Are Condos A Good Investment? Best Way To Figure Out The Math in 2021

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Condos are a popular housing option. But are condos a good investment? The answer to that requires you to do some math. A recent study showed that the market for condos (condominiums) dropped by 53.5% in May and 31.3% in June.

Before covid brought the world to a standstill, the price of condos had hit a 3-year high with a 9.7% year over year growth. However, since the pandemic hit, the price for condos has began to decline.

So is buying a condo a good investment? Yes. Like any real estate investment, the property’s value depends on whether you’re buying it at the right time in the market cycle, i.e., when interest rates are low. Condos are worth the purchase if you plan to live in it for a few years before reselling it. 

Let’s look at condo investment and whether it is the best investment decision in this time of economic uncertainty. 

Definition Of A Condo 

A condo is defined as an individually owned residential unit in a complex or building consisting of multiple units. Each unit is sold to individual owners and comes with its own deed and title. Condos are different from a townhouse or any other type of home. For instance, in a townhouse, the units are not detached, with residents sharing one or more walls with an adjacent townhouse. 

The common areas in a condominium complex such as, the community areas, parking, pool or the gym belong to all the unit residents. These residents are required to pay homeowners association (HOA) fees for maintenance of the common areas.

What sets a condo apart from other types of houses in the lot and land. Every resident shares ownership of the land that the condo is constructed on. When the value of the land increases, all of the owners of the condos benefit, and vice-versa. 

investing in a condo, appreciate in value

Are Condos A Good Investment? 

Condos are a fine investment, especially if you purchase one that’s in great condition and is in a good location. Condo investments are popular because they are affordable and come with great amenities.

Although they are cheaper than a single-family unit, you will still need a decent amount of money to purchase one. In 2019, the median price for a condo in the U.S was $257,000, while a single-family unit was priced at $280,200 meaning a difference of $23,000. 

It is important to note that purchasing a condo doesn’t automatically makes it a good investment. If you purchase a poorly managed condo, you may end up losing more money then you will make. To figure out how much the condo is going to cost and what the return will be, it is important to do the math.

Suppose you research and find a condo worth $105,000, and you pay for it in cash. You rent it out for $800 per month (that’s $9,600 per year). At first glance, that represents a 9.14% yield ($9,600 divided by $105,0000). However, before you leap for joy, you have to factor in additional expenses:

  • Real estate tax at approximately $1,575 annually for the condo in this example (general property taxes on a condo range between 1.5% to 2.5% of the appraised property value)  
  • Insurance at $490 approximately annually
  • You estimate about $400 annually in maintenance and repair.  
  • The condo remains vacant for about one month per year (at the cost of $800 per year). 
  • Each time it’s vacant, you spend about $150 per year on advertising. 
  • You deduce that you may have a bad experience one out of every five years and incur legal costs plus additional repair costs of about $800 per year. 

These costs total $4,215 per year (about $351 per month). Therefore, your net rent is $9,600-$4,215 which becomes a net rental yield of 5.13%, which is still an attractive return. Aside from the cash flow and depending on the location, the property should also appreciate in value.

If you expect the real estate to rise by about 3% a year, in the first year, your condo will appreciate from $105,000 to $108,150 for an additional gain of $3,150. 

If you are not able to pay cash and instead have to finance the condo, you will also need to take into account the monthly mortgage repayments. If it’s an investment property, you should plan to put 20-25% down to qualify for a loan.

Appreciation Of Condos 

The biggest question in every home owner’s mind is whether condos appreciate, especially at a rate higher than single-family homes. The truth is that a single-family home will appreciate at a faster rate than condos.

For instance, from 2017 to 2018, the median price for condos increased by 3%, whereas the price for single-family homes increased by 5%. But this is not a concrete rule because location is incredibly important. If you were to compare a condo in a good location and a single home in a rougher neighborhood or further away from downtown, the condo will appreciate faster and could even be worth more. So, if you want a condo that will give you good returns, ensure that you find it in a good location. 

Is A Condo A Good Investment For A Rental Property?

Condos are a popular form of real estate to purchase amongst first-time homebuyers and are a great investment as a rental property. This is because they are affordable and include amenities like a swimming pool or gym. Condos are also low maintenance because you only need to maintain the inside of the unit. As such, there is less work than a single family home such as, mowing the lawn or trimming trees.

Another benefit is that you won’t bear the burden of incurring expensive repairs like roof repairs. In most instances, repairs that have to do with the condo’s exterior are catered for by the HOA. 

If you are looking to buy a condo as an investment property, make sure that it will is positively geared. This means that the costs cover the mortgage that you pay for the condo unit, the cost of maintaining the property, and condo association fees. You’ll need to charge a rent that’s sufficient enough to cover all of these costs. This means that you won’t need to personally put your own money into covering the costs each month.

Something else to take into consideration, is to ensure that you aren’t charging a level of rent that currently exceeds the going rent within the community. This is because it can make it difficult to lease out your condo. However, if you charge a rent that’s attractive enough to lure a renter and still give you some profits, then you will be doing well.

buy a condo, appreciate in value

Additional Factors To Consider 

When you consider purchasing a condo, you should factor in all types of costs. You should consider the condo association fee, and any other improvements you need to make inside the condo.

Also consider whether the value of the property is likely to increase. Take time to assess the property. Is it well maintained? What’s the age of the building? What areas of the shared space need to be fixed, updated or replaced soon? These factors are essential, as they could increase the condo’s association fee. 

Before purchasing the unit, you need to ask yourself the following questions:

  • Is the condo in an area where rental properties are in great demand, for instance, a major town or near a college? 
  • Is the area growing in popularity or decreasing? 
  • If a major employer in that area shut down their business, would rental demand significantly decline? 
  • Could a condo complex improvement nearby leave yours in need of expensive improvements or repairs? 

You should ensure that the HOA is well-managed before buying a condo. As you assess the unit, you could ask the agent whether the HOA pays the common area bills and what percentage is reserved for maintenance.

It is also beneficial if you inquire about the owner-occupancy rate. What this means is that you should ask how many owners live there as opposed to renters. If it is over 50% that are owners, then it’s a good sign that the condo is a great investment. 

Pros And Cons of Owning A Condo 

Pros

  • Common areas and well maintained and costs are shared amongst all owners
  • Great community feel
  • Reduced prices when compared with a single family home
  • No external maintenance and repairs required by you
  • Amenities – such as, gym, pool, playground area etc

Cons

  • Could be poorly managed by the homeowners association
  • Additional fees required to cover poor management and repairs required
  • HOA rules may be restricting
  • Less privacy than single family homes
  • Difficulty in obtaining financing

The Bottom Line

Overall, condos can be a good investment depending on several factors, such as the current supply and demand within the market as well as it’s location. If you plan on investing in a condo, don’t rush into it. Make sure your finances are in check before taking the plunge.

For example, when looking to purchase an investment property, don’t take out an additional loan to pay off another mortgage if you haven’t finished paying off the loan on your home. Especially, if you aren’t sure whether you would be able to service the debt in the event that the condo is vacant. The cost of the two mortgages can be a source of a significant amount of stress. 

It is beneficial to talk to some of the residents in the building to get their feedback concerning the property, community, condo fees and how the HOA is. Remember that you can also leverage the help of a real estate agent to shorten the assessment process and help you get the best price possible.

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