(This advanced blog summarizes real estate investing tips and insights Lofty AI has acquired from working with thousands of investors and institutional funds.)
What is a condo?
A condo is a private, individual unit located in a building with other individual units.
Unlike an apartment, a condo is owned by its resident, not rented from a landlord.
Residents own and maintain the interior of their unit but don’t own the property on which it sits.
The exterior, lawn, and shared spaces are maintained by the Homeowners Association, or HOA.
Unlike townhouses, condo owners only own the interior of their unit. The building's exterior is owned by the Homeowners Association (HOA). All members share in the costs and maintenance of the common areas by paying monthly HOA fees.
Condos range in style and can be found in a high-rise in New York City or in a row of back-to-back units. They come in all shapes and sizes and can be seen in Class A, B, C, and D neighborhoods all throughout the world.
Condos tend to have a community focus which is one of the biggest draws for condo investors. Condo communities can contain a grilling area, business center, pool, dog park, covered parking, clubhouse and more.
HOA fees vary drastically, but $200/month is right around average. However, fees vary based on what the HOA provides.
Every homeowners association has its own policies. Some HOAs provide more varied and extensive services than others, and as such will set their fees accordingly. Condo fees generally cover some of the expenses you'd ordinarily have to pay for. As a general rule, most homeowners associations cover:
Maintenance of communal areas
Water and sewer services
Condo association insurance typically covers building exteriors and common areas. However, this type of home insurance does not likely cover what is inside your specific unit. It also may not cover all damages outside your unit.
Pros of investing in condos
Like all investment properties, there are pros and cons of investing in a condo.
Let's walk through the pros below.
Condos have more of a community built in than townhouses and other investment properties. This includes clubhouses, pools, and gyms. Because of these amenities, you're generally able to charge higher rents to tenants.
Properties with attractive amenities are often in high demand. That can mean a quick turnover when a tenant moves out. Short vacancies are an investor's best friend when it comes to managing cash flow.
Most condo communities have security and are gated. This is helpful when convincing tenants, especially those with families, to move in. Depending on the building, you may have secure entrances and parking, a doorman or concierge, and other amenities that increase security and safety.
Because condos tend to be more compact and require less land than single-family homes or duplexes, they tend to be a more affordable way to own property. Property taxes tend to be lower as well. For some first-time buyers, condos can make ideal starter homes because they do not require the upkeep and maintenance of a detached home, but you can still reap the benefits of ownership and building equity.
Of course, this doesn’t hold true in all markets – property investors should also consider property values in the neighborhood, the cost of living in the area, and HOA fees when comparing costs.
Condo communities will often organize social events like pool parties and barbecues. Because you tend to see your neighbors in hallways and in elevators, you’re more likely than not to meet them in person.
The rules of the HOA about maintaining the property also lend itself to creating a homely and calm environment that is often attractive to many people, especially families. People may be willing to pay more for these aspects.
The association serves as a policing force that prevents owners from neglecting their property and discourages bad behavior by residents.
To truly maximize your returns, you want to look for a Class C condo located in a Class B neighborhood that you can add value to that will also benefit from rapid neighborhood appreciation.
One of the biggest perks of investing in a condo rental is that the maintenance is more often than not done by the HOA, not the condo owner.
You do not have to worry about mowing the yard, fixing the roof, shoveling the snow, etc. – your monthly condo fees cover all maintenance expenses and other people will do the work for you.
For a real estate investor that’s busy with work, likes to travel, or simply doesn’t want to deal with all that work, this is a major benefit of buying a condo for investment. Moreover, this creates a huge demand for renting condos because tenants themselves don’t need to worry about the maintenance either.
Rules set by the HOA can help keep your property clean and well-kept for years to come. A tenant would need permission from the condo association to make changes to the unit, inside or out.
Often, residents are prohibited from conducting any business activities from a home office. Condo rules are likely more strict than similar properties not deemed a condo. This helps to deter unwanted activity that leads to property depreciation.
Cons of investing in condos
HOA fees and potential issues
The HOA fees can range from under $100 to as much as $300 per month depending on the complex, location, and quality of your community. Adding these fees to the regular principal, interest, and tax payments on the mortgage, might be a reason to opt against buying a condo for investment.
Although you're paying high HOA fees, maintenance issues such as lawn mowing or pool cleaning may not be handled correctly.
Lack of privacy
Unlike townhouses, your condo is surrounded by neighbors above, below, and beside you. There's a good chance at some point in your ownership that you or your tenant will end up getting a neighbor you wish hadn't moved in.
If the neighbors are undesirable to live next to, you may have a hard time keeping your tenant happy. This can result in higher-than-desired vacancies and constant tenant turnover.
You, as the owner, likely will have to personally handle grievances with your neighbors (other tenants or owners), which can be frustrating and time-consuming.
On the flip side the rules set by the HOA can have a negative effect on your property and ROI. Each resident must abide by the community rules on issues such as visitors and pets. Rules change from one community to the next and are determined by the condo's property management company.
As a real estate investor, you want to be sure that the condo you’re buying can, in fact, be rented. Many HOAs have strict rules against renting and don’t allow it. Others have what is called a “Rental Cap,” – this is a limit that restricts the number of condos that can be rented out vs the number of owner-occupants.
Condos can be a risky investment because you are sharing ownership with other people in the same building. It's possible that if one person forecloses or short-sells their condo, it can take a toll on your value since you own a condo in the same complex.
With inflation comes more profits for you, but likely also higher costs of HOA fees. If you don't budget for increasing fees, you could get into a position where you can't afford the condo fees or special assessment.
Condos are harder to finance
If you’re buying your first investment property, you are most likely going to take a loan to finance the purchase. If you are interested in buying a condo for investment, one thing to definitely keep in mind is that obtaining a mortgage is much harder for a condo than a detached single-family home.
For buying an investment property (whether a condo or any other type), lenders, most banks, typically require from property investors a 20-25% down payment. However, some lenders require the real estate investor to live in the condo for a year before renting it out.
Plus, if your lender doesn’t require you to live in the investment property initially, then you might have to pay a larger down payment.
Banks and other lenders are more amenable to condo’s with a homeowners association with a low delinquency rate and no ongoing litigation.
The difference between a condo and an apartment
People often confuse the condos and apartments because, structurally, they look the same.
The simple difference between a condo and an apartment is ownership. You own a condo and you rent an apartment. In rare cases in specific markets, like New York City, you can buy an apartment.
In an apartment building, all of the units are usually owned by a single person or company who rents out the units. Whoever owns the building owns all of the common spaces as well.
Both types of dwellings generally have multiple floors and units on each, with shared amenities and common areas.
Should you invest in condos?
Condos are a great investment. Property appreciation, extra security, and direct access to amenities more than make up for the extra $200/month you will spend in HOA fees.
The bottom line is, usually condos require less out-of-pocket cash than single-family homes or townhouses, with similar features. Therefore, they are good for beginner real estate investors.
Just be sure to review the HOA’s rules and condo documents very carefully. You want to make sure that your condo will generate acceptable cash flow over time, even accounting for things like vacancy, maintenance costs, and special assessments.
Plenty of investors will see the higher HOA fees and assume condos are worse investments because of the hit to monthly cash flow. But that's thinking short-term compared to what you should be thinking about: The future worth of your property in the long term.
A condo in a building with a stable association that produces a reasonable amount of cash flow can certainly be a good investment in the right circumstances, but it is important to evaluate all of the potential positives and negatives before you decide.