they are bought.
Although condos usually suitable for investors, their value usually appreciates slower than multifamily and single-family units. Don’t forget to consider appreciation when completing the Rental Return Analysis.
The Return Rental Analysis Will Help You to Decide
A Return Rental Analysis is necessary to determine if investing in a condo makes sense. Making a property investment is an important decision, and you need to consider additional fees.
You need to make sure that your acquisition is going to generate cash flow, even when the place is vacant. You also need to take into consideration maintenance and other costs. There are no perfect guidelines for buying a condo, but if you set aside at least 10% of the rent, then you can cover the vacancies. Another 10% would help you with covering special assessments and any maintenance costs.
Suggested Return Rental Analysis for your condo’s potential for cash flow:
Buying a condo priced at $100,000 and making a down payment of 20% on a mortgage for 30 years at the 4,5% interest rate would bring you a monthly association fee of $250. The unit should be expected to have a $1,1100 monthly rent, and the insurance and property taxes expenses should be at $600 – $1,200 per year. If the unit will be occupied all the time, you wouldn’t have to pay special assessments or maintenance expenses yourself, so your cash flow would be higher.
When making the Return Rental Analysis for buying a condo, you must consider the future cash flow realistically. Don’t only consider the ideal situations. Property and investment concept. Flat lay real estate. Calculating finance and accounting concept.
What Else Is Important to Know When Buying a Condo?
If you have decided to buy a condo, there’s one thing you mustn’t overlook, to stop real estate rookies to tricking you. Carefully read the association documents of that condo. Request to see these documents before signing any contract. In these papers, you need to see the association’s financial condition and to make sure that their condition is good. If there’s little to no money in the association’s reserve, expect to have much higher monthly fees. Looking for delinquencies is also very important. If there are litigations, or the association has been involved in shady businesses, it will mean you paying more than agreed. It’s advised that you don’t buy a condo in any association that has financial troubles. If you do, then financing for that condo will be almost impossible. From a legal standpoint, you can ask the association for the following documents:
- The association’s financial assessment, reserve funds, and budget
- The in-place guideline and bylaws dictating ownership regulations and rules
- Association’s fees breakdown, occupation limitation, and insurance requirements
- Association’s special assessments and statements of upcoming or unpaid assessments
Further, the documents arriving from the association can mention the terms on leasing or renting individual units; if you’re allowed to rent your unit; how many of the units are allowed to be leased at a given time. This can be very helpful when turning a condo investment into an income source.
Details about the association will inform you of potential or current problems. If you need assistance analyzing the previously mentioned documents, then ask for the help of a CPA or a real estate attorney. A professional can give you advice on how sound the investment you are about to make is.
It’s also a good idea to volunteer for a condo board position if you want to remain updated on the association’s financial situation. This would also ensure that the maintenance needs of your unit are promptly addressed.
Is Buying a Condo a Good Property Investment?
This question doesn’t have a general answer. While buying a condo in any building where the association is financially stable can bring in a steady cash flow and can be the best property investment you have made, it’s very important to check the advantages and disadvantages of buying a condo for rental means.
How Can Condos for Rental Make You Money?
Rental condos can make you money in two basic ways. They can either generate your current income or they can have equity that can increase. When the mortgage balance declines, and the property increases in value with time, the equity will rise. According to experts, real estate investors should remain focused on the cash flow because appreciating equity is extremely tough during shorter periods. Besides, the principal reduction of mortgage can be very low during the ownership’s first years.
However, looking at the Return Rental Analysis, both ways of earning income after buying a condo are important for long-term returns. If you own a rental condo for many years, equity appreciation can become the most important for the return you receive.
Prices for real estate have been growing rather faster than inflation. Therefore, if you plan on holding on to a rental condo for about 25 years, then expect it to increase in value, provided the property is well maintained. However, fluctuations in property value over a shorter period can’t be accurately predicted. While appreciation is potentially beneficial and an important consideration, the most significant part of the Return Rental Analysis is the cash flow. Here’s why:
Property values in certain locations tend to rise and drop at similar rates. In case you are thinking about buying 10 potential condos, their values should be increasing at the about same rates with time
Mortgage repayment will take place at about the same rate when it comes to each condo, assuming you are getting a similar loan that has an interest rate that doesn’t change.
Let’s say you are buying 2 condos at 30-year mortgages with a fixed rate, 6% interest, 20% down. Each loan you have been paying should be the same each 5, 10, or 20 years. While equity matters, the most significant variable is the cash flow. This is what determines if buying a condo is a good investment. It’s easy to understand the concept of cash flow. Cash flow is the income brought minus expenses.