Explore your mortgage options
If you’re looking to make a real estate investment, a condominium (aka condo) can be a great way to test the waters.
Before you start investing, it’s a good idea to know:
- How condo ownership works
- How to use them as investment properties
- The pros and cons of buying a condo as an investment property
- The questions you’ll need to ask before you commit
Read on to learn more about investing in condos.
What Is a Condo?
A condo is a privately owned apartment or unit within a residential building or community. All condo owners share in the ownership of the common areas and share in the financial responsibility of the property.
Condos can come in different styles and take different forms, ranging from apartment towers in major cities to attached or semi-detached townhomes to detached houses in a condominium community.
You can find condos anywhere, but they’re popular in major cities and vacation hotspots where property values are high and available land is at a premium.
Who Owns the Condo?
Ownership is shared between the condo owners and the condo association.
The owner (that’s you)
When you buy a condo, you take out a mortgage and buy a unit within the complex or community. As a homeowner, you can build equity, and you have the right to sell or rent the unit as long as you adhere to your condo association’s rules.
The condo association
Everything outside the unit is owned and managed by a condo association, which is sometimes referred to as a homeowners association (HOA). As an owner, you are entitled to have a say in how the building is managed, and you’re expected to pay for a share of the maintenance and operating expenses.
The condo association sets rules and restrictions for the building or condo community. This can affect everything from when you’re allowed to blast your music to when and to whom you sell or rent your unit.
Is a Condo a Good Investment?
Anyone can buy a condo, but condo living tends to be an attractive option for first-time home buyers, older adults who are looking to downsize and home buyers interested in a second home or a vacation property.
If you can find the right property, it could be a great way to build equity and earn a little extra money at the same time. Because condos tend to be less expensive than single-family homes, it’s a good way to test the waters as a real estate investor.
Let’s say you find a condo that costs $300,000, and you make a 20% down payment of $60,000. That leaves you with $240,000 to finance. In the end, you get a $240,000 30-year fixed-rate mortgage at 4% interest.
Your monthly mortgage payment would be $1,146.
Of course, there’s more to it than that. You’d have to cover expenses like property taxes, insurance and condo fees. Here’s an example breaking down what these expenses could be:
- Mortgage payments (principal and interest only): $1,146
- Property tax escrow payment: $200
- Insurance escrow payment: $100
- Condo association monthly fee: $200
That leaves you with a total of $1,646 in expenses a month.
Let’s say you can rent the unit for $2,000 a month. That’s $354 a month extra or $4,248 in profit a year. If you keep the rental rate the same, you’ll recoup your $60,000 down payment in 15 years while continuing to collect enough rent to cover your monthly mortgage payments.
But here’s where it gets interesting. Average rental rates in most areas tend to go up over time, which means, as an owner, you have the option to raise the rent to stay competitive in the current market. Meanwhile, your fixed-rate mortgage means your mortgage payments stay the same, letting you bring in more rental income over time.
That’s even more money to cover your mortgage, pay off your down payment faster and even pay yourself.
If you get a condo in an area where the prices of homes are going up, the value of your condo will likely go up, increasing your equity and how much profit you’ll make if you choose to sell.
Keep in mind that you’ll have to save for general maintenance that is required upkeep with any property. Think: upgrading/repairing appliances, replacing carpet, putting on fresh paint and more. You should consider this, along with comparable rental prices in the area, when setting your rent.
What Are the Pros of Investing in a Condo?
Easier to buy
Because they’re made up of multiple units in a larger community, condo prices are usually lower than single-family home prices in the same area.
A November 2021 report from The National Association of REALTORS® found that the median price of a single-family home was $362,600 while the median price of a condo unit was $283,200. The median price of condos was $79,400 less, representing a 21% difference in price.
More attractive for renters
More and more Americans are moving away from rural areas, and they’re headed to cities and suburbs. That’s led to a growing demand for urban housing.
Assuming your condo is in a popular area, your property should appreciate (gain value over time), and you shouldn’t have much trouble finding tenants. That means you’re less likely to experience gaps between renters – and higher demand can command higher rent.
Maintenance and amenities included
When you buy a condo, the condo association is responsible for:
- Maintaining the common areas
- Making repairs and improvements
- Hiring building staff (think: cleaners, landscapers and security)
- Offering amenities like a fitness center, conference rooms, etc.
The only maintenance issues you’ll have to deal with are the ones that crop up in your unit. This makes a condo easier to maintain and can also make it more attractive to potential tenants.
What Are the Cons of Investing in a Condo?
Condo association restrictions
Condo associations are great because they handle a lot of the administrative and maintenance issues for the property. They also set the rules about everything from quiet hours to when and how you or your tenants can use the facilities.
They can also decide how many units you can buy and whether you’re allowed to use your unit as a rental property. Before you buy, make sure you review all the condo association’s rules on how owners can use their unit.
Association fees and special assessments
When you own a condo, you pay a monthly fee to the condo association. You can deduct association fees on your tax returns, but they won’t help you build equity in your condo.
Like any property, a condo may require repairs or improvements. If the repairs or improvements fall outside the normal maintenance covered by association fees, the condo association may ask owners to pay a special assessment to cover the costs.
As a condo member, you have the right to tell the association whether you’ll pay the extra cost or not, but if most of the condo association votes in favor of the assessment, you’ll need to pay up. You may be making a lump-sum payment or you may see an increase in your monthly payment.
If you’re wondering if condos appreciate, the answer is yes. However, condos tend to appreciate at a slower pace than single-family homes in the same area.
For example, from 2020 – 2021, the median sales price for a single-family home rose by 14.9% while the median sales price of a condo only increased by 4.4%.
Because condos tend to appreciate slower, you may need to hold on to them longer to sell them at a profit.
More lender restrictions
Lenders tend to charge more in interest and have higher down payment requirements for condos than they do for single-family homes. Condos are seen as a higher risk for lenders because the finances for your condo depend on you and your condo association.
Lenders also need to meet Fannie Mae and Freddie Mac lending standards, which limits loans if condos don’t meet certain vacancy and occupancy rate requirements.
When you buy a property as an investment and not a primary residence, lenders usually charge higher interest rates and require larger down payments. Be financially prepared to meet these requirements if you decide to buy a condo as an investment property.
Fewer government loans are available
Both loan types require that any condo purchased with an FHA or VA loan be on their list of approved condos, which means your options may be limited depending on where you live and what’s approved by the FHA or VA.
What To Look For in an Investment Condo
When you’re thinking about buying a condo, it’s important to research the specific building, community or area where you want to buy. Here are some questions to consider:
- Is the property located in an attractive area with a high demand for rental units?
- If other units in the condo are rentals, how much are they charging for rent? Is it the average rental rate for the area?
- What amenities does the condo offer that may attract potential tenants?
- Does the building allow for renters or require that all or some of its units are owner occupied?
- What do the condo’s finances look like? Do they have a reputable management company and sufficient cash reserves to handle emergencies?
With this key information in hand, you’ll be able to make an informed decision about buying a condo as an investment property.
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The Short Version
- A condo is a privately owned unit in a building or community where ownership of the common areas and financial management is handled by a condo association
- Buying a condo as an investment property can be a good choice for first-time investors, but it comes with unique challenges
- Before buying a condo as an investment, make sure you know the details of the condo association’s financial health
National Association of REALTORS®. “November 2021 Existing Home Sales Increase for Third Consecutive Month.” Retrieved January 2021 from https://cdn.nar.realtor/sites/default/files/documents/ehs-11-2021-breakouts-of-single-family-condo-and-co-op-2021-12-22.pdf
The Pew Charitable Trusts. “Shrinking Rural America Faces State Power Struggle.” Retrieved December 2021 from https://www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2021/08/10/shrinking-rural-america-faces-state-power-struggle
Fannie Mae. “B4-2.1-01, General Information on Project Standards (12/15/2021).” Retrieved December 2021 from https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B4-Underwriting-Property/Chapter-B4-2-Project-Standards/Section-B4-2-1-General-Project-Standards/1032996351/B4-2-1-01-General-Information-on-Project-Standards-04-07-2021.htm#Fannie.20Mae.E2.80.99s.20Project.20Risk.20Overview
U.S. Department of Housing and Urban Development. “Condominiums.” Retrieved December 2021 from https://entp.hud.gov/idapp/html/condlook.cfm
U.S. Department of Veterans Affairs. “Request a Customized Condo Report.” Retrieved December 2021 from https://lgy.va.gov/lgyhub/condo-report