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Are Condos a Good Investment?

Are Condos a Good Investment?
Jen Smith
Updated August 30, 2021
7 Min Read

When my husband and I bought our home in 2017 I had nothing to compare the deal to. Fast forward four years and I wish I could tell myself to buy four more houses at that price.

With the price of real estate soaring, it’s getting harder and harder to find deals. And for investors who are tight on cash, that means looking into condos.

What is a Condo?

Condo is short for condominium, a single unit within a multi-unit property. It can be one of many units in a shared structure like a high-rise building or several buildings throughout a community. You own your unit, specifically the interior of the unit, and share common areas and amenities with your neighbors. 

Condo communities can have private parks, pools, walking trails, playgrounds, gyms, and more. There’s a lot to consider when trying to decide if a condo is a good investment for you. You’ll definitely want to compare all your rental property options before you sign on any dotted lines.

Condo vs Single Family Home

The big difference between a condo and a house is that a single family residence offers you more privacy. Your tenants don’t share any walls with anyone and your neighbor’s home upkeep only slightly affects your property’s value.

Like a condo, some homes do have an HOA but you can find plenty without one. That means more maintenance for you or the added cost of a property manager but you also don’t worry about a condo association mismanaging funds.

You may want to consider a duplex. If you live on one side and rent out the other, also known as house-hacking, you can get owner-occupied residential financing while still earning income from the rental side.

Condo vs Townhouse

Like a condo, a townhouse is also an attached home owned by an individual. Both can be one or multiple stories but you'll typically only share one or two walls with an adjacent neighbor instead of the possibility of neighbors on all sides, so there’s a bit more privacy.

The biggest difference between the two comes down to ownership and fees. With a townhouse, you own the land and exterior walls of your property just like a single-family. Which means you have total control of the walls, lawn, and roof but it also means you’re financially responsible for them.

Condos tend to be cheaper to buy, since you’re not investing in any land. But you also have to deal with condo association fees to maintain the shared spaces.

Do Condos Appreciate in Value?

Condos have historically been thought to not appreciate as well as other types of residences. But as baby boomers transition out of their single family homes they’re looking for condos. In 2017, Condos actually outpaced single family homes in appreciation.

Is it Better to Invest in a Condo or House?

Deciding to invest in a single-family, townhouse, or condo should first come down to the numbers. If a property cash flows at the rate you’re happy with then it’s a good investment. That said, there are some things to consider with a condo that are unique from single-family homes and will affect how your condo potentially cash flows.

Pros to Investing in a Condo

There are a lot of pros to buying an investment condo, especially if you’re a new investor. Condos tend to be popular among older adults, who aren’t ready for assisted living but don’t want to deal with the upkeep of their single family residence. This makes them great for investors who may want to transition into landlording by purchasing a rental condo for their parents or in-laws.

They can also be popular for buyers who want to be downtown but still want to start building equity through homeownership. You can buy a condo, live in it for several years and rent it out when you’re ready to move into a single family home. There are a lot of logistical pros as well.

Less Maintenance

One of the biggest draws for investors considering a condo is that exterior property maintenance is typically handled for you. Neither you or your tenant will have to worry about lawn maintenance, snow removal, trash collection, exterior wall repair, or roof replacement. Not having to budget for roof replacement is huge for an investor’s bottom line.

More Affordable

It’s typically less expensive to buy a condo in a given market than it is to buy a comparable single family home or townhouse. Which is great for new investors with less cash upfront. You will however need to factor HOA and/ or condo fees into your calculations when pricing your rental.

Amenities

Another big benefit of owning a condo is the shared amenities in the condo community. There’s typically a club room, area for grilling, pool, fitness room, and more. These amenities can make your condo attractive to potential renters who want the amenities of an apartment but the custom features of a single-family home.

Customization

A less discussed benefit of condo ownership is that you can customize the interior of the condo to your liking. While apartments tend to have industrial and builder-grade features you can add unique features that make your condo stand out to potential renters and even command a higher rental price. 

Note that while you can make changes you don’t have free reign in your design, you will have to get permission from the condo association to make alterations to the unit.

Cons to Investing in a Condo

While the pros are great, there are just as many cons you’ll need to consider before you purchase an investment condo. These cons really come down to the deal. If you can get a great deal on a condo that will cash flow well then it may be worth dealing with the cons and factoring them into your calculations.

If margins are thin then any of these could be a deal-breaker in your decision to invest.

Condo Fees & Special Assessments

Fluctuating condo fees and special assessments are the biggest risks investors take when investing in a condo. Condo fees go toward the upkeep of the property and typically increase every few years with inflation. If you’re unlucky, you’ll also get hit with a special assessment.

A special assessment is an additional fee for a special project like repaving the parking lot or unexpected roof repair. These can be costly, especially if you’re renting without much margin. You’ll need to budget for increasing fees and special assessments from the beginning to keep your property cash-flowing.

Financing

While condos offer a lower price point and less maintenance than a single family home, the biggest difference investors should be aware of when it comes to buying a condo vs single family home is financing. The regulations around lending make condos complicated to buy, especially for someone new to real estate investing.

For investors who plan to put down less than 25%, the condo association needs to meet Fannie Mae guidelines in order for conventional lenders to approve a loan. And if you’re looking to get a Federal Housing Administration (FHA) loan, the entire condominium complex or development can only have up to 25% to 50% non-occupant owned units.

Risk of Mismanagement

Typically, a group of investors owns the condo buildings and a third-party property management company collects condo fees and manages the community. Condos are governed by an association board, often including community condo owners who volunteer or get elected. It’s this association who decides where the money should go and there’s a risk the association could mismanage funds for their own benefit.

If the association mismanages funds the common grounds can decline which can drive away quality tenants making it harder to cash flow. In the end mismanagement will leave you with lower property values, less appreciation, and expensive special assessments to clean up the mess.

You can alleviate the risk of investing in a mismanaged condo by reviewing copies of the association’s financial reports looking at the history of fees, the rate at which they increase, and special assessments.

Condo Rules

Strict rules can be a pro and a con to investing in condos. These rules help preserve the aesthetic integrity of the community but they can also make renting them more difficult.

First, not all condos can be leased. Condo association bylaws often state that only a percentage of owners can rent out their unit. You also have to be aware of community restrictions. Many condo communities are 55+ making your pool of renters extremely limited and it may take you longer to sell later.

Condo associations also have the power to pause move-ins and move-outs from the community, close amenities, and change rules as they see fit. These instances are rare but it’s important to read your condo’s governing documents so you know what power you have, or don’t have, as an owner.

Neighbors 

When you buy a condo you own the interior of the unit and everything outside of that is shared. Your unit can have neighbors above, below, and on either side. And for the most part they won’t be renters who might move out in a year or two, they most likely own the unit. If you have a neighbor who’s not favorable to renters you could experience high tenant turnover and vacancies. 

You may also have to deal with grievances which could take up time and energy. If a water leak or other type of damage from one unit ends up affecting your unit you may be stuck with the repair costs with no help from the condo association or compensation from the neighbor.

How to Invest in Condominiums

Before you invest in a condo you need to make sure the math works. Estimate the annual rent you expect to get and subtract the ongoing expenses you’ll incur including the mortgage, taxes, insurance, condo fees, etc. Then estimate one time expenses like renovations, legal fees (for tenants or neighbors) and potential special assessments and expense them across several years.

If you’re satisfied with the numbers then you’ll need to make sure the condo association will allow you to rent the condo and you can get financing if you need it.

Investing in real estate is a great way to diversify your portfolio and protect your wealth from taxes and inflation. If a condo investment works for you financially and otherwise then consider it a great investment. Just don’t be fooled by the low price and advertised amenities. Do your research and make your investment decisions wisely.

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