Consideration Before Investing in a Condo as a Rental Property
Buying an investment property is a big venture, but it doesn’t have to be a risky one if you’re well informed. Condos, in particular, can make excellent investments, because as rental property they are nearly always in demand. Condos also typically require less owner maintenance, making them an excellent first-timer investment. If you’re considering purchasing a condo as a rental property, here are a few insider tips to help you make the right choice.
Self Manage or Hire a Property Manager?
Being a rental property owner involves more than just collecting the rent. Are you prepared to repair or hire a contractor to make the necessary repairs? How do you feel about a 2 am call letting you know your property is flooding? Are you familiar with the rental laws in your state? Could you if you had to, face the long and draining eviction process? These are just some of the responsibilities of a property owner. If you are not prepared for any of this, you will need to hire a property management company to handle your rental. At about 8-10% fees, property management companies can turn your condo into a stress-free investment.
Location, location, location
This can’t be the first time you’ve heard that location is everything. Well, it pretty much is when it comes to investment properties. Location doesn’t just mean picking a condo located on a beautiful street in a fantastic neighborhood loaded with all kinds of amenities. It also means things like property taxes and crime rate, which fluctuate with each area so when scouting out possibilities, make sure you take these things into consideration.
Stay away from the fixer-upper
Unless you are Chip and Joanna Gaines or extremely handy, avoid purchasing a condo that needs renovating. Sure, you might save a little money upfront, but depending on how long the renovation takes and out of pocket cost, you might just end up losing money. The idea of investing in a rental property is to start making a profit as soon as possible. Costly renovations could delay the renting process and add another mortgage to your monthly budget. However, this doesn’t mean you can’t add a few new appliances, a coat of fresh paint, and/or update fixtures. Something as simple as changing out an interior door can breathe new life into a place without breaking the bank. Just don’t buy a condo that needs major rehab, especially if this is your first investment property.
Determine expenses before purchase
Even if you are financially stable, it’s important to calculate your expenses so that you can estimate your profit (since that’s the main goal of owning a rental property). An easy way to calculate your portion of expenses is to use the 50-percent rule in regards to rent. If you plan on charging $1500 a month, expect to spend half of that for expenses. Things like maintenance and repair or HOA/condo association fees but also any unbudgeted expenses that may pop up. A good rule of thumb is to calculate your expenses and double that total for rent to make sure you are covered.
Luxury Condos Can be Safer Investments.
If your budget allows, consider higher-end properties for your rental. The fact is that you will have longer-term tenants with stable financial situations. While most investors are profitable in low-income neighborhoods where renters are common, there are headaches that come with this, from higher incidents of property damage to costly evictions. Families or individuals that are looking to rent instead of purchase in higher-value neighborhoods are often hard-pressed to even locate annual rentals, so the demand is lower than the supply, allowing you to command a higher rent.
Have the down payment ready.
First-time home buyers may get a 3% down rate, but investment properties require usually 20% down, though occasionally you can negotiate a slightly lower down payment depending on your credit. On that same note, interest rates on rental properties are also higher so you should take that into consideration as well. Also, be warned. Some lenders require owners to live in the property for a year before renting it. Your best bet is to opt for an FHA approved condo if possible and seek a mortgage professional with experience.
Know the rules and regulations of the HOA or condo association
Condos are maintained by either HOAs or some type of condo association, which provides property maintenance for a monthly service fee that ranges in price. It is the owner’s responsibility to pay the monthly fee, which is not typically passed on to the tenant. And though HOAs offer some great benefits, there are a few things to keep in mind before deciding if you want to purchase a condo with an HOA. For one, some condo associations have rental caps. This would keep you from raising the rent above their proposed limit. Also, many associations impose restrictions in regards to short-term rentals if you are thinking of VRBO or Airbnb. Other HOAs require that they approve tenants and any changes you make to the condo. Though this is mostly concerned with the exterior, it can still be limiting. So, just make sure to weigh the pros and cons of an HOA before you buy it.
Buying a condo as an investment property doesn’t have to be an extreme risk. In fact, it can be a great move financially if you follow a few simple guidelines and do a little research before diving in.