The Pros & Cons Of Buying A Condo
By JD Esajian on January 12, 2015
Like most aspects of the real estate investing world, one question may be met with several answers. On one side, there is a large segment of investors who wouldn’t even consider purchasing a condominium. Accordingly, there is also a contingent that believes there is real money to be made with the purchase of a condo. That said, the answer falls somewhere in the middle. Before buying a condo, either with the intent to hold or to flip, you need to know everything about the property and the area. What has worked for one investor may not work for you. If you are considering a condo, there are a few things you need to know.
Condominiums are popular among first-time homebuyers and those looking to downsize – primarily because of their affordability and ease to live in. There is value in not having to take care of the lawn or shovel the driveway during the winter months. Additionally, most condos have one story, making them convenient for the elderly or immobile. The condo market took a dip when the market collapsed, but has since rebounded nicely and has seen stark improvements over the past few years. There are currently many good condo deals available, but they do come without their fair share of risk and baggage.
A majority of complexes have large management companies with strict sets of rules and bylaws that must be followed. There are rules regarding the use of amenities, parking, exterior paint colors and even the color of wood stain on a deck. Additionally, there could be potential problems regarding insurance coverage amounts and the number of owner occupants in the complex when it is time to sell. The very first thing you need to do if you are considering making an offer on a condo is to read the bylaws and see exactly what you are getting into. If the management company or the association looks like it could be difficult to deal with when you are buying, it is only going to get worse if you rent or decide to sell.
The second issue with condos is the monthly association fees. These fees go directly to the management company and are in addition to the payment you make on your mortgage, property taxes and homeowners insurance. This fee covers the use of amenities, lawn care and snow removal services. Even in complexes without a tennis court, pool or weight room, the owner will still have to pay some amount to the association. This fee is good for as long as you are the owner, and not just until the house is paid off. On the flip side, many homeowners view this as money well spent. Instead of having to pay to use a pool, they can take a short walk and take advantage of the condo pool. Instead of having to buy a lawnmower and cut the grass every week, you will have it done for you. The monthly fees should be in line with what is being offered. If not, you will have a lack of buyer or renter interest after you take ownership.
When selling a residential property, you can get an idea of the value based on comparable sales or listings in close proximity to your subject property. With condos, you are usually basing your price off of what similar condos in the same complex sold for. If the sales in the complex dip, your property will drop in value – regardless of the amenities or location of your unit. There are always upgrades you can make to add value, but you are largely compared to what has sold a few units away. This can be great when the market takes off, but what is usually the case with condos is that appreciation is a much longer process than with a residential property. This opens the door to buy at a reduced price, but you may not see much in the way of value for quite some time.
If you are looking to flip a condo or sell after you have rented for a while, you may be surprised in what you cannot do to the exterior. As we mentioned, you may be restricted in what color you can paint your house. You may also be restricted in what you exterior upgrades you can make. Seemingly little things like planting flowers or changing the color of mulch may not be allowed. This reduces the amount of curb appeal you can have and the interest you can attract within the unit.
Buyers will always have interest in buying condos. As an investor, you need to take the time and know everything about your local condo market and, specifically, the individual complex that you are interested in. Not every investor will entertain a condo purchase, but don’t be persuaded by other investors’ stories. There is no right and wrong way to invest – only what works for you.