Are Condos a Good Real Estate Investment or Are Single-Family Houses Better?
It’s easy to see the appeal of buying a condo as an investment rental property. First and foremost, they tend to be cheaper. You can usually get a condo for less out-of-pocket than a single-family house in the same neighborhood.
Condos can be a good investment. At MartelTurnkey we tend to think it’s hard to go wrong with real estate of any kind as long as you prioritize location and manage your risk.
There are, however, some crucial downsides you need to keep in mind. Here’s what to be aware of as you consider investing in condos:
Condos Don’t Appreciate As Quickly
Yes, you can get into a condo for less out-of-pocket than a single-family hom, but you may end up having to settle for less appreciation. If a big part of your investment strategy involves selling or refinancing your property for a profit or capital recapture, condos may not be the ideal vehicle.
Conversely, if cash flow is your first priority and not long-term appreciation, a condo can get you there if you run the numbers and manage your risk. As an added bonus, appreciating less precipitously means they don’t have as far to fall in a downturn, so if you want to limit your volatility, condos may actually be a good choice.
There Are Exceptions
There are circumstances where a condo will appreciate explosively. Remember, the three most important factors in real estate value are location, location, and location. A condo in a location that catches fire with popularity is likely to skyrocket in value right along with the nearby houses — tenant demand is just that strong. Condos in popular urban infill areas will always be in demand, especially in historic, entertainment, and nightlife districts.
Watch Out for Houses that are Functionally Obsolete
You may be tempted to go with any single-family house if you want appreciation … but be careful. Houses appreciate quickly because they cater to investors and homeowners alike, but you will find minimal homeowner demand for houses that are functionally obsolete.
A house is functionally obsolete when it lacks certain features that the market has come to expect. Examples include a 3bedroom-1bathroom house — most homeowners expect at least two bathrooms. Another example might be an older house that has no dishwasher hookups.
A functionally obsolete house in a great location might make a fantastic rental — tenants might be so eager to live in that area that they will compromise on an out-of-date house. Sometimes, functional obsolescence can be cured. However, a condo has little advantage over a functionally-obsolete house.
You May Face Higher Vacancy
This isn’t a guarantee, but condo renters tend to be single people, while a single-family house is more likely to attract a family as a renter. Single people tend to move more often than families which means you will have to deal with more vacancy.
This isn’t a guarantee, though. The family you rent a house to may transition to homeownership or simply move on to a shiny new rental. But it’s something to be aware of when calculating your cash flow potential on a condo.
Condos Have Associations and Dues
Condos are usually part of condominium associations, basically a homeowner’s association (HOA) for the entire building. The association has the right to collect regular dues and place restrictions on its owner-members.
This might get onerous. The association may demand to screen your tenants themselves. They could fine you for your tenants’ behavior. Some condos will not allow you to rent out your property at all. Condo associations are also notoriously insolvent. If the roof needs repair, or they decide to upgrade the gym (whether you use it or not), they may assess a special and unexpected fee, and threaten you with foreclosure if you don’t pay it.
Of course, with a single-family house, you’re on the hook for repairs also, but you are in control. You get to decide when to do the repairs and how much you want to pay. Single-family houses can also be located within HOAs and have all the same downsides. But in general, the condo association is going to be a source of headaches and cash flow uncertainty. Beware.
Condos can be a good investment, but there are several pitfalls to be aware of. The majority of our inventory at MartelTurnkey is single-family homes in desirable neighborhoods. They are usually not the most expensive property on the block which means they have a lot of headroom and excellent investment potential.
Best of all, they come newly renovated, under management, with a tenant already in place! Call us today to find out how easy it is to make one of these cash-flowing properties yours!