Condominiums have been attractive to savvy investors for the last couple of decades. Those who were fortunate enough to invest early may own a unit that is twice as valuable as it was when they originally purchased it. But is it still worth it to buy a condo as an investment property today? We’ll tackle this question and examine the variables that make condominiums more valuable to renters.
Why do people invest in condos?
Single-family homes have proven to be the most valuable investments. They are the most desirable, and there is often a limited supply. You don’t have to be great at math to understand how those two factors drive up the price of standalone homes. But since supply is low, it can become difficult to secure a home.
Alternatively, condos are more abundant and affordable. Condo buildings consist of dozens (if not hundreds) of units; developers can create more housing in less time when the homes are in such close proximity to each other. Condos are also more affordable, making them a bit more accessible. In some instances, it may also be easier to find tenants to rent out a condo. With a big home, you’ll want to target a family or perhaps multiple college-aged students. But you can rent a condo out to one individual, a couple, roommates, or a small family.
You are likely to get a return on your investment
While nothing is guaranteed and no one knows what the real estate market will look like in the future, condo investors are very likely to see a return on their investment. That being said, passive income (the money you make from renting the condo to a tenant) may be less than you had hoped it would be. One must assess the demand for this type of housing, and look at how much rent and sale costs have increased or decreased over the past five to ten years.
Rent has increased, but so has the cost of living
In most states and provinces, both rent and home prices have spiked since the last year. Condo sales cooled during the worst of the pandemic as people prioritized space over convenience. However, people have now returned to the office, they’re participating in hobbies and clubs, and dining out again. Since they’re no longer home all of the time, condos have become attractive again.
According to Redfin data, the “average condo” price spiked to $319,000 in February 2022, an increase of 14.6% from the previous year. Condos are currently in high demand in part because they are more affordable than houses. Convenience is another big factor.
Rent has also spiked – but landlords aren’t exactly lining their pockets with money. Bloomberg reported that the consumer price index rose 9.1% from July 2021, the largest gain since the end of 1981. Still, renters are in a less favorable position than owners since they cannot usually choose how long their lease will last.
In Canada, the average rent was estimated to be $1,885 per month in June of 2022. Believe it or not, the average rent price was higher during the same time in 2019 ($1,953), but it dipped in 2022 and 2021. Most experts believe that rent will continue upwards due to the increased cost of living and short supply of affordable housing.
Factors to consider before investing in a condo
Not all condo units are the same. If you’re planning to purchase and rent out your condo, make sure to do your research. It’s not just about the quality of the unit; consider the financial health of the corporation or association, the condo rules and bylaws, and what kind of neighborhood the condo is located in.
Condo rules
All corporations and associations have rules, but those rules can vary drastically from one community to the next. To minimize issues associated with short-term rentals, some condo buildings may have created rules that prohibit owners from renting out their units. In other cases, there may be a minimum rental period owners must abide by (ex. leases cannot be shorter than 6 months). Be aware that there are also a few states and cities that have imposed their own short-term rental rules. Local and state laws supersede rules created by condos.
Location
The location of the building will determine how much you can charge for rent. If you purchase a less expensive unit near the outskirts of a major city, don’t expect to set a premium price for rent. Conversely, if your unit is across the street from transit, restaurants and retail, you will be able to charge tenants more.
Do a bit of digging to see if there are any new development plans that have been or may be approved. While there is a clear view of greenspace from your balcony today, a new condo might block that view. It could also lower the appeal of your condo.
Fees and condo finances
One big downside to purchasing a condo unit over a home is that condo owners must pay fees. While some single-family homes belong to HOAs, all condo units are part of a corporation or association. Associations require owners to pay fees so that they can maintain the value and functionality of the community. Depending on where you live, these fees can be $400+ each month. You will have to factor in monthly fees when trying to figure out how much to charge for rent.
Furthermore, owners may be asked to pay a special assessment. This is a one-time fee that is issued to owners when a major unexpected repair must be completed right away. Depending on the issue, a special assessment could cost each owner hundreds of dollars that they weren’t planning to spend.
Make sure you get financials from the condo first, and ask about any upcoming special assessments.
Do the math
It sounds obvious, but take the time to calculate how much the condo will cost you each year, and how much you’ll need to charge in order to see a profit on your investment. Make sure that you will still be able to support yourself financially if you are unable to find a tenant for a month or two. If the market is cool, the unit might sit vacant for a bit.
Let’s use some real numbers to get a better idea of how much it will cost an investor who is planning to rent out their condo.
- Cost to purchase a condo: $250,000 (yes, this is much less than most owners will have to pay today)
- Monthly mortgage: $857, which works out to $10,284 per year. This is assuming you put 20% down and obtained a rate of about 3%
- Homeowners insurance: $600 per year
- Property taxes: $2,100 per year
- Condo fees: $200 a month or $2,400 per year
Based on the sale price of the unit, a reasonable landlord would set rent at around $1,350 a month. That works out to $16,200 for the year. But deduct the annual costs, and you’re left with $816 for the year.
As we said before, that’s probably less than most people think landlords earn. But there are also repairs and vacancies to consider. Issues like these reduce that ROI, and may make some reconsider this big investment.
Conclusion
Condos are still a good investment in 2023. But, opportunists must take the time to crunch the numbers and ask themselves how much they really expect to earn each year. For some, the ultimate goal is to eventually resell when the unit has increased in value. If that’s the case, then purchasing a condo is a relatively safe bet. But if you’re focused on generating more revenue right away, you may want to explore other options.