Pros and Cons of Buying a Condo as an Investor
Investing in real estate can be a lucrative venture, and one option that often appeals to investors is buying a condominium, or condo, as an investment property. Condos offer a unique combination of convenience, amenities, and potential for rental income. However, like any investment, there are pros and cons to consider. In this blog, we will delve into the advantages and disadvantages of purchasing a condo as an investor to better help you decide what type of real estate is the best choice for you.
What is a condo?
A condominium, or condo, is a type of housing unit where individuals own their specific living spaces within a multi-unit building or community, while sharing ownership and responsibility for common areas and amenities with other unit owners.
Condo owners have titles to their units and typically belong to a homeowners' association or condo association, which manages the shared elements of the property.
Overall, condos offer a balance between homeownership and shared facilities, providing a sense of community and access to amenities that may be impractical or expensive to maintain individually.
Condos are just one type of real estate investors may purchase. Other options include:
Can condos be rented out?
As individual units within a condominium building, condo owners often have the right to lease their units to tenants. However, it's important to note that the ability to rent out a condo may be subject to certain restrictions and regulations.
Condo associations sometimes have specific rules and bylaws regarding rental policies. For example, some associations may impose limitations on the number of units that can be rented, the minimum lease term, or require approval from the association before renting out a unit.
For Your Consideration: Real Estate Investing for Beginners.
Pros of Buying a Condo as an Investor:
Convenience and Low-Maintenance: One of the primary advantages of investing in a condo is the convenience and low-maintenance it offers. Unlike traditional single-family homes, condos typically require less upkeep, as the responsibility for exterior maintenance, landscaping, and common areas falls on the condo association or management. This can be especially beneficial for investors who prefer a hands-off approach or have limited time to dedicate to property management.
Amenities: Condos often come with attractive amenities such as fitness centers, swimming pools, community rooms, and security services. These amenities can be appealing to tenants, attracting a wider range of potential renters. Additionally, having these amenities within the condo complex can increase the property's value and desirability, making it easier to rent or sell in the future.
Rental Income Potential: Investing in a condo can provide a reliable source of rental income. Condos are often located in desirable areas, such as urban centers or popular vacation destinations, making them attractive to renters. The rental demand for condos can be high, especially among young professionals, students, or retirees who prefer the convenience and amenities offered by condos over traditional housing options. With careful market research and proper management, investors can generate steady rental income from their condo investment.
Affordability and Entry-Level Investment: Compared to single-family homes or commercial properties, condos are generally more affordable, making them an attractive option for investors with limited capital. Condos provide an opportunity for entry-level real estate investing, allowing individuals to enter the market and build their investment portfolio without requiring substantial upfront investment. This affordability can be particularly advantageous for first-time investors or those seeking diversification within their investment portfolio.
Security: Condos often offer enhanced security measures compared to other types of properties. Gated entrances, security personnel, surveillance systems, and secure access points are commonly found in condo complexes, providing tenants with a sense of safety. This security aspect can attract tenants who prioritize their well-being and create peace of mind for investors in terms of property protection.
Cons of Buying a Condo as an Investor:
Association Fees and Regulations: One of the main disadvantages of investing in a condo is the presence of association fees and regulations. Condo owners are typically required to pay monthly or annual fees to the condo association for the maintenance and management of common areas and amenities. These fees can vary significantly and may increase over time, potentially impacting the overall profitability of the investment. Additionally, investors must abide by the association's rules and regulations, which can restrict certain activities or limit the freedom to modify or rent out the property.
Lack of Control: When investing in a condo, investors relinquish some control over the property. Decisions regarding maintenance, repairs, and renovations are often made collectively by the condo association or management, limiting the investor's ability to make individual choices. This lack of control can be frustrating for investors who prefer to have full autonomy over their investment properties.
Market Fluctuations and Resale Challenges: Condos are subject to market fluctuations, and their value can rise or decline depending on various factors such as the local real estate market, economic conditions, and demand. While condos located in prime areas or high-growth neighborhoods may experience appreciation, others may struggle to maintain or increase their value. Additionally, selling a condo can be more challenging than selling a single-family home due to factors such as oversupply in the condo market, competition from new developments, or potential restrictions imposed by the condo association on selling or renting.
Limited Privacy and Space: Condos are known for their shared walls and close proximity to neighbors. This setup can result in limited privacy compared to single-family homes. Noise disturbances, limited outdoor space, and shared common areas may not appeal to some investors or potential tenants who prioritize privacy or require more living space. Condo living often involves adhering to community rules and regulations, which can restrict activities such as hosting gatherings or making modifications to the property. The lack of private outdoor space, such as a backyard or garden, can also be a drawback for individuals who enjoy outdoor activities or have pets.
Rental Restrictions: Condo associations often have rental restrictions in place to maintain the quality of the community or to adhere to local regulations. These restrictions may include limitations on the duration and frequency of rentals, minimum lease terms, or even outright bans on renting. Such restrictions can impact an investor's ability to generate rental income or limit their flexibility in adjusting rental strategies based on market conditions.
How much of a down payment is needed to purchase a condo as an investor?
If you’re just purchasing a single unit, and you know the HOA will allow you to rent it out, you may be able to get by with only a 15% down payment. However, if you’re purchasing two or more units, you may be asked to put down between 20-25%.
Keep in mind that it depends on the lender and your credit profile. While rate shopping, you’ll obviously want to compare interest rates, but you’ll also want to compare required down payment amounts. Lenders offering lower interest rates may only be offering those rates because you’re putting more money down—meaning that, in essence, you’re giving them more collateral. Whether one lender is offering a better deal or not depends on how long you plan to keep the property in your portfolio. If the plan is to flip it, it may work to your advantage to take a higher interest loan with a lower down payment requirement.
Conclusion
Buying a condo as an investor has its share of advantages and disadvantages. On the plus side, condos offer convenience, attractive amenities, and potential for rental income. They can be a relatively low-maintenance investment option, especially for those with limited time or resources.
However, investors must also consider drawbacks such as potential restrictions and high fees. Whether a condo is the right purchase for you will depend on multiple factors.
If you’re considering purchasing a condo and have one in mind, first find out if it can, in fact, be rented. From there, it falls to the math and your risk tolerance.
Happy investing, Hipster!