Article Courtesy of Bankrate
By David McMillin
Published April 25, 2021
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
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
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.
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.
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.