Condominium Investing: The Pros & Cons

Key Takeaways

  • Learning how to invest in condominiums should begin with a serious dialogue regarding whether or not it’s the right fit for you.
  • Condos can be a great investment, depending on an investor’s financial goals and market compatibility.
  • Just like with any other type of investment, condominium investing is associated with unique implications to consider.

There are many different ways to invest in real estate. What works for someone else may not work for you and your market.  That is why you should never completely eliminate or blindly dive into every new niche that comes your way.  One of the areas that is often debated is whether or not condominium investments are a sound decision. For every investor that swears by them, someone else is adamantly not a proponent.  Like everything else in the business world, you need to make your own educated decisions.  Much of this will be based on your individual personality, risk aversion, and goals.  If you are considering investing in condos, here are some guidelines and tips to help you make your verdict more clear:

How To Invest In Condominiums

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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 bottomline.
  6. 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.
  7. 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.
  8. Schedule a property inspection: Have the property inspected before you close on it to determine if it’s in the condition the owner suggests.
  9. 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.


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Condominium investing

Are Condominium Investments A Smart Choice?

Investing in condominiums is a great choice 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. However, sometimes their HOA fees offer investors more than they bargained for. That said, whether or not condos are worth the investment depends on one’s own intentions. Before you ask yourself “is a condo investment a smart choice,” be sure to identify what it is you hope to accomplish with your next purchase.

Learning how to invest in real estate is similar to learning how to read stocks; both activities require ample time and research, as well as years of practice, before you start to feel like you know the market like the back of your hand. In addition, every investor develops a unique set of preferences and strategies over time – there is no one correct answer. One such possible strategy is condominium investing.

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.

Condo Investing Pros

  • 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. There are some exceptions depending 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

  • 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 the color of exterior paint, whether or not a deck is allowed, and where you can park. Every complex and association can enforce their 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. Association fees can range from under $100 to as much as $300 a month depending on the complex. 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 a comparable. If the bedroom and bath count of your condo 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.

Buying A Condo For Investment: Will You Try It?

Making the decision 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, as well as weigh the pros and cons.

Summary

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.  With a condo, you need to know exactly what you are getting into 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.

Are you considering investing in condos? If so, what about it is appealing to you? What type of exit strategy would you enact?

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