One of the beautiful and compelling things about real estate investing is just how much diversity and flexibility there is. Even when you zero in on a niche like income-producing rental properties, you have lots of choices. There are single-family homes, multi-family properties, and apartments. But most people forget about another lucrative niche: condominium units.
What Exactly is a Condo?
In a condominium – commonly called a condo – some parts are privately owned (such as individual living spaces) while others are collectively owned by all owners of the larger complex (like exercise facilities, parking lots, and landscaping).
“A less technical way to think of a condo is as an apartment that you own,” Jonas Elmerraji writes for Investopedia. “In practice, condos often take the form of an apartment or a similar shared complex, such as row townhouses, but theoretically a condo could physically be any kind of shared building.”
Condos tend to be found in places with high property values – like crowded cities, college towns, and vacation spots – where real estate is scarce and it makes sense for people to pool their money together to maximize resources.
7 Things to Consider Prior to Investing
Most people purchase a condo to be a personal residence or vacation home, but they can also make for solid investments. They’re especially attractive for beginner investors or people who want turnkey properties. That’s because condos tend to require fewer repairs, often have maintenance included, offer a range of stellar amenities, and can be cheaper than single-family homes in the same market.
Before investing in a condo, however, there are some things you’ll need to consider. Take a look:
1. Lender Requirements
“If you are planning to finance a condo purchase, there are often tighter restrictions on condos than detached homes,” real estate agent Megan Flynn writes. “For an investment property (condo or other), lenders typically require a 20-25% down payment and some lenders require the condo purchaser to live in the unit for up to one year before renting it out.”
Obviously the down payment portion of this equation doesn’t matter for an investor who is buying in cash. However, there isn’t a workaround for the latter aspect. Whether you’re buying in cash or financing the deal with a traditional mortgage, you’ll have to abide by condo-specific rules regarding residency.
2. Hold Strategy
In all likelihood, you’re looking to buy the condo as an investment that you’ll hold for a number of years. But on the off chance that you’re planning to buy, rent for a year or two, and then quickly sell for a profit, you’ll want to think again.
Generally speaking, condos don’t appreciate as quickly as single-family homes. They’re far better as long-term investments and short-term flips. You’ll want to bank on holding for at least five years. (Though there are exceptions.)
3. Assessments, Litigation, Etc.
When you buy into a condo you’re purchasing more than your residence. You’re also signing up to be part of the homeowner association (HOA) that’s responsible for maintaining the entire property (typically everything outside of your unit’s drywall). If you aren’t careful, you can end up buying into a condominium that has a special assessment (or is about to enact one).
As Flynn explains, “Special assessments refer to the fees charged by [an HOA] to cover condo building repairs (like a new roof, seismic upgrades, or siding repairs) that exceed the amount in the current HOA account. They are mandatory and can be costly (in the thousands of dollars per unit).”
As part of your due diligence, you also need to be sure the condo building isn’t under any sort of litigation. This can happen when there’s some sort of defect in the development. And if you buy into a condo with litigation, you’ll find it nearly impossible to sell until the issue is sorted out.
One of the major appeals of investing in a condo is that maintenance and repairs are often included in the HOA. While you’ll still have to handle the repairs inside your individual unit, you’re off the hook for landscaping and common areas.
Obviously location is important with any piece of real estate, but it’s especially crucial when it comes to a condo. If you purchase a condo that’s on the edge of town or in an area that’s no longer considered desirable, it could rapidly depreciate in value. A condo in the middle of a growing urban area, on the other hand, will stay rented nearly 100 percent of the time.
Savvy renters may stay away from leasing a condo if they need reliable parking. Many complexes – particularly those in urban areas – have extremely limited parking. And even if there is adequate parking, it may require walking a long distance. This might seem like a little thing, but it can be a big deal.
7. Comparable Sales
Again, condos are intended to be held for a while. Having said that, you make your money when you buy. Be sure to analyze as many comparable sales as possible before putting in an offer.
Green Residential Professional Property Management
It’s one thing to be a real estate investor. It’s something else entirely to be a real estate investor and a landlord. The latter requires lots of time, a strong stomach, and a willingness to field phone calls in the middle of the night, deal with neighbor disputes, and chase down late rent checks. If you want to invest in rental properties without having to deal with the day-to-day troubles of landlording, you’ll need a friend in the business.
At Green Residential, we partner with real estate investors and property owners to help them manage their rentals. We take care of everything from finding and screening tenants to collecting rent and dealing with maintenance issues. This allows you to spend less time worrying about small problems and more time focused on the big picture.
For more information on our Houston property management services, feel free to contact us at your earliest convenience!