Condos are becoming more popular. They’re a good option for first-time homebuyers, as they are less expensive than single-family houses and can be easier to manage once you move in. But what about condos as an investment? This guide covers everything you need to know about investing in a condo—from whether it’s even possible and how much money you’ll need—to finding the right type of property.
Is a Condo Good Investment?
Condos are a great option for investors or primary homebuyers looking for properties with little-to-no upkeep. When compared to single-family homes, Condos can be a great “low maintenance” investment, but this will come with some added costs many investors are not comfortable paying for. You’ll also have to deal with more restrictive HOAs (homeowners associations), closer neighbors, and a lessened ability to “force” appreciation through exterior upgrades.
Do Condos Appreciate or Lose Value Over Time?
Condo prices are heavily influenced by location, the market, and even your lifestyle. If you live in a condo in an urban area, you’re more likely to see appreciation than if you live in a suburban location.
Condos tend to appreciate faster in high-rise buildings compared to low-rise buildings because of the convenience and proximity to amenities like restaurants and shops. High-rises also offer better views of the city skyline.
That being said, condos tend to appreciate slower than traditional homes. And, as discussed before, it may be harder to “force appreciation” since there is a limited amount of upgrades you can perform within the condo
The Pros of Investing in a Condo
Condos have a specific set of benefits that almost every other type of real estate lacks. Some of these perks could boost your cash flow, occupancy, and appreciation over time! Here are some of the reasons why condo investing works:
- Affordability: Condos are more affordable than single-family homes, on average.
- Maintenance: Condos require far less maintenance (from you at least) and upkeep costs are relatively low.
- Amenities: Condos tend to offer amenities single-family homes don’t have (pools, tennis courts, gyms, etc.).
- Location: Condos are often in more central locations, which could mean higher rent potential and a wider pool of tenants to choose from.
- Appreciation (and cash flow!): Condos still experience a solid amount of appreciation on average, meaning they’re not just a cash flow collector, but an equity vehicle as well.
The Cons of Investing in a Condo
As you can see, there are some major pros to condo investing. But, some downsides make condos undesirable even to the biggest and best investors. Before you make a bid, be sure you’re aware of these dense-living downsides.
- Strict Rental Policies: Condos tend to have strict long-term rental policies and even stricter short-term rental policies. You need to be very careful when evaluating a condo as you may be buying one that doesn’t even allow you to rent out the property for any less than a year-long lease.
- Special Assessments: Under certain conditions, an HOA may approve a “special assessment.” This is a fee (usually many thousands of dollars) that a condo owner MUST pay for the HOA to repair or upgrade a certain part of the building. This is why all condo owners should investigate the HOA’s treasury balance before investing.
- No “Forced Equity”: You can upgrade the inside of a condo, but you can’t upgrade the outside. This leaves many investors with a very limited number of ways they can increase their property value.
- Parking: Parking may either cost or be so limited that you need to find public parking elsewhere. This is not only a pain for tenants, but homeowners (especially if you have ten grocery bags to bring in!)
- Density: Density isn’t always a good thing and condos can be noisy, smelly, or feel unsafe from time to time, simply because so many people are living on top of each other.
Buying vs. Renting a Condo
Buying vs. renting a condo is close to the same debate as buying vs. renting a house. When you buy a condo, you lock in your property’s value, allowing you to capitalize on the appreciation over time. But, you’ll also be hit with the HOA fees, property insurance, and property taxes that homeowners are so used to. Fortunately, even if you choose to rent a condo you can still do rental arbitrage, which allows you to sublet the condo when you’re not there. You NEED to be sure that the landlord signs off on this and that the HOA allows it. You can also “rent hack” which is when you rent out the other rooms in your condo so you can subsidize your rent. Again, a landlord MUST allow subletting in their lease for this to be possible.
Investing in a Condo as a Primary Residence
Buying a primary residence of any kind has serious advantages. The first is that you get access to low-down payment loans like the FHA loan or 5% down conventional loan. These loan products allow homeowners to buy properties with significantly less cash needed than the traditional 20% down method.
If you are looking into making a condo your home, be sure to analyze the HOA’s past performance, how much they have in reserves, and how much their monthly fee is. Unlike a regular single-family home, condos can have far higher monthly fees attached to them, but they come with the added benefit of fewer maintenance bills, better amenities, and often a better location.
Using a Condo as a Vacation Home
If you’re looking to use your condo as a vacation home, then be sure that it is in a location where there are plenty of tourists and visitors. If the condo is right in the middle of a busy city, you can expect more people to stay at your place when they come into town for business or pleasure. However, if the condo is way out in the middle of nowhere, then don’t expect many people to stay there.
Look into the amenities that the condo offers. Is there a swimming pool? A gym? Grilling stations? A playground for kids? These are the types of amenities that will make your condo into a killer vacation rental. But, be sure that short-term rentals/Airbnb investments are allowed by the HOA, or you could be throwing away a serious cash flow opportunity.
It’s also important to note that buying properties on a second home mortgage allows you to come in with just 10% or 15% down, instead of the traditional 20% down. But, your vacation condo will need to be a certain amount of miles away from your current primary residence and you’ll have to stay at the condo for some portion of the year to qualify.
Investing in a Condo as a Rental Property
Condos, while not always applicable, are one of the many different types of rental properties and can make great rentals. Their prime locations, excellent amenities, and routine maintenance make them less of a headache (for landlords at least) than single-family rentals. But, since you’ll be buying the condo as an investment property, be prepared to come to the table with 20% (or more) down. And, be sure to investigate the HOAs rental policies as much as possible. If there are rental restrictions, you’ll need to reevaluate your investing strategy to fit them or find another condo to invest in. If you already know you want to use a condo as a rental property, read our best states to buy rental property guide to help get you started in the market that’s best for you.
Note: Condo HOAs change over time. An HOA that disapproves of subletting could be replaced with an HOA that approves of it. But, this also works backward, so look for a long track record of rental property acceptance within the condo and HOA.
5 Considerations Before Buying a Condo
Before you buy a condo, it’s important to consider several factors.
1. Rental Restrictions
The first thing to consider is whether or not the building has rental restrictions. Many condo buildings have “no rental” clauses in their governing documents, which means that if you want to rent out your unit, you’ll need the approval of the condo association. This can be difficult to get and may require paying extra fees.
2. HOA Fees
The second thing to consider is the condo association’s HOA fees. These are monthly or yearly fees that cover common areas like hallways and lobbies, as well as any other maintenance and replacement costs for your building. This can be a significant expense, especially if you don’t use all of the amenities in your building.
3. Resale Value
The third thing to consider is the resale value of your condo. If the condo is in a high-end building and has a good location, you’ll likely be able to sell it at a higher price than if it’s in an older building or one with less desirable amenities. You should also consider whether there are any restrictions on selling your unit, such as having to wait for approval from the board of directors before listing it.
4. Financeability
The fourth factor is the financing part of the equation. Know how you’re going to fund the condo before you buy. Will you use an owner-occupied loan with 5% down, or a 10% down second home mortgage? If you’re planning on having it as an investment only, prepare to bring 20% down to the table.
5. Cash Flow
The fifth and final factor is cash flow. If you are buying a condo as an investment, it’s important to know how much income you can expect to receive every month after all expenses have been paid. The return on your investment will be affected by several factors, including the purchase price, your monthly mortgage payment, your monthly (or nightly) rent, your HOA fees, and your cost of common maintenance.
The Bottom Line about Condos as an Investment
We hope this article has helped you learn more about the pros and cons of condo investments. If you’re ready to get started on your condo investment plan, be sure to check out these FAQs, as they may answer some more questions you have.
Condos as an Investment FAQs
When you buy a condo, you are buying into a community. That means that you will be responsible for paying HOA fees, which can range from $50 to $500+ per month depending on the complex. In addition, condo owners could be hit with “special assessments” that force them to pay for large-scale repairs and upgrades (capital expenditures items).
The answer is yes IF you buy in a good location and get a good deal. But there are many more factors that go into condo investing than just finding a property that meets your needs. For example, you need to be aware of HOA fees and special assessments. You should also do your homework on the neighborhood, schools, local crime rates, public transportation access, and employment opportunities before deciding whether or not this investment is right for you.
Yes, condos can lose value over time. Condos are subject to market fluctuations, just like any other property. If the market goes down—and it does from time to time—then your condo will likely decline in value as well.
Millennials are known for preferring a different type of living than their parents did. They’re more likely to rent and less likely to buy homes. However, they do still like the idea of owning property, especially if it means that they can be close to amenities like shopping centers and parks. Condos offer this type of convenience in an urban setting.
