Are Condos Good Investments?

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Posted: June 28, 2018 by Anna Jotham

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When you’re ready to invest, you may consider purchasing a condominium as an investment. But are condos a good investment? Let’s take a closer look.

 

Factors that may or may not make a condo a good investment

There are a number of factors that contribute to whether a condo is a good investment. In addition to considering the sale price of the condo, you’ll also want to take into consideration the other costs associated with owning and managing a condo, and you’ll want to know specifically what those costs and potential sources of income are, so you can determine your potential return on your investment, if any. Here are some of the items you’ll want to add up.

 

Does the condo association allow rentals

Your ability to rent out your condo is key to whether your investment will pay out. Several condo associations only allow for owner-occupied units, so renting one out may not be an option. This is common and explains why investment condos are few and far between. Most investment condos are otherwise known as apartments, and the landlord happens to own the entire multi-unit property.

 

Potential sources of income from a condo investment

Before you start adding up the potential income from your investment condo, it’s essential to take a step back and ask yourself a few questions. First, is the condo located in a desirable neighborhood for renters, and is it likely to be in demand? Is the area changing and becoming less desirable, for whatever reasons? Is another development coming in that will compete with the building your condo is located in, requiring further investments into the property? Is a major business or employer closing, which could drive down potential rents? These are all risks you must weigh and measure as a potential investor. If it all checks out, then you’ll want to consider your potential income from the property. That includes:

1.            The annual rent you could potentially earn on the space.
2.            Any other income from the property that you could realize.
3.            Potential appreciation of the value of the property.

Let’s say you know your property will likely pull in $1,000 per month in rent, or $12,000 per year. Now, it’s time to factor in potential expenses.

 

Potential expenses associated with a condo as an investment.

You’ll find a multitude of potential and likely expenses associated with owning a condo as an investment property. Here are a number of items you’ll want to add up to determine your possible ROI.

1.       Maintenance, upgrades or repairs. See that new multi-family housing unit going in down the street? It looks good, with its modern touches and desirable amenities. That can drive up your costs as you try to compete. Be realistic about the necessary maintenance, upgrades and repairs that will need to be done (regardless of whether a competing property is adding pressure). Factor in what these projected costs will be on a yearly basis. Don’t forget to add in potential repairs necessary if a tenant causes damage to the condo—a frequent issue for landlords.
2.       Marketing and advertising. How will you find tenants for your property? Advertising and marketing cost money, especially when you want to effectively reach specific target audiences. Consider how much you’re going to have to invest to fill that unit.
3.       Legal fees and other costs associated with eviction. Unfortunately, landlords sometimes have to evict a tenant, and that, of course, necessitates legal action. Know what those costs are likely to be upfront.
4.       Condo association fees and assessments. Most condos charge fees to help with the expenses associated with care for common areas. So you could have some expenses coming your way for repair to the parking areas or the landscaping. Know what these expenses are likely to be on a yearly basis.
5.       Costs associated with financing. If you aren’t paying cash for the condo, you’ll want to factor in any financing costs, such as interest, as well as your monthly payment on any loan.
   
   
   Final steps: income, expenses, and your potential cash flow
   
   Now, add it all up and determine what your average annual expenses associated with the condo will be. With simple math, you can determine after expenses, how much you are likely to earn on your investment, every year, and whether the positive cash flow makes a condo a wise investment for you.
   

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