Are condos a good investment?

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Near the beginning of the pandemic, plenty of real estate analysts wondered if an exodus from dense urban areas would lead to an abundance of empty condos. The appeal of condo living continues, however, with condo sales recently up by more than 22 percent compared to the previous year, according to October 2020 data from real estate brokerage Redfin.

What about next year, though, and the years that follow? Are condos generally a good investment? Here’s what to consider.

Is a condo a good investment?

The answer to this question depends on many variables, including how you plan to use the condo and how the market moves once you own it.

First, it’s important to keep in mind that a condo in one housing market can look very different from a condo in another. From a real estate investment standpoint, location can be key.

“If you look at a condo in Phoenix or New York City, they can be completely different,” says Nate Martinez, sales associate and owner of The Nate Martinez Team with RE/MAX Professionals in Arizona. “There are high-rise condos that can have very high HOA fees, and there are more traditional two-story buildings that can feel closer to an apartment.”

In addition to those monthly HOA fees, a crucial factor when considering a condo investment is what you can and can’t do with the property, and how that aligns — or doesn’t — with your goals.

“It’s important to understand the bylaws of the [condo] association,” Martinez says. “Over the years, we have had a massive amount of properties go into the Airbnb [and vacation rental] space. Some communities allow it, and some do not.”

What if your goal is to rent the condo out to long-term tenants? Aside from understanding the rules, doing the math can help you assess the opportunity.

Let’s look at a condo with an asking price of $250,000. If you make a 20 percent down payment and nab a rate of 3.13 percent, your monthly mortgage payment would be $857, or $10,284 per year.

Say you can rent the unit for $1,350 a month, bringing in $16,200 for the year. At first glance, this looks like an attractive investment: You’d earn $493 a month. However, there are other costs that will eat into that $5,916 annual profit:

  • Homeowners insurance: $600 per year
  • Property taxes: $2,100 per year
  • HOA fees: $2,400 per year ($200 a month)

After accounting for those expenses, you’d pocket $816 for the year. That’s not bad, but it doesn’t leave much room for the inevitable, sometimes unexpected costs of being a landlord. What if you need to replace the air conditioning unit, for instance? What if your tenant reports a plumbing issue that you need to address? While a condo can be a great investment as a rental property, these are real scenarios and costs that you’ll need to consider.

Think far ahead into the future, too: What will it be worth when you’re ready to sell? There’s no crystal ball here, but think about the neighborhood. Is it an emerging part of town, for instance, where home prices are likely to increase at a clip? If so, you might be able to sell the condo for a sizable profit as demand rises in the area.

Condo as a first home

If you’re a first-time homebuyer, you might be thinking of a condo less as an investment and more as simply the most affordable option. It’s true that condos are typically smaller than single-family houses, but with a smaller asking price to match, they can be the ticket to trading up to a bigger home later on.

“A first-time homebuyer who purchased a condo for $185,000 [recently] decided that the one-bed, one-bath condo was too small and decided to list it with me,” Martinez shares. “We sold it for her for $212,000 five months later, and now she has $20,000 to put on a larger place.”

If you’re considering a condo for your first home, know that there implications when it comes to the HOA fees in relation to getting approved for a mortgage.

“Let’s say a buyer qualifies for a $400,000 mortgage with a 10 percent down payment,” Martinez says. “If the HOA fee is $200 or $400 per month, that takes away from your qualifying. If the HOA fee is higher, the lender may drop you down to a $350,000 loan. They take those HOA fees into account when considering your application.”

Condo as a rental property

If you’re an investor looking at buying a condo for passive income, it’s important to crunch the numbers in these two areas:

  1. Cash vs. mortgage – Do the math of what you’ll pay and what you’ll earn. Will you pay all-cash or get a loan? If you’re paying for mortgage interest, think about how much extra you’re paying each month and whether you can make it up by charging higher rent.
  2. Financials of the HOA – “Make sure you get financials from the HOA,” Martinez says. “Ask if there are any upcoming special assessments.” These are one-time but considerable costs owners must pay. If the HOA determines that every unit needs to pay for new windows, for instance, an owner could be on the hook for $10,000. That’s a huge extra expense that takes away from rental income.

Here are more tips on how to buy a rental property.

Condo as a vacation home

If you’re lucky enough to be thinking about buying a vacation property, a condo can be a smart investment. Vacation, after all, should feel somewhat carefree, which makes the proposition of a condo — paying the HOA to handle exterior maintenance, lawn duties and other tasks — especially appealing.

“I like to say it’s trading dollars for time,” Martinez says.

To make the equation work for a vacation home, though, you’ll need to think about how much time you’ll actually spend using the condo, as well as account for the overall costs of owning a vacation property. Do you plan to charge others to use the condo as a place for their vacations, too?

There are also significant differences when it comes to getting a mortgage and paying taxes on a vacation home vs. a rental investment property. Considering all of these factors can help you make the most of your investment.

Bottom line

Whether you plan to buy a condo to leap into homeownership, rent out or use as a second home, this type of property can be a relatively affordable and worthwhile investment. Before you begin your search, be sure to have clear goals in mind from the outset, and run the numbers. It can be especially helpful to work with a real estate agent who specializes in condos in the area you’re looking to buy or invest in.

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