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Buying a condo can be a good investment, especially if it's in an in-demand location and the value of the property increases over time. But like any other financial move, buying a condo comes with potential risks along with the benefits.
A condo is a unit that's part of a larger residential property. It can be either attached to other units or detached, and it can look and feel like a typical apartment or townhouse. But the main difference that sets condos apart—and what can count as both a pro and a con—is that you'll typically pay homeowners association (HOA) fees to help maintain shared amenities. Here's how to decide if buying a condo is the right investment for you.
Do Condos Offer a Good Return on Investment?
To determine the potential return on investment (ROI) of your purchase, first identify how you plan to use the condo. Will you live in it, use it as a short- or long-term rental unit, use it as a vacation home or flip the property to sell for more than you bought it?
If you want to rent it out to earn passive income, you'll need to confirm the rules with the condo association before making the investment. You may not be allowed to rent out your unit to short-term tenants on Airbnb, for example, or at all. That could significantly impact your ability to earn money from the condo.
But let's say you're able to use your condo as a rental. Determine your ROI by finding your likely rental income per month and subtracting your monthly expenses—like HOA fees, insurance and taxes—from that number. Take that net monthly income and multiply it by 12 to find your annual net rental income from the property. Divide your annual net income by the remaining cost of the condo, which will typically mean the amount on your mortgage. That will give you the likely ROI of the investment.
Here's an example: If you stand to earn $1,000 per month in rental income and your monthly expenses are $300, your net rental income would be $8,400 per year. If you have $125,000 left on your mortgage, you'd earn an annual return of 6.7%.
Pros and Cons of Buying a Condo
The pros and cons of buying a condo often depend on how you plan to use it. But in general, here's what you can expect.
- Lower cost: Condos are often cheaper than single-family houses. In January 2022, the median existing condo sold for $297,800, compared with $357,100 for existing single-family homes, according to the National Association of Realtors.
- Additional perks: You may be able to access amenities you couldn't afford as a single-family homeowner, such as a pool or a decked-out gym.
- Less maintenance: HOA fees often cover maintenance and repairs for common areas, meaning you'll spend less time mowing the lawn or repairing lights along the driveway.
- Income: You'll have the potential for cash flow via renting, or a return if you sell the condo in the future.
- Extra fees: HOA fees can be high, cutting into potential net rental income. They depend on the size of your condo and the range of facilities and services offered.
- Limited flexibility: Condo association rules may restrict your ability to rent the property and earn income. The condo association may also prevent you from remodeling your unit.
- Extra steps in the mortgage process: Getting financing may be more complex, as mortgage underwriters evaluate the financial strength of the condo association in addition to you as the buyer.
Should You Buy a Condo?
Your personal financial situation and your future goals will largely determine whether buying a condo makes sense. When comparing a condo to a single-family home, though, a less expensive condo can make homeownership more accessible earlier in your life, opening up the possibility to build equity, have a vacation home or earn rental income.
When considering a condo purchase, get a clear picture of the basics that all homebuyers should look into, plus some condo-specific features. Consider the condo's:
- Location, including its proximity to in-demand amenities like downtown areas, schools, major highways, public transportation and recreation areas.
- Local real estate market and potential resale value.
- In-unit and condo association amenities and common areas.
- Likely rental demand based on the surrounding rental market and trends.
- Potential property taxes.
- Condo association rules, regulations and restrictions.
- Strength of the condo association's finances, which a mortgage lender will look at. This could include how much money the association keeps on hand for maintenance projects, the proportion of owner-occupied vs. renter-occupied units in the complex, and how much of the complex is set aside for amenities vs. living space.
The Bottom Line
Real estate is a worthwhile investment for many because of its potential to help you build equity and wealth if you sell the home down the line. Earning rental income from a condo can be a smart move for those new to real estate investment.
But like any purchase, buying a condo requires extensive forethought and an understanding of the local and national market. Taking on any level of homeownership is only wise when you're ready, and that time frame will vary greatly from person to person.