Is a Condo a Good Investment?
The great thing about making investments in real estate is that there are so many different options. But what is the right choice for you given the current chaos that the Coronavirus is causing and the new fears of an upcoming recession?
Is buying a condo a good investment? Yes, if you are buying at the right time in the market cycle, interest rates are low (if you are financing), and you plan on living in the condo as your personal residence for a few years. If you can check the boxes on those three high-level criteria, you should be able to move forward with your condo purchase with confidence.
Keep in mind that, in general, there are pros and cons to any real estate purchase. Condo purchases are no different. Read on to learn more about condo investments and how to make the best decision in the current economy of high economic uncertainty.
What is a Condo?
Before you can decide if a condo is a good investment, let’s talk about what a condo is and what makes it different from a townhouse or other type of home. A condo (short for condominium) is a building that’s been divided into several units, like the condos around downtown Orlando FL. The units are sold separately to individual owners. Each unit in a condo comes with its own deed or title.
Any common areas in the condo, such as an elevator, community area, parking, roofing, and external walls, belong to all of the unit owners. Everyone is responsible for sharing the cost of maintaining common areas.
Who makes decisions about common areas? Who manages everything? The Condominium Association is in charge of maintaining the building and making decisions. The owners of the units in a condo pay a fee to the association who is in charge of upkeep.
The primary, and most important, the difference between a condo and just about every other type of real estate building is the plot or land. Every owner in the condo shares ownership of the land the condo is built on. That’s why when the land value of a condo goes up, all of the units in the condo benefit. The same is true when the land value goes down. That begs the question, “is a condo a good investment after all?”
What Makes a Good Investment?
Generally, a real estate investment is considered good when the value of the property is worth more than the purchase price. That’s the simplest way to think about good investments. But when it comes to purchasing homes, there’s more to consider.
Finding Value in an Unstable Market
The Coronavirus has caused an incredible level of chaos amongst all assets classes. The stock and bond markets provide immediate movement based on responses to the emotions of the masses. Real Estate markets take more time to release data as the basis for decision making. They are by nature more illiquid than other paper assets. The current market sentiment is extremely fearful.
This environment of fear should provide a significantly slower transaction volume for the balance of 2020. That will put pressure on sellers, which should create many interesting opportunities for you as a condo buyer. Do not feel intimidated by making offers that are 10-15% below the listing price of a condo. You can always go up in price, but it is next to impossible to get the other side to go down in price after your initial offer.
Buying Condos for Personal Use
Maintenance costs and home improvement costs can quickly take an investment from good to bad. A big loan with high-interest rates may not be a good investment for condos, either. It depends on whether the value of the property increases fast enough to cover the interest on the loan.
If you can only control the interior of a condo, your improvements may not be enough to dramatically change the value. On the contrary, you may risk needing to invest so much in improvements that you recoup the costs. Make sure you know the total cost before you take the plunge.
Here are some of the most luxurious South Beach Condos
Buying Condos for Rental Property Income
If you’re planning to rent out your condo, the sum of the monthly mortgage, cost to maintain the property, and condo association fees are really going to impact whether or not a condo is a good investment for you. You’ll need to set the rent high enough to cover all of those costs, and if that exceeds the going rent in your community, you’ll be out of luck.
However, if you can get the condo at a very low price, the investment could be worth it. Just keep in mind that very lowly priced condos need to be thoroughly vetted. Make sure you know the reason the price is lower than the value.
Expenses to Carefully Consider
When it comes to condos, consider all of the cost, not just the purchase price. Add in the condo association fee, the costs to maintain the unit, and any improvements you plan or need to make. Then, consider whether the property value is likely to go up or down. Is the property well-maintained? How old is the building? What common areas are going to need to be fixed or replaced soon? If you own a unit in a condo, those things could increase your condo association fee.
Condo vs House
There are actually fewer differences between owning a condo and owning a house than people think. Homeowners association costs can just be as high – or higher – than condo associations. They can also be just as restrictive about what you can do to the outside of your home, or with your yard.
The difference from an investment perspective comes from what you actually own, and what you don’t. When you buy a house, you typically own everything including the land underneath your home and around it. You own the roof, the driveway, and in some places, you may even own the sidewalk in front of your home!
The same cannot be said for a condo. When you own a condo, you own the inside walls, what’s attached to them, and your floors. You don’t own the external walls, and shared walls will have their own rules based on the condo association guidelines.
When you buy a home, you buy insurance for that home. You pay all of it. When you buy a condo, the condo association may pay for your roof insurance, for example. Sometimes, out of pocket expenses are less with a condo than with a house of similar value.
Think of a house purchase as a completely whole purchase with nothing shared. Even if a homeowner’s association where the external things like yards, parking lots, sidewalks, and community areas are maintained, the homeowner owns their property and its plot.
Condo vs Townhouse
Townhouses are unique. They are not like homes and not like condos, either. For example, a townhouse owner owns the roof over the home, but the roof could be maintained and insurance by a homeowner’s association. With a townhouse, there are shared walls and usually some restrictions on what can be done to them.
But like a home, people who own townhouses own their yards and plots. Changes to them are subject to city laws and homeowner’s association by-laws, where applicable. Townhouse owners pay insurance similarly to homeowners. And generally, there is no shared ownership of anything beyond shared walls.
Like a condo, the common areas in a townhouse community belong to everyone to use, and the association maintains them. However, a huge difference is that a townhouse owner doesn’t share ownership, the association or community owner does. If you buy a townhouse, you may benefit from the increased value of the property surrounding your home, but it’s not in the same way as a condo owner would.
Condo vs Apartment
A condo and an apartment are very different. They may look and feel the same, but condo units are considered properties and apartment units are part of one larger property.
Apartments are leased. When you lease an apartment, you don’t own any of the property and you’re not on the hook to maintain the property. Property insurance is carried by the building’s owner, not the renters (though part of the lease may go toward that). The walls and anything permanently affixed to the walls – like cabinets – are owned by the company or person that bought the building.
Count the costs
In the end, “Is a condo a good investment?” is a question that depends on many things. Whatever you decide to do, count the costs. Condos are excellent choices for many buyers and investors, but they are unique. It’s worth it to take the time to really know what you’re getting into. First-time buyers – whether investors or not – should consider talking to some of the owners in the building to get their feedback. It is also worth looking at what external factors may positively or negatively impact the property’s value, and the length of time you plan on keep it.