Real estate is one of the safest ways to invest. The types of properties you can purchase are varied, ranging from homes to apartments and condos. Among these, condominiums, commonly known as condos, are in many cases the least expensive to buy. What makes condos a good investment?
Are Condos a Risky Investment?
Depending on the location, condos can be the hottest investment you make in the real estate market. Buying a condo that’s close to a college, an art gallery, a town center or any other commercial area can drive demand. If you’re new to real estate investments and aren’t prepared to micromanage your properties, the maintenance fee can take care of certain services. The condo may employ staff to take out the trash, clean windows and doors, do domestic repairs like fixing the roof, take care of landscaping and snow-shoveling services and offer security among other services.
Conversely, buying an old or dated condo can be a risky investment. An aged condo can depreciate quicker than homes in the same neighborhood. And if your condo is in the middle of the rural U.S., you may shoot yourself in the foot. Location plays a key role in determining the value of a condo. Because the price of a condo does not equal the price of the land it is on, condos have the potential to rapidly depreciate.
How to Buy Condos for Investment
Unlike other types of investments, you can’t buy a condo instantly. The process of buying a condo for investment can sometimes take weeks or even months. Assess the average rental cost of a condo in the area you want to purchase. If everything checks out, you will have to find a way to finance your investment.
If you have the money in cash, you can make a direct investment. If not, you have to approach a bank, a real estate broker, an investment firm or an independent money lender to help you with your investment. Bear in mind that nonowner-occupied condos fall into the high-risk category and will have higher interest rates compared to properties purchased for self-occupancy.
Can You Use an Online Broker to Invest in Condos?
You can use an online broker to invest in condos. Most online real estate brokering platforms offer a local list of homes, apartments, condos and villas. Based on your preference, you can apply advanced filters such as price range, property type, size and number of bedrooms and bathrooms to match your needs. Most online brokers give you an additional option to find a realtor or an agent to assist you in your investment journey.
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Advantages of Condo Investments
Now that you know how to invest in real estate, here are a few merits of owning a condo:
- Great for those just getting started: Many condos cost less to buy than regular houses, giving new investors a good head start on their real estate portfolio.
- Hassle-free maintenance: Condos charge a flat maintenance fee that covers the cost of basic facilities. As an investor, you can be hands-off and sit back and relax while your tenant enjoys their stay.
- Amazing amenities: Many condos come fully equipped with a gym, pool, spa, yoga center, community hall and security.
- Early bird offers: Condos under construction or in development may offer lucrative investment options. You can expect less than a 20% deposit on the overall price for early investors.
- Liquidation: Condos may be quickly resold on the real estate market for cash. This can come in handy as an exit strategy for investors facing financial emergencies.
Disadvantages of Condo Investments
While there are many pros of investing in a condo, there are a few cons you need to keep in mind before making a decision.
- Homeowners Association (HOA) fees: HOAs are governing bodies appointed by the condominium. The HOA charges you a fee for amenities and upkeep. It can cost you anywhere between $100 to $300 or more per month depending on the property. It’s a heavy recurring cost on your investment that you, as the owner, will have to shell out of your own pocket. Be sure to take this cost into account before buying a condo.
- HOA restrictions: You and your tenant must adhere to the rules and regulations set by the HOA. The HOA has the final say in policies such as allowing pets inside condos, designating car parking for tenants, allowing loud music to play and so on. In some cases, the association may even stipulate terms for renting your condo for short-term stays on third-party rental platforms such as Airbnb and Booking.com.
- Finicky financing: Independent money lenders might require you to live in the condo for the first year before renting it out. Banks may even charge you a flat 25% down payment on your mortgage loan. Some lenders will also have certain criteria that the HOA must qualify for before approving a loan.
- Real estate depreciation: Compared to single-family homes, condos are generally resold at lower prices. You have the option to upgrade the facilities inside your condo to increase its market value but you might be required to get approvals from the HOA in order to do so.
- Rash residents: While wear and tear are inevitable, occasionally residents might be irresponsible and fail to keep your condo in mint condition.
Calculating ROI on Condos
Turning a profit on your condo investment isn’t a simple task. Consider expenses that have to be accounted for before determining the return on your investment.
Let’s say you buy a condo with 2 bedrooms and 2 baths for $80,000. You can rent it out to an individual for $1,000 per month. Before you get excited by the $12,000 gross revenue you might receive every year, consider the expenses that come along with owning a condo. Substantial expenses include your property tax at $800 per year, condo insurance at $450 per year, HOA fees at $3,600 per year and a reserve for incremental damages at $2,000 per year. Subtract these costs from your $12,000-per-year earnings, and you could still be left with about $5,000 in your bank account. That’s more than a 6% return on your investment.
Condos Can Be a Smart Investment for First-Time Buyers
Condos can be a smart investment but be careful not to rush into it. Apart from doing an in-depth analysis of the real estate markets, you should also consider talking to other condo owners in the vicinity before making an investment. If you’re an investor with limited time to manage your properties, a condo could be a good fit for your needs. Your passive income collected as rent could put you in a better position to make bigger and wiser investments.
Frequently Asked Questions
Do condos appreciate in value?
While condos can appreciate in value, they do so at a slower pace than other residential properties.
What are the disadvantages of a condo?
Some of the disadvantages of a condo are a lack of privacy, challenges when selling it, HOA fees and the fact that you don’t own the land that the condo sits on.
Do condos cash flow?
Like other rental properties, rental condos can provide cash flow if the conditions are right. Be sure to conduct enough research to ensure that the rental price in the is enough to cover your expenses.
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