As good single-family real estate properties increase in price, investors often begin to look for less expensive alternatives, such as townhomes, mobile homes, and condominiums. But is investing in condominiums a good idea or not? Today we will look at the pros and cons of buying or investing in this type of real estate to help you decide that question. Let’s begin with the pros:
- Lower purchase price. The biggest advantage to investing in Condos is the purchase price, which is almost always lower than single-family homes in the same area. While prices vary according to geographical area and amenities, condos are often 25% or 30% less expensive than single-family homes on the market.
In addition, taxes are lower and dwelling insurance for a condo costs far less than insurance for a single-family home because you don’t have to insure the exterior of the building. The condominium insures all of the areas outside the walls of each condo unit. The only liability the investor would have is for an injury to the tenant inside the condo unit. The tenant, and not the landlord, is also responsible to insure the contents of their home.
- Fewer Repairs to Make. Because the condo owner is not responsible for the exterior of the unit, there are far fewer repairs to make on the property over time. Investors don’t need to worry about expensive repairs for a new roof, replacing siding, or installing new sod or landscaping. All of that is the responsibility of the condominium association. The condo investor simply has to take care of repairs and cosmetic enhancements to the interior.
- Fewer Maintenance Issues. Mowing the lawns, landscaping, and other outside maintenance are of little concern when investing in Condos. The association takes care of all of that as well.
- Buyer’s Market. Unless your local real estate market is extremely hot, you may find there is a buyer’s market for condos. Investors may be pleased to discover there are fewer competitive bids for condos in foreclosure than single-family homes on the market.
- Greater Amenities for Tenants. Tenants often enjoy renting condos over single-family homes, because they can make use of amenities such as swimming pools, exercise rooms, and clubhouse room rentals. They also don’t have to worry about mowing the lawn or cutting bushes. This makes them highly desirable to rent quickly and for a good price.
So in summation, investing in Condos is a worthwhile endeavor because of the lower costs of purchasing, insuring, and taxes, and the investor has far less to worry about when it comes to maintenance and repairs. Lighter competition may even create a buyer’s market at times for condos, and tenants love the perks. But there are also several caveats about investing in condos. Let’s take a look at some of the cons in condominium investing:
- Monthly Association Dues. Whatever savings you get from the lower purchase cost, taxes, and insurance can be largely offset by the monthly association dues. Investors should always find out the cost of association dues before making any bids on a condo property.
- Condos are more difficult to sell. When it comes time to sell your investment condo, you may find it takes longer to find a buyer interested in this real estate property. Be prepared for some tepid offers as well. The number of approved condos for FHA mortgages has markedly declined over time, so many condos are now purchased by cash buyers. And those buyers are often reluctant to pay full asking price on their purchase.
- Condos are the first to drop in price in a down market. During the housing market collapse between 2007 and 2010, a flood of condo foreclosures crushed the values of many condominium communities. Condos purchased by young first-time homebuyers were hard hit when those who lost their jobs had few savings or other resources to fall back upon. They simply handed the keys back to the banks, seriously depressing the values of the condo property market in general.
- Condos are the last asset to rise in price during a recovery. As tough as it is to sell one’s condo during a downturn, you also may find that single-family homes recover their values faster and appreciate more than condos do when the economy improves. With prices and interest rates depressed, the public jumps on the single-family home bargains first, while ignoring the less expensive condos.
- Unexpected assessments can put a crimp in your profits. At times a condo association may have to replenish its reserves in a hurry, because of unexpected repairs to swimming pools, playgrounds, or other amenities. Broken pipes or foundation problems can also deplete a condominium of its funds. When this occurs, the association will require each condo unit owner to pay a one- time assessment to replenish the reserves. If the assessment is big enough, an investor could give back several months of rent in one fell swoop. So always ask if there is a pending assessment before investing in condos.
- Government regulations make selling a condo more difficult. Designed to limit risk to mortgage holders, government regulations often make it much harder for condo owners to sell their units. FHA lenders place restrictions on any condo community that has a high ratio of rental units to owner-occupied units. In some instances, a condo may even mandate that investment purchases not be permitted. There are also restrictions on communities that have too many foreclosures, or have a substantial amount of association dues in arrears.
Such restrictions negatively impact the time it takes to sell a condo, as well as the price the investor can get upon resale.
Therefore, each investor must decide whether or not investing in Condos makes sense for them. Condo investing is very popular among older citizens, who don’t want to be bothered with repairs or maintenance. But the returns on condominium investment are often substantially less, as opposed to investing in a single-family rental home property.
About the Author:
Ethan Roberts is a real estate writer, editor and investor. He’s a frequent contributor to InvestorPlace, and his work has been featured on MSN Money and Reuters. He’s also written for Seeking Alpha, Investopedia, The Fiscal Times, ForSaleByOwner and Smarty Cents, and was one of five contributing editors to The Tycoon Report. He’s been investing in real estate since 1995 and has been a Realtor since 1998. He also teaches classes on investing in residential real estate.
