Some people may find buying a condo to be in their best interest, while others do not. Is buying a condo a good investment for you, specifically? By the end of this article, you will be able to determine for yourself if you are the right candidate to be investing in a condo community—whether you’re an investor or looking for a personal residence.
First, let’s look at what a condominium is and who ultimately has control over it.
What is a condo?
Owning a house means that you own the unit and the property, whereas a condo is entirely different. Basically, a condo owner only owns the airspace inside an individual unit within a building. They share ownership and responsibility of common areas and communal property such as the stairways, hallways, walls, exterior areas, and sidewalks.
HOA vs. condo association
Homeowners in private communities are generally required to pay condo or HOA fees. While both HOA and condo associations exist to maintain rules and guidelines in private communities, these associations vary from each other based upon the differences between homeowners and owners in a condo community.
Since the key difference between a homeowner and condo ownership, which we just discussed, is the amount of ownership, buyers in these situations have different roles when it comes to participation in the community association boards and decisions.
Condo owners share joint ownership, and therefore, joint interest or responsibility due to the residents’ shared stake in what the association owns. With a homeowners association, owners are responsible for their individual property and lots. Unlike the condo community, the HOA actually owns the common areas in private communities itself.
So, after learning owners in a condominium don’t own much other than the air space in their units, you must be asking yourself the central question of this article: “Is buying a condo a good investment?” Well, let’s look at some of the positives for condo ownership.
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Pros of investing in condos
If you choose condo ownership for your housing investment, there are several good things about living in a condominium:
1. Cash flow
The No.1 benefit of owning a condo is the easier potential for increased cash flow. Condominiums typically are built in densely populated areas such as cities, tourist destinations, and near university/college campuses. Because of these factors, investors typically can take advantage of the great rent-to-purchase ratio.
They can buy condo units at a lower price and charge higher rental rates, creating a strong cash flow. Vacation rentals can especially result in an increased cash flow for an investor due to increasing weekly rental rates depending on the season and local events. Tourists are typically prepared to pay more when they’re visiting for specific reasons.
One of the best things about condo ownership is that you split the amenities with the condo community. Condominiums include monthly fees known as a common charge, which covers the common amenities.
Here is a list of several typical condominium amenities:
- 24-hour security
- Swimming pool
- Dog park
- Exercise gym
- Tennis courts
- Laundry room
- Electric car charging stations
- Bike storage lockers
- Recycling center
One thing that appeals to certain buyers is that condominiums are not as cookie-cutter as someone might assume. In reality, condo communities typically pride themselves on the fact that each condo is unique. However, other markets (such as townhouses) differ in that their properties and homes tend to look the same.
4. No maintenance
The potential buyers for condos (usually) fit into two categories: first-time homebuyers or retired couples. First-time buyers are typically not ready for all the expenses of a home, and retired couples are usually looking to downsize.
The main selling point of a condo community to this target market demographic is the convenience of little to no maintenance costs. They don’t have to worry about upkeep, such as lawn mowing in the summer and snow shoveling in the winter. Repair and maintenance costs are kept to a minimum.
Condos are a generally cheaper investment than buying a single-family property. Of course, this isn’t always the case due to changes in the housing market. Just keep in mind that since condos are generally lower in price, they are easier to sell in the overall housing market.
Now that you know some of the positives of a condo ownership investment, let’s discuss some of the negatives you need to be aware of.
Cons of investing in condos
While investing in condominiums definitely includes some pros, you must look at the cons to make an informed decision on whether or not buying a condo is a good investment for you.
In addition to your regular tax payments, interest, and principle on the mortgage, you have to factor in association fees. These fees could range from $100–$300 monthly and play a major role in buyers not wanting to purchase when you are prepared to sell.
2. Limited market
Since condos typically appeal to first-time buyers or elderly retired couples, your buyer’s market is narrowed to people from those specific demographics. You most likely won’t be able to produce a bidding war for your property—and a limited market means it can be harder to sell.
Condos don’t appreciate as much as free-standing single-family residences. Regulations enforced by condo association boards can contribute to this lack of appreciation. Also, the cash flow, while having the potential to be fantastic, can still be unpredictable.
Are you the type of person who likes to throw a party or have family members over frequently? Condo ownership means sparse parking. The lack of privacy and space drives buyers away from the condo community sooner or later.
5. Comparable sales
When you sell, buyers will judge you against other condo units in the complex. Even if you improve your unit, they will not be enough to raise your sale price higher than another comparable unit with the same number of bedrooms and bathrooms.
6. Your unit is a bubble
When you purchase, your home inspector is there to make sure your dishwasher works and your hot water tank isn’t ancient. That’s it. They don’t check the condition of the building. In fact, unless there is a reason for an association to believe there are issues, no such report or investigation exists.
There are very few ways for a buyer to ensure that the building isn’t leaking or has other material defects. Developers aren’t always in the business of building with integrity. Instead, they’re in the business of protecting their bottom line. This can lead to shortcuts that may go unnoticed.
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7. Rules, regulations, and rental policies
You have to be familiar with the condo association rent policies before investing in this type of real estate. Condo associations have strict rules and regulations you won’t be aware of unless you read through all of the governing documents.
Even if you have to read them with a glass of wine, read them! You need to know what type of agreement you are getting into when you buy a condo. Do they allow you to rent out your unit? Are pets allowed on the lawn? Are you allowed to have three kids? Can Christmas decorations stay up for New Years’? Save yourself from making a big mistake and read through all the rules and regulations before investing in the condo community lifestyle.
8. Condo association boards
The strict rules, guidelines, and regulations are put into place by the condo association boards associated with each condominium. This means that your life and your condo unit are completely governed and controlled by a group of people you’ve never met. You have no power.
One way to remedy this issue is to become as involved as possible with your board. Attend meetings, get involved in community projects, and apply for positions on the board. If you want to see changes made, it is your responsibility to be that change. Be prepared, however, to invest a lot of your time, money, and energy. It may take years of advocation and hard work to achieve the changes in regulations that you are seeking.
After having considered the pros and cons of a condo ownership investment, you need to consider several questions before moving forward with a purchase.
Questions to ask before buying a condo
You have to be your own detective. If you’re about to purchase a condo built in the ’70s that’s never had its siding replaced, there’s your first clue not to buy.
You want to be prepared with several questions to ask before making your final decision to purchase:
- What does the insurance cover?
- Do I fully understand the rules and regulations, and may I have a copy of them to read?
- Do I fully understand the monthly fees?
- Is there any ongoing litigation?
- Do you have a resale package that I can view?
- How often do you check your fire alarm systems?
Keep in mind that a mortgage lender will also scrutinize the finances of a particular condo community before approving you for a loan.
If you are a first-time homebuyer or an older adult looking to downsize, buying a condo may be a good investment for you. You would have a lower down payment and minimal maintenance costs than if you were to buy a single-family home.
If you don’t fit within this narrow segment of the home-buying population, you may want to consider renting instead of buying. Residents who are renters have even less cost and responsibilities to worry about than the owner does. Rules and regulations don’t affect your ability to move out since you don’t have to worry about selling your unit.
For investors, consider how willing you are to deal with the unique cons of buying a condo before investing in this market. While they can be profitable, condos may also create big headaches.
Overall, to answer the question, “Is buying a condo a good investment?” you need to look at the current stage of life you are in and consider all the pros and cons discussed in this article.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.