Is Buying a Condo a Good Rental Investment? – HomeUnion

Is Buying a Condo a Good Rental Investment?

Condos can be a great investment alternative to a single-family home (SFH).

That’s because condos free you of a lot of responsibilities by virtue of being run by a homeowners association (HOA), condos are usually more affordable than SFHs, and condos are often found in places where there are less SFHs available. But don’t start writing your check just yet. Like every investment, the first step is being well informed.

What is a condo?

Condo is short for condominium. They are apartments that you own. They’re found in buildings or a complex of buildings. They’re typically smaller and less expensive than single-family homes, making for a low-maintenance, affordable living alternative to SFH and other types of spaces. The main difference between a condo and a regular apartment is that condos are owned by their occupants who either paid for them entirely out of pocket or took out a loan.

When you live in a condo, the common spaces are managed by an HOA or a condo board made out of people elected by condo owners. Owners pay fees or dues for various types of maintenance (landscaping, pool cleaning, parking, etc). Additionally, if a large expense is incurred, like a roof or sewer pipe in need of repair or replacement, the HOA will call for a “special assessment” that will lead to either a one-time payment for the repairs or a monthly dues increase.

What’s the difference between a condo, a co-op, and a condo?

Co-ops and condops both typically disallow investors from owning apartments with the intention of renting them out. Nonetheless, you should still know what they are so that you don’t get them mixed up while conducting your condo search.

What is a co-op?

“Co-op” is short for cooperative. When you buy a co-op you don’t buy your literal apartment. Instead, you purchase shares of the co-op corporation that owns the building. The greater the square footage of your apartment the more shares of the corporation you own.

  • Pros: Co-ops tend to be less expensive than condos. Co-ops have a greater owner-occupancy rate because they discourage or disallow investors. Occupants are thoroughly vetted before being allowed to move in.
  • Cons: One of the pros of co-ops is also one of its cons. Despite going through a rigorous screening process, which is likely to include an in-person interview with the co-op board, you can still be rejected, which can make the apartment search much harder. Co-ops also tend to require a minimum down payment of at least 20%, just like an SFH. It’s also possible for a co-op to ask for upwards of 50% upfront, while some deny using loans to provide the down payment.

What is a condop?

A condop is when a co-op is formed inside of a condo. The bottom floor tends to be a single condo unit that acts as a commercial or retail space and is run like a condo. Above that, is basically one giant condo unit that houses a co-op, with apartments divided into shares.

The co-op’s occupants follow co-op rules, but the co-op also follows the condo’s rules. In effect, each resident follows the rules of both the condo and the co-op. Like with co-ops, condop owners own shares of the co-op corporation as opposed to the apartment itself. Occupants pay fees that include taxes as well.

What are the pros and cons of living in a condo?

Pros of living in a condo:

  • Downsizing: If you need less space like if you’ve gotten older, ended a relationship, need to save money, etc, then a condo is a solid pick. You also don’t have to worry about most forms of maintenance.
  • Save money: Condos can be significantly less expensive than an SFH. This makes them appealing to first-time homebuyers, particularly if you’re single, recently partnered, or aren’t planning on having children soon.
  • Investment: One reason condos are popular among investors is that you don’t have to rely on your tenant to handle maintenance.
  • Second Home: A condo is a popular choice for people who vacation in the same place every year, regularly travel to the same place for business, etc.
  • Community: Just by virtue of living around so many more people in a similar situation to your own creates community. Condos may also cater to a particular demographic, like singles or retirees. They’re also known to set up events. Plus, you’ll likely be interacting with your HOA or condo board, or other members in shared spaces like the gym.
  • Location: Condos tend to be located in places where SFH is less frequently found, like urban areas and vacation spots.
  • Amenities: Your condo may have things like pools, gyms, rooms to reserve for conferences or parties, etc.

Cons of living a condo:

  • Rules: Condos can get pretty strict when it comes to what you can or can’t do to your units exterior and even interior. You might get in trouble just for the types of curtains you use. And it’s possible that at least one person will be overly into enforcing the rules and harp on you for it.
  • Bad HOA: A bad HOA or condo board can really tarnish the condo experience. You may be paying a lot and more (it’s likely that fees will go up). This is why it’s so important to know what the HOA or the condo board is like before moving in, as well as how often the rates go up.

What are the pros and cons of investing in a condo?

Pros of investing in a condo:

HOA: The HOA will take care of all the maintenance of your unit. Also, since the cost of major repairs is divided amongst all the residents you don’t have to take a huge hit when your roof or HVAC unit inevitably has to be replaced. You also don’t have to worry about as many individual expenses because the HOA has already set up utilities such as electricity and gas for your unit.

Advertising: While you’re likely going to be getting the word out about your unit, the rest of the condo will be helping you simply by existing and having residents. Every occupant is potentially providing you with word-of-mouth advertising, and if the condo has its own website then you benefit from their online presence. Also, if people have just generally heard good things about the condo, that reputation boost can make your ads stand out too.

Location: Since condos tend to be found in desirable areas, that creates a built-in market. One risk of investing in SFH is that if they’re in a location that depends primarily on a single industry or company to provide jobs for its residents then you don’t have to worry about the effects of that industry or company going under.

Community and Owner Pride: Since living in a condo requires meeting certain HOA expectations, that means that, collectively, occupants will take greater care of their property and your own. You can also personally feel proud to be able to have met stricter guidelines to make your investment.

Security: Most condos, whether they’re in buildings or complexes, have added security measures. This can range from needing a key or code to get access to front desk attendants.

Rules: The rules your HOA has in place may prevent your occupant from engaging in the sort of activities that may potentially harm your place. If your occupants are not allowed to paint their front doors or interior walls, for example, then that may prevent damage to your investment (like using paint that you’re not supposed to use on certain types of material).

Cons of investing in a condo:

HOA: Some HOA fees are cost-prohibitive. It’s possible for them to be upwards of several hundred dollars per month. Additionally, the fees the HOA charges tend to increase.

Financing: Getting a mortgage for your condo may be much harder than getting one than your investment in an SFH. A conventional lender will typically only lend if the building or complex is at least 50% owner-occupied and the HOA has a low delinquency rate and no current litigation. Watch out for condos being sold at deceptively low prices. It’s not uncommon for prices to be low because financing is so hard to get.

Rental Restrictions: Not all condos are open to having units used as investments, or they allow investing so long as you follow particular rules. For example, your HOA may allow you to rent your unit out only after you’ve owned it for a full year. Additionally, some of the rental restrictions may make it harder for you to attract occupants.

Slower Appreciation: Compared to SFH or multi-family homes, condos appreciate in value slower. One reason is that investors and people paying in cash make up a large percentage of condo buyers, and these are the sorts of shoppers hoping for a bargain. This makes condos better for income-oriented investors.

What should you find out before investing in a condo?

  • Does the math work? As with any property, you want to make sure that math adds up to a worthwhile investment. But when doing your calculations for a condo investment you must be extra careful because there may be fees that you’re unfamiliar with and, therefore, take for granted. Vacancy and maintenance costs are regular considerations for budgets but don’t forget to include special assessments that the HOA may make to cover an emergency repair or the HOA raising fees in general. To play it safe, make sure to have savings in place for vacancies and emergencies.
  • Is the HOA good? Read the HOA’s documents and budget so you know what you’re getting yourself into. Make sure to read the documents before the contract’s due diligence period expires. What you want to know before making your purchase is the financial condition of the HOA. If the HOA doesn’t have a lot of money in reserve, an increase in dues may be imminent. Delinquencies are also something to look out for because they may also lead to a fee increase and may jeopardize your ability to get a loan. Also, find out about when big-ticket items need to be replaced, if amenities are up-to-date, and see if you can speak to residents who’ve moved out to see what their experience was like (and if they left for reasons that might make you not want to invest). All this will also give you an idea of how active, responsive, and accommodating the HOA is. If they drop the ball in this process consider looking elsewhere.
  • What do the fees cover, how often do they go up, and by what percentage do they tend to increase? Some condos have high fees, but when you find out what the fees cover you may be more on board. Find out how often the fees go up and by how much so you can budget appropriately.
  • Have there been any recent special assessments? If so, find out if the owner selling to you or the HOA plans to take care of it before the closing.
  • Are there any upcoming special assessments? You’ll want to know if the fees are about to change before you move in so you can budget appropriately.
  • What’s the owner occupancy? Find out what the owner occupancy is. If over 50% of the residents are owners then the condo is likely a good investment because they’re more likely to take better care of their property than a renter. That’s because, for an owner, the property actually is theirs. Also, 50% owner-occupied units is a common minimum for getting financing. Lastly, if the owner occupancy is low or the vacancies are high, find out why.
  • Is HOA currently under litigation? Because most lenders require the HOA not be in the midst of litigation
  • Is there a rental cap? If there’s a limit on the number of renters who can occupy units then this may make it harder to find tenants, especially if an unexpected vacancy occurs. Find out what the waitlist situation is like, and how long it usually takes for it to dwindle.
  • How long can you hold onto your investment? Because of the slow pace of appreciation, you’ll want to hold onto your condo for at least five years for it to be a worthwhile investment.
  • What are the rental rates in the area? Compare how much people are charged for rent in your condo relative to other types of rental units in the area. You want to make sure you can compete.
  • Do you plan on using a property manager or will you manage the condo? Even though the HOA takes care of a lot of traditional managerial duties, you still have stuff to do. Dealing with tenants (finding them, keeping them, evicting them, etc), handling money, responding to repair requests, writing the lease, etc. All of this takes time and effort. If this sounds unappealing to you, a property manager may be a good idea. Just make sure the math works out because property managers get paid between 4% and 12% of collected rent.
  • What’s the rental market like? Find out where your potential renters may be coming from. Is there a college or major corporation nearby? Does your location just bring people because you’re in a city or vacation destination? Is your area getting more or less popular? Could a new condo get built nearby that will get more renters (and potentially cause your condo to make renovations to compete, thus raising the fees)?

Bottom line: is a condo a good investment?

If you wouldn’t want to live in the condo yourself, then you should most likely pass. But if you’d like to live in your own unit, and your condo passes all the other tests, invest away.

You’ll have a regular income stream and, if you give it enough time, your investment will most likely appreciate in value as well.

Ready to learn more? Schedule a call