More and more homebuyers are finding home in condominiums because a condo isn’t just a place to lay your head. It’s a choice that more Americans are adopting each day based on shifting lifestyle choices.
Millennials are taking the lead in home buying, with 86% of homebuyers at 28 years of age and younger, according to the National Association of Realtor (NAR) 2018 report. For today’s busy professional, there’s a convenience in condo living that cannot be equaled in traditional standalone homes. Round-the-clock security, gorgeous amenities, and lower bills – what’s not to love?
In this world today, time is a commodity, and condo living offers a convenient, efficient way of living that also promises lower bills, fewer household responsibilities, and of course, massive savings on home repair and maintenance.
As condominiums continue to rise in popularity, they are slowly replacing the traditional housing option of an apartment, townhouse, and house. However, it does beg the question: do condominiums make a sound investment?
What is a Condo, Exactly?
A condominium is an apartment located within a building that offers shared services and amenities. Unlike an apartment which is leased, a condo is purchased. The sale of a condominium is not just limited to the unit; instead, all owners also share in the ownership of the land that the building sits upon.
Parking areas, laundry facilities, common areas, and even the roof belong to all collective owners. Therefore, the cost and maintenance of these items are shared amongst all building residents, making it far more affordable than the costs one would face as a homeowner. Shoveling snow, raking leaves, mowing the lawn are all a thing of the past, now thanks to a new condominium.
The higher the land values, the more condo owners earn in profit. Just as things rise, they also fall, so it is imperative to carefully explore and consider any potential purchases to ensure a sound investment.
Do Your Research
Whether a condo is a solid investment is a bit of a controversial subject, simply because there are so many variables at play. Property and land values, square footage, location, and amenities all play a crucial role in determining the price of your unit.
Before any purchase, it’s always best to perform a market analysis of the local area to get a better understanding of market prices, as well as the health of the current rental market, should that apply. A sound investment is dependent upon property values; a homebuyer wants to buy low and sell high in order to make a profit. The idea is to generate positive cash flow, turning your new investment into a profitable one. Your monthly mortgage, combined with monthly expenses, will determine what you need to make positive gains.
Then, there is the matter of the loan. Many first-time buyers lack the cash to make a full purchase, so a mortgage loan is most popularly used. The average down payment hovers between 20% and 25%, leaving the rest to be financed. If you receive a poor loan with high-interest rates, you are already at a loss before you even begin. The size of the home loan, combined with its accompanying interest, will make an enormous difference in your investment.
Condominium Association and Dues
Don’t forget about your condo fees, either! All condominium owners are subject to the rules and regulations set forth by the building’s condo association and are obligated to pay regular condo fees.
The amount of these fees can vary, however, depending on the particular amenities and services provided. It’s essential that you plan for these additional condo fees to ensure you have enough room in your budget for this specific property.
Your condo association can also set certain stipulations for owners, such as the design of your unit, whether pets are permitted, and restrictions on parking. Your condo association may also handle insurance and charge the cost along with your regular dues. Even if you have to purchase an individual insurance policy, coverage for a condo is far more affordable than the average American home, given the reduced square footage.
Some buyers purchase a unit not for their own occupancy but to serve in a rental capacity. However, not all condo associations permit rentals, while others may stipulate that the owner occupy the space for a certain period before allowing rentals.
Condo associations may set specific parameters, like how long renters are allowed to stay or how many units permitted to rent. It is crucial to review all policies to ensure your full understanding prior to your investment. When renting, you do not want to risk outpricing the market, which will undoubtedly result in no renters and an empty property. Local market reports are an invaluable resource because they assess the average cost of rent in your area and give you an idea of what to charge.
Run The Numbers
Regardless of whether you choose to occupy or rent your property, you will still need to cover more than just the mortgage. There are fixed expenses that you pay regularly, and then there are variable expenses that are unplanned surprises, like a broken heater or a plumbing emergency.
When creating your budget, ensure that you include the other costs that accompany condominium ownership.
Standard fees include property taxes, emergency repairs, and professional services, such as a realtor or property management company. There are also the occasional expenses, such as legal fees or eviction costs. And, with 50% of home buyers using the Internet to find their new homes, advertising fees are typically a sound investment to help with visibility for your property.
It’s a lot to consider, so let’s go to the numbers. You have found a gorgeous condominium that is selling for $150,000. You already have a home you love, so you plan to rent your new condo for $1,200 per month. That will net you $14,400 each year with a 9.6% yield.
But what about those pesky expenses? Some additional monthly expenses for your unit could be:
- Taxes: $1,500/year
- Insurance: $500/year
- Maintenance and Repairs: $400/year
- Vacancy: $1,200 (based on 30 days per year)
- Marketing: $150
- Legal Costs: $2,000
Given these estimates, your total expenses are $5,750 annually, or about $480/month. When we factor in the net rent after expenses, it only leaves you with a yield of 5.8%, which is a significant difference from 9.6%.
Not all buyers pay cash, however. In fact, according to the 2018 NAR report, 88% of homebuyers financed their home purchase, with 24% accepting a loan of five years or more. If you choose to finance in lieu of a cash payment, you will also need to include interest in your monthly calculations. If you put down a 25% deposit of $37,500, you will end up financing the remaining 75% of the sales price, or $112,500. With a 5% interest rate, you will be adding an extra $805.23 to your monthly expenses, for a grand total of $1,285.23.
With your loan eating any potential profit, you will be forced to either raise your rent or reconsider your investment so as not to lose money.
This is where market research is crucial because you do not want to outprice the market, but you also do not want to charge too low and risk future gains.
Remember, appreciation only serves to increase property values year after year.