Have you ever considered the idea of buying a luxury condominium as your next investment? Since condos are typically less expensive than a single family home, they can make accessible investments for those with little cash or who are new to real estate investing. However, they sometimes get a bad rap on their investment potential.
Like with most things in real estate investing though, a lot of preparation and attention to detail can enable anyone to make a profit. Here are a few things to consider about condominiums as an investment.
Hard Math Trumps Dumb Luck
The reason why people sometimes end up losing their shirt over a condominium investment, is almost always because they failed to understand the costs involved. Those new to land-lording tend to focus primarily on the rent they can charge, without giving full credence to the costs they will also incur.
Aside from your mortgage costs, you will also have property taxes, insurance, and potentially mortgage insurance, as well as maintenance and repairs. In addition to that, you may also incur advertising costs for finding tenants, legal fees if a tenant needs to be evicted, or the expense of a property management company if this type of work does not sound like your cup of tea.
If after subtracting all of these costs from the rent you believe, based on hard research, that you can charge, you are still making a more attractive return on your investment than you would investing in an index fund, then it generally makes sense to buy.
As an illustration, suppose you find a condo for $55,000 that you can pay cash for. Rent prices for a similar condo are about $750 per month or $9,000 per year, giving you a return (before expenses) of 16.4%. Now let’s discuss expenses. Taxes, insurance, and maintenance and repairs on such a property will typically cost a little less than $2,000.
If the property is vacant, you will not only lose the $750 in rent you charge each month, but will also incur a $250 advertising fee to find a new tenant. Additionally, once every few years or so you could have a bad experience with a tenant or even an act of nature that could cost you anywhere from $1,000 to $5,000 in legal fees and/or repairs.
After subtracting these fees, your net rent is now closer to $5,500 per year, giving you about a 9% return on investment, which is still fairly attractive.
Home Owner’s Associations
Another big expense that many people do not realize about buying condos is that there is typically a home owner’s association to which you will have to pay dues. Commonly referred to as simply an HOA, this organization is responsible for the upkeep of common areas, such as landscaping, parking areas or garages, improvements, and anything else that may affect the value of your investment.
While for some, a condo may be too much of a risk, for the savvy investor, a condominium can be a great way to get your feet wet in real estate investing.