More than five million Americans live in condos or co-ops.
Condo investments promise the home equity and tax advantages of homeownership without the hassles of single-family houses. Yet can they be a poor investment? Who wins when they purchase a condo, and who loses?
The answer depends a great deal upon the location and rules of the building you are considering. Let’s take a look at some factors.
1. What Is a Condo?
A condo is a property that a real estate investor can own outright.
A condo is a private home that is owned by an individual homeowner or by a community with multiple units or townhouses. Condos are usually part of high-rise buildings or attached to other homes. Detached condos, however, do exist.
One thing that all condos do is share common areas. This may include community rooms, courtyards, tennis courts, swimming pools, or garages. These spaces get maintained by the homeowner’s association, making upkeep for homeowners much easier.
Owners pay a homeowner’s association fee each month that gets managed by a board. These elected individuals hire the handling of landscapers, snowplows, lifeguards, and any other employees needed to keep the property running smoothly.
When you need a small repair, a handyman is usually available. Pipes, plumbing, and roofs may also get handled by the board’s employees.
2. Condo Advantages
Owning a condo seems like an easy choice for retirees or young adults. In urban areas especially detached, single-family homes are quite expensive. A condo allows folks who don’t need extra space to enjoy the advantages of homeownership without paying for excessive upkeep.
Condos are generally better built and maintained than rentals. They also allow homeowners to build up equity. Couples without kids can claim a condo they own as dependent when they file taxes.
Condos are popular in urban areas, which are considered luxury locations and promote an attractive lifestyle. Younger people get drawn to cities, where there are ample nightlife and a variety of shopping and activities.
Condos are also great investments in popular vacation areas, such as ski towns and beach communities. Here, you are more likely to get a higher return on your investment than you would with a single-family home.
Purchasing a house in vacation locations could be very expensive, which would lead you to charge more for rent. This may drive away potential vacationers.
A condo, however, will not cost as much to own monthly. You could charge your renters less for their stays and generate a profitable monthly income.
Many individuals are also drawn to the amenities offered by condos. Young singles, for example, may appreciate 24-hour security or a fitness center. Retirees might like a game room or swimming pool on the property.
Condos promise an active, social lifestyle in popular locations. They are, however, not always a perfect investment.
3. Condo Disadvantages
Condos may not be the best advantage for everyone. Those who are independent and want to have more freedom with their property may get deterred by homeowner association rules and regulations.
Homeowner rules are designed to make living more pleasant for everyone. People aren’t allowed to make noisy repairs or have loud parties after certain hours. There is a limit to the number of people living in each unit.
You will also, however, need to check with the board before you paint the exterior of your unit or get an extra pet.
Those investors wishing to rent out their properties should check HOA rules before they buy. Some boards have strict rules against renting, and others have a rental that gets capped. In some cases, you may need to live in the unit for a certain amount of time before you will be allowed to rent it out.
Rental rules are designed to keep strangers from taking over condo buildings. They can, however, be a deterrent to those hoping to get a return on their investment through renting.
All the amenities of condos are not free. A homeowner’s association fee of at least $200 a month will get required for the services you are receiving.
Parking can also be a problem in congested areas. Many condo owners find that they can only host small parties because it is difficult for guests to find a place to park.
Condos can be difficult to finance since a 20-25% downpayment is usually required. Lenders may not finance your purchase if the building is under litigation.
Condos also appreciate at a slower rate than detached homes. This is because you do not own the land on which the condo is built.
A Wise Decision
Do a little homework before deciding whether or not a condo is right for you. You or a real estate agent should conduct a comparative market analysis to make sure you are getting a good price. You should also get details about typical rates for current renters in each building.
Make sure that the condo you are considering allows renting if that is your aim. Ask for a copy of the board’s financials, and be sure to have a lawyer look it over before closing the deal.
You should research the local market and pay close attention to its health and future. Find a property that seems like a good buy compared to its competition before making your final decision.
Choosing Condo Investments
There are a lot of advantages to condo investments. You can own a great home with little maintenance and access to many amenities and attractions. Be sure to do your research before deciding if a condo is right for you.
For more information on sound investing, read our blog today.
Further Reading from Bergan & Company