Real estate investment has long been considered a lucrative avenue for building wealth and securing financial stability. Among the various options in the real estate market, investing in condominiums has gained popularity due to its unique characteristics. Condominiums, or condos, are residential properties where individuals own their units while sharing common areas and facilities with other residents.
Condominium investment is a great way to get started in real estate. Even though there are a few challenges to this form of investing, it’s generally one of the better ways for neophyte investors to start building up a portfolio of rental properties. Let’s explore the advantages and disadvantages of investing in condominiums to provide a comprehensive understanding for potential investors.
PROS
1: Lower Upfront Costs
Condos generally cost less than a house simply due to their smaller size. This makes it much easier to get the financing required to purchase a unit, especially since it is likely not your first property (assuming you own the place you’re living in.)
Getting a mortgage for real estate isn’t as difficult as getting a large business loan, but it still helps to aim lower and work your way up as your properties gain more equity.
2: Entry Point for First-time Investors
Compared to single-family homes, condominiums generally have a lower entry price, making them more accessible to neophyte investors or those with limited capital. This affordability allows investors to enter the real estate market and begin building equity with relatively lower financial risks.
3: Amenities and Services
Condominiums often come with various amenities such as gyms, swimming pools, security services, and landscaping. These facilities enhance the appeal of the property to potential tenants or buyers, providing added value and increasing the potential for higher rental income or resale value.
4: Lower Maintenance Costs
A landlord with single family homes or duplexes have more things that can go wrong than a condo owner. The roof, yard, driveway, and all of the windows are a few examples.
Meanwhile condominium investment means all you have to worry about is your unit. When a new roof or driveway is required, at least you share those costs with the other owners in your building.
5: Less Upkeep
One of the significant advantages of investing in condos is that the property management and maintenance responsibilities are typically handled by a homeowners’ association (HOA) or a property management company. This relieves investors of the burden of day-to-day upkeep, making condo investments more convenient and less time-consuming.
A single family home with a yard may need all of the following services done regularly:
- Pest control
- Weed spraying
- Pressure washing
- Lawn mowing
- Bush trimming
- Raking/leaf blowing
That’s not to mention other necessary services like trash and recycling. Condominium investment doesn’t include all of these nitty-gritty stuff. As the landlord, that’s more money in your pocket each month to invest in more property.
6: Ideal Location
Condominiums are frequently situated in prime locations close to urban centers, commercial areas, and public transportation, making them attractive to tenants and potential buyers. The convenient locations contribute to a steady demand for condos and potential for capital appreciation over time.
7: Better Resale or Rental Value Appreciation
No doubt, a strategically-located condominium complex is always attractive to a market eager to live with conveniences and amenities on hand. Condo units have always proven to be prime rental spaces, particularly among workers opting to relocate to urban communities. The same goes for those with primary homes but can afford renting a condo unit near their work area than commute daily.
That said, the potential of rental rates or resale value going up is much faster compared to single-detached homes or apartment complexes located farther from urban centers.
You may strike gold with condo investment, particularly if you make your purchase at significantly lower pre-selling rates.
8: Diversification
Investing in a condo can be a means of diversifying one’s investment portfolio. Real estate can act as a hedge against stock market volatility, providing investors with a more balanced and stable investment strategy.
But even though there is a lot of upside to purchasing and renting out a condo, it’s not all sunshine and rainbows. There are a few cons to think about as well.
CONS
1: HOA Fees and Restrictions
Perhaps the worst part of condominium investment is the HOA fee. Even though HOAs have a nice place in community ownership, high fees can eat into your profits very quickly. Paying thousands of dollars a year just for the HOA is pretty common.
While an HOA can take care of maintenance, investors must pay regular HOA fees, which can vary significantly depending on the condo’s amenities and services. Additionally, HOAs may impose certain restrictions, such as pet policies or rental limitations, which can limit an investor’s flexibility in managing the property.
2: No Control Over Neighbors
When you live in a detached home with noisy neighbors, you have at least 10-20 feet between your residences. When you’re in a condo and have a noisy neighbor, you only have walls and a few feet separating you!
While having a noisy neighbor may be the least of your worries, having next door occupants who don’t care for their units well can affect your business. Potential renters will not want to live beside someone who doesn’t take out their trash regularly or has rowdy visitors over the weekend.
Thankfully, there’s the HOA to help you out with these concerns, but it can take some time before matters are addressed.
3: Market Oversupply
In some markets, condos might face oversupply issues, leading to increased competition among landlords and potentially lower rental income. An oversaturated market can also make it challenging to sell a condo quickly or at the desired price.
4: Capital Appreciation
While condos in prime locations often experience capital appreciation, not all condos share this advantage. In some markets, condos may not appreciate as quickly or significantly as single-family homes, which can impact the potential return on investment over the long term.
5: Financing Challenges
Some lenders have stricter lending criteria for condominiums due to concerns over the financial health of the HOA and potential risks associated with multi-unit properties. This can make obtaining financing for condo investments more challenging compared to single-family homes.
6: Limited Control
As a condominium owner, investors must abide by the decisions made by the HOA or property management company. This limited control over the property’s management and rules may lead to conflicts or decisions that are not aligned with an individual investor’s interests.
How much does it cost?
The amount you need to invest in a condo unit in the United States can vary significantly depending on several factors, such as the location, size, amenities, and overall real estate market conditions. Condo prices can differ substantially from one state, city, or neighborhood to another. Additionally, factors like the age of the building, views, and nearby amenities can also impact the cost.
As of the last quarter of 2022, the National Association of Realtors placed the median price of pre-owned condos in the United States at around $331,000. In major metropolitan areas, especially in popular cities like New York City, San Francisco, or Los Angeles, condo prices tend to be higher than the national median. Conversely, in smaller cities or less populated areas, condo prices might be more affordable.
Moreover, financing options also play a crucial role in determining how much you will need to invest upfront. If you plan to take out a mortgage to purchase the condo, the down payment requirement and interest rates will influence the initial investment. Conventional mortgage lenders often require a down payment of 10% to 20% of the property’s purchase price, though some programs may allow for lower down payments.
To get an accurate estimate of how much you will need to invest in a condo unit in the United States, it’s essential to research specific locations and consult with a real estate agent or mortgage lender who can provide up-to-date information on current market trends, prices, and financing options.
The Bottom Line
If you’d like to get started in real estate but don’t have a lot of time or cash to invest, condominium investment may be the best route for you. The condominium market is more volatile than detached houses, but has several benefits that make it a great option for new investors.
