The Advantages and Disadvantages of Investing in a Condo
Investing in real estate is a great way to make money. However, investors have to answer many questions before they are ready to buy a property and start renting it out. Many factors have to be taken into consideration in order to land a profitable real estate deal and make a good investment. One of the first questions which real estate investors should ask themselves is: “What property type should I go for?”
One of the popular types of real estate, especially in the hot markets of top cities, is condominiums, or condos for short. Condos are a viable choice for property investors. Nevertheless, as any other investment, they have both positive and negative aspects, which buyers should study carefully before making a final decision.
To help out real estate investors considering a condo for sale, we have put together a list of the advantages and disadvantages of investing in a condo to rent out:
Advantages of Investing in a Condo
- Condos Cost Less Than Other Property Types
One of the most important factors for any real estate investor, especially a beginner, is the price of the property. If you are just starting out investing in real estate, you probably don’t have a big budget, so you should stick to an affordable property. That’s why condos are a good option for first-time investors as they generally cost less than a single-family home and a townhouse in most housing markets. This makes the financing of a condominium easier to figure out than the financing of a townhouse or a single-family home.
Buying an affordable property is a major component of a successful real estate investment. The last thing you want as an investor is to invest in a property which you cannot afford to pay for. Then you run the risk of dealing with a foreclosure or a short sale and losing your property to the bank or another financial institution.
- Condos Can Be Passive Investments
Many people decide to stay away from real estate investments as they perceive of them as full-time, hard work. While being a landlord is definitely not a walk in the park, condos take away a lot of the responsibilities of a landlord and make investing in real estate accessible to first-timers as well as people busy at their other full-time job.
Condominiums come with a wide range of amenities and services, which means that the property owner does not have to take care of such things as painting the outside, cleaning the pool, mowing the lawn, improving the curb appeal, maintaining the common areas, etc. On the other hand, these are all maintenance works which investors in single-family homes are responsible for. So, condos are a step towards passive income in real estate.
Moreover, because condos offer more amenities, you can charge a higher rent for them than for another property of the same size and in the same location. This means that you get a chance for a better return on investment when buying a condo.
- Condos Attract High Demand
Another important factor to consider when choosing what property type to invest in is the demand which you will get from tenants. The higher the demand from renters, the higher rent you can charge, the higher your cash flow, and the higher your profit.
There are two main factors which push the demand for condos up compared to single-family homes or townhouses. First, most condominium complexes are located in the most central locations in hot real estate markets, while houses are typically found in the suburbs. This means that college and university students, professionals, and young families will all want to live in your rental. Location is key for the success of a real estate investment, as all experts know, and condos provide you with an excellent location.
The second reason why condos attract demand from renters is the many amenities such as a swimming pool, a gym, a common area, and others which they offer at a reasonable price. If tenants want to enjoy the same kind of extras in a rental house, they will have to pay hundreds of dollars more each and every month.
These are the aspects which make investing in a condo a smart real estate investment decision. However, investors will also face some downsides which they should keep in mind before going for this property type.
Disadvantages of Investing in a Condo
- Condos Can Face Many Restrictions
While condominiums come with a lot of amenities and services, they can also bring along a long list of rules and restrictions. For example, some condo complexes prohibit renting out units altogether and allow only owners to live on site. Other HOAs have very strict rules on when and how exactly you can rent out. For instance, you can rent out a condo on a long-term basis, but you can’t rent out on a short-term basis.
Thus, the first thing you should do before investing in a condo is to check out the rules which apply to the specific building in which you are interested. Make sure that renting out is allowed, and study the requirements. Don’t make the mistake of planning to rent out your new property as a vacation rental due to the high demand in your city only to figure out that this is prohibited after you have already purchased the condo.
- Condos May Limit the Potential for Return on Investment
You are planning to invest in real estate in order to make money – that’s the goal of any property investor. That’s why you should consider all ways in which investing in a condo to rent out might limit your potential for return.
First, condominiums tend to generate lower rental income than single-family homes and townhouses in most major markets, according to data from Mashvisor, a US real estate data analytics company. However, this is not necessarily bad news for investors as condos also cost less, so the cash flow from them and the return on investment might remain higher.
Second, when owning a condo, you have to pay monthly fees to the HOA, which might eat into your profit. The way to go about it is to include these fees in the rent you ask from tenants. You have to be careful though to highlight all the extras which renters get from your condo as compared to an apartment or a house in order to justify the slightly higher rent they will have to pay.
Third, condos appreciate less in value than houses over time. This is just a fact, and there isn’t much you can do about it as a real estate investor. Moreover, it’s very difficult to force appreciation on a condo unit because of all the restrictions you face from the HOAs. So, in the long term, when you decide to sell your property, the return you get from a condo will be lower than the return from a single-family home or a townhouse.
As you can see, deciding whether to invest in a condo is not a black-and-white decision. You have to analyze the situation carefully in order to decide if this property type makes sense for you. Most importantly, talk to the HOA in a condominium complex with units for sale to see if renting out to tenants is allowed. Generally speaking, go for a market where traditional, long-term rentals are the optimal rental strategy as they are more likely to be permitted for a condo. Last but not least, select a market with strong real estate appreciation over the past decades to compensate for the fact that your condo investment will not increase so much in value as another property type. With careful research, planning, and execution, condominiums can be a profitable real estate investment opportunity. As data from Mashvisor shows, you can achieve the same return on investment with condos as with single-family homes or townhouses in terms of capitalization rate (or cap rate for short), all for a lower property price.
Daniela Andreevska is Marketing Director at Mashvisor, a real estate analytics tool which helps real estate investors quickly find traditional and Airbnb investment properties. A research process that’s usually 3 months now can take 15 minutes. We provide all the real estate information in easy to understand visualizations.…