Pros and Cons of Investing in Condos: Are They Good Investments?
We all know that investing in rental properties can be a great way to earn income. But purchasing single-family homes to rent out can be expensive, especially for beginners. Condo units are usually cheaper. Do they make a good entry point for an investor?
What Is a Condo?
A condo, or condominium, is a private residence within a larger building or community. It can be a multi-story townhouse or a single unit in a high-rise with other condo units above and below.
As an investment property, a condo can be rented out to tenants. This can make it seem very much like an apartment. The difference is ownership. Individuals own each condo. But apartments are rented out by someone who owns the entire building.
A property owner purchases a condo and pays a monthly condo fee (in addition to the purchase price of the condo itself). This fee covers the maintenance and upkeep of common areas shared with other owners in the condo community.
Should you buy a condo as an investment property?
It depends on some key things, as does any real estate investment.
Most important are the property’s location and the financials. No matter what, the condo’s location has to be a desirable one with a qualified pool of tenants.
In addition, the return on investment (ROI) of the specific property needs to be in synch with your investing goals.
Condos make up a portion of my real estate portfolio, along with single-family residences. So I’d say that, yes, a condo can be a good investment.
Here are the pros and cons to consider.
Pros of Condo Investing
Less maintenance to worry about
One of the biggest benefits of condo ownership is that other people do the exterior property maintenance for you. Neither you nor your tenant bears the responsibility to shovel the snow or mow the lawn, for example.
As a condo owner, you don’t have to budget for big expenditures like replacing a roof. You own the space inside the condo but not the building’s exterior structure. So you have to worry only about maintaining the appliances and systems contained within your unit.
The condo association takes care of the expense and the hassle of building maintenance and the grounds. (But there’s no hard and fast rule of condos. Each association decides what the condo association is responsible for and what the owners are responsible for. So read the condo docs carefully before buying.)
As an investment, it’s typically less expensive to purchase a condo than a single-family home or townhouse with similar features. So you need less out-of-pocket cash to get started.
However, make sure the monthly rent you’re able to charge can support all your ownership costs, including the monthly condo fee. The purchase price of a condo is less, because homebuyers factor in that recurring fixed condo fee.
A big benefit of condo living is access to high-quality community amenities. There’s often a club room, pool and fitness room. These amenities are very attractive to many tenants, which helps you keep your unit rented. Properties with attractive amenities are often in high demand. That can mean a quick turnover when a tenant moves out. Short vacancies are an investor’s best friend when it comes to managing cash flow.
Pride of ownership
Most condos have a high owner-occupancy rate. The bylaws often state that only a percentage of the owners can rent out their unit. This typically translates into a pride of ownership that encourages community and responsible care of one’s property. Owners typically take better care of their property and the shared community resources than renters do. That translates into a more attractive investment for you.
Most condo buildings have enhanced security. You usually need a key to access the building before getting to the front door of your unit. Each unit is equipped with an intercom that residents can use to “buzz in” approved guests and visitors. This added security makes residents feel safer and keeps out solicitors — an attractive feature that many tenants will pay a premium to enjoy.
Condo rules can preserve your investment property’s value
There are typically more rules to follow as an owner in a condo community. You’ll need permission from the condo association to make changes to your unit, inside or out. Chances are you can’t change the color of your front door, for example. Often, residents are prohibited from conducting any business activities from a home office. Condo rules are likely more stringent than similar properties not deemed a condo. This helps to deter unwanted activity that leads to property depreciation.
Condo rules and regulations are often exactly what’s needed to keep a tidy community that benefits all owners. Your tenant may not be able to grow herbs in pots on the patio, but you also won’t have to worry about a neighbor’s patio becoming a storage space for junk.
I like to invest in rental properties where there’s a modest condo or homeowners association (HOA) fee. The association serves as a policing force that prevents owners from neglecting their property and discourages bad behavior by residents. This helps maintain home values and makes the property attractive, which is important whether I’m seeking new tenants or looking to sell the property.
Cons of Condo Investing
Neighbors behaving badly
In any community, you’ve got neighbors. You may have neighbors above, beside and below you. There’s a good chance at some point in your ownership that you or your tenant will end up getting a neighbor you wish hadn’t moved in. If the neighbors are undesirable to live next to, you may have a hard time keeping your tenant happy. This can result in higher-than-desired vacancies and constant tenant turnover.
And as an owner, you likely have to personally handle grievances with your neighbors, which can be frustrating and time consuming. Not all owners are responsible and considerate.
In one of my condos, I discovered there was water damage to the bedroom closet ceiling. The cause turned out to be an air conditioner leak in the unit above mine. The condo association did nothing to help me resolve the issue. I had to take the owner to court in an attempt to get reimbursed for my repair cost. My plumber gave me written verification that the damage to my unit was caused by their air conditioner (which is directly above the obvious leak), but I still lost in court. Their plumber friend contradicted the obvious, and the court sided with them. I was stuck paying the cost of mold remediation and drywall repair.
Increasing condo fees and/or special assessments
Condo fees generally go up every few years with the cost of inflation. In addition to monthly fees, you may get hit with an expensive one-time “special assessment.” An assessment is an additional fee assessed on each owner for a special project, like repaving the parking lot. If you don’t budget for increasing fees, you could get into a position where you can’t afford the condo fees or special assessment.
Financial mismanagement potential
Condos are governed by an association board, often including community condo owners who volunteer or are elected. Typically, a group of investors owns the condo buildings and hires a property management company to administer the collection of condo fees and manage the community. State governments require that condos create and follow legal governing documents, such as bylaws and articles of incorporation. But there’s still a risk that the condo association could mismanage funds and even become insolvent.
Property mismanagement potential
If the condo association does a poor job of maintaining the common grounds, it can reflect poorly on the entire community. As an owner, you rely on them to do what they say they’re going to do to maintain the esthetics and value of your property. Their inaction to make necessary upgrades and properly manage the building and community can negatively affect your long-term property appreciation and drive away quality tenants from wanting to rent your unit.
Condo rules can limit your freedom
Most condo communities limit the number of units that can be rented. If the limit is already met, you can’t rent out your property. And the condo association likely limits the number of occupants, the length of the lease and other restraints on your use of the condo. These policies preserve the community feel and prevent the property from becoming an apartment building rather than an owner-occupied community. Make sure you can rent out your condo before you buy, and ensure you and your tenants are able to comply with the condo requirements as a leased property.
Selling may take longer
There can be a smaller pool of condo buyers than buyers for single-family homes. So when it’s time to sell, you may be looking at a longer number of days on the market. But again, it all depends on the location. Condos in hot areas sell faster than houses.
The Bottom Line
Read all the governing documents carefully prior to making an offer on a condo. And talk with a few of the neighbors. They’ll tell you how well the condo association manages the community and share the inside scoop on what it’s like to live in the building.
And as with any real estate investment property you’re considering, run your numbers to make sure the rent will cover the condo fee, as well as all other costs associated with owning and managing a rental property.