Investing In Condos: Is It Right For Your Business?
By JD Esajian on January 8, 2014
The concept of investing in a condo is one in which entrepreneurs have debated for years. For every investor who wouldn’t go near them, there is another that has carved out a lucrative niche. However, investing in condos is similar to any other real estate investment strategy. There is money to be made in the right situation, but if you do not preform your own due diligence, you can find yourself hemorrhaging money. The difference with condos, as opposed to single or even multifamily properties, is that there are restrictions on ownership rights and lending guidelines. Before you consider investing in a condo, there are a few things you need to know.
Unlike a single family rental, when you take ownership of a condo you are taking ownership of the condo space or unit. That space is governed by an association that sets the rules for the complex. Some associations restrict what color you can paint your deck or if you can hang a flag of your favorite sports team above the garage. Your first move should be to get a copy of the condo bylaws, which will have the common charges, rules of ownership and number of investor occupants.
The number of owner occupants is important because many lenders will not lend on a complex that has under 65-70% owners living in the unit. You may not catch this when you are buying, but if you try to sell, you may be restricted in selling because your buyer can’t find a lender who will do the deal. In addition, the lender may require a certain amount in a reserve insurance fund to be an eligible complex. If there has been past litigation due to an injury in the complex or improvements pending, there may not be enough in that fund and you will be stuck not having a large pool of buyers to choose from.
On the flip side, the condo market was one of the hardest hit areas when the real estate market went south a few years ago. While it has slowly recovered, there are still many good deals to be found. Due to the smaller amount of square footage, the amount of rehab work will typically be smaller than on a single or multifamily property. This allows investors to get into these deals with less money out of pocket and have a great chance to see appreciation down the road.
Some complexes will include electricity in their payments, giving prospective renters a firm idea of what they are paying every month. Many enjoy the benefits of a pool, basketball court, secure parking or lawn maintenance without having to think about it after they are done. This is great for both first time buyers and the elderly.
Like most other items associated with investing, you should take each condo on its own merit and never ignore an opportunity solely because a fellow investor had bad luck with one in the past. Do your own due diligence and decide if condo investing is for you. Like most other real estate investments, you can find success given the right opportunity.