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Real estate investors who buy property to hold and rent out have lots of choices: a single-family detached house; a single-family attached house (like a townhouse); a multifamily home (duplex, triplex, or quadplex); or a condominium, which is a different type of property than the rest. A condo could be a great investment opportunity for many reasons, but there are some drawbacks to consider as well.
Overview of a condo
A condominium, often called a condo, is typically a unit inside a building. In fact, it's often difficult to determine whether a multifamily building is an apartment building or if the units are condos. A main difference between condos and apartments is that people rent apartments and own condos.
What makes a condo unique is its setup: Condo owners own only what's inside the walls of their own unit; condo ownership doesn't include anything outside the walls, including land. A condo owner typically has shared ownership with the other owners of common areas, amenities, and the building itself. That means owners share in the cost of maintaining those items.
HOA management and fees
Perhaps the biggest consideration regarding whether to buy a condo as an investment property versus another type of property would be the loss of control you'd have over your investment. You'd need to not only pay condo association fees but also abide by HOA decisions, some of which could cut into your bottom line.
Say, for example, the homeowners association members vote to upgrade the clubhouse at a huge expense that calls for a special assessment, which everyone must pay. You'd need to pay your share even if you don't want a renovated clubhouse and won't receive much benefit.
That said, you'd have a nice, new clubhouse to offer renters, meaning you could possibly charge more for rent. But the real question is whether any upcharge you could get would pay for the cost of the special assessment you must pay. It's usually the resident-owners, not renters, who tend to gather at a neighborhood clubhouse, meaning not as many renters would pay more for a nice clubhouse as an owner-resident might. This is just one example of what could happen when owning a condo and sharing common areas with a group.
If being part of an HOA is OK with you, look at how the HOA manages the property. Not all HOAs are created equal -- some do a phenomenal job of managing the property while others don't. Look at the budget to determine whether the HOA has adequate reserves to pay for routine maintenance, as well as maintenance that will need to happen 10 years out.
Pros and cons of buying a condo as investment property
There are about an equal number of pros and cons to buying a condo as an investment property. We'll go over the main ones so you can use that information to determine whether investing in a condo fits your business model.
Condos are usually cheaper to buy than all the other investment property types (single-family detached homes, single-family attached homes, and multifamily homes). Investors with a limited budget might choose a condo for that reason alone. But keep in mind the total investment with the HOA fees, not just the initial purchase price, when running the numbers.
Condos also tend to be in areas renters want to be, such as more urban locales with jobs, shopping, restaurants, parks, and public transportation.
Because all owners share maintenance of the common areas, that means less maintenance you're solely responsible for, such as the roof and exterior of the property (painting, pressure-washing, and landscaping).
Finally, and this is a big one: Luxury condos often offer amenities you can't necessarily offer with other property types, such as a rooftop social area, pool, tennis court, and weight room.
In a condo situation, there could be renter restrictions. This is the first thing any investor needs to determine. Some condos either don't allow renters or limit their number. If you can't rent the condo, you'll need to move on (unless you're OK with living in the condo and waiting until you can rent it).
A condo feels like an apartment, which means you'll be in direct competition with apartment complexes for getting renters. You'll need to differentiate yourself somehow, which might mean lowering rent if you have lots of competition around you.
Because there are many close neighbors, the odds of a sticky neighbor situation arising increase, and that could cause your tenant to move. A careless upstairs neighbor could cause damage to your unit, maybe by letting the bathtub overflow, causing a water leak (and maybe mold) in your condo unit.
HOA fees are usually high with condos. You need to ensure you can get enough rent to pay your expenses and still earn a profit. If you're just earning enough and your fees go up or there's a special assessment -- either from members voting for an improvement or from mismanagement -- it might make the venture unprofitable.
Generally, condos are usually not as easy to sell as single-family homes. But this could vary depending on where the condo is located.
The Millionacres bottom line
Condo ownership could be a good investment for you. They're popular in certain areas, particularly in expensive cities and vacation towns. Run the numbers to determine what your costs will be and what you could likely get for rent. Keep in mind the risk factor of ceding some control to the HOA, perhaps creating a buffer in your budget in case there's a dues increase or a special assessment. If investing in a condo checks all your boxes, you could have a lucrative business renting one (or some) out.
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