Investing in rental property is one of the best strategies for generating passive income and building wealth. You can invest in a wide range of properties including condos, single family homes, multi family homes, and apartments.
In this article, we will explore the pros and cons of investing in a condo, as well as tips for condominium conversions.
Condominium definition
What is a condominium?
A condo is basically an individual residential unit within a larger community or building. It could be a single unit within a high-rise or even a multi-story townhouse. Just like an apartment, a condo can be rented out to tenants. However, the difference between apartments and condos is ownership. While apartment complexes are owned by one investor, condo units are individually owned. In addition, condo owners share common amenities like yards, gyms, and pools.
How much do condominiums cost?
A recent survey looked at the average condominium pricing in several major cities in America. Here are the findings:
- Average condo price in the New York real estate market: $1.68 million
- Average condo price in the Los Angeles real estate market: $529,000
- Average condo price in the Chicago real estate market: $340,000
- Average condo price in the Houston real estate market: $200,000
- Average condo price in the Philadelphia real estate market: $337,000
Are condos a good investment?
Just like any other real estate investment, condos come with their own benefits and downsides:
Pros of condominium investing
- No external maintenance needed: One of the major advantages of condo ownership is that you don’t have to worry about exterior property maintenance. The homeowner’s association (HOA) takes care of tasks like mowing the lawn, cleaning gutters, trimming hedges, and shoveling snow.
- Affordability: Mashvisor’s analysis of nationwide real estate data shows that, generally, it is cheaper to buy a condo than a townhouse or single family property with similar features. This makes condos an ideal investment for real estate investors that are starting out
- Amenities: Owning a condo means having access to community amenities like a pool, rooftop deck, meeting room, club room, and even security and concierge services. Such amenities make it easier to attract and retain traditional tenants and Airbnb guests.
- Condo rules: Owners of property in a condo community are required to adhere to specific rules. For instance, some condo associations don’t allow owners to change the architectural design or structure of condominium buildings. Others prohibit residents from engaging in activities that disturb the peace and comfort of their neighbors. Such rules make condominium developments attractive and maintains home values.
Cons of investing in condominium
- High condo association fees: Condos usually have a homeowner’s association that charges a monthly fee for routine maintenance of common areas. There might also be a one-off ‘special assessment’ fee for specific projects like repaving the parking lot. The monthly HOA fees can be as high as $700, thus eating significantly into your profits – both cap rate and cash on cash return – as a real estate investor.
- Financial mismanagement risk: Condos are managed by an association board and a few selected condo owners. Despite the laid down rules, there is still a risk that the HOA could mismanage finances and even become insolvent.
- Property mismanagement potential: If the condo association is lax about maintaining common amenities, it might drive away tenants and result in property depreciation.
- More difficult selling: Generally, there are fewer buyers for condos than for single family homes. When you decide to sell, your investment property might remain in the market for a longer time.
- Restrictive condo rules: Some condo associations limit the length of lease, the number of occupants, and even the type of rental strategy (Airbnb vs renting on a long term basis). For example, some associations don’t allow Airbnb guests. This can severely limit your freedoms as a real estate investor.
Let us now look at the condominium conversion meaning and steps:
Condominium conversion definition
Condo conversions simply refers to the process of transforming existing apartment units to condominiums. This means that each unit of the apartment is converted to an individually owned property.
So, how do you convert a rental apartment building into a condo building?
Conversion in real estate is a complex process. With all the federal, state, and local regulations, it can be very confusing.
Here are the steps for a successful condos conversion:
- Buy an apartment building: If you don’t already own one, you will need to find an apartment building for sale. You can find an apartments complex for sale on real estate websites, newspaper ads, or by word-of-mouth. However, the best place to find such properties is on the Mashvisor online marketplace. On this real estate software platform, you will find a wide range of MLS listings as well as off market properties including short sales, foreclosures, and bank owned homes. You can search for small apartment buildings for sale in your preferred market and within your price range.
- Notify the tenants: Once you begin the process of converting a rental apartment into a condo complex, the law requires you to notify any current tenants. They can then either choose to move out or buy a unit. However, the law says that you cannot evict tenants for at least one year (or two years if disabled or elderly).
- Consult an attorney: Find an experienced attorney that understands how condominium conversions work. The attorney will advise you on the laws related to conversion and the procedure you need to follow. Ask them to check up your property on the registry to find out if it qualifies for conversion to condos.
- Get as-built drawings: Ask a qualified engineer to complete as-built drawings for both the exterior and the interior of the property.
- Get approval from the municipality: Condominium conversions should be compliant with the Subdivision Map Act. You will need to submit your subdivision map to the municipality for approval.
- Prepare a master deed: When converting to condos, a master deed must be created and recorded with the relevant government office. This deed will indicate the division of the rental into separate units, as well as show where the common areas will be. Any restrictions to the use of the home are also mentioned.
- Draft condo management documents: Before registering a condo association, you will need to draft a condo declaration of covenants, conditions and restrictions and reservations of easements (CC&Rs). This will include the condominium description and constitution.
- Register your condo association: The next step of condominium conversions is registering your condo association at the local registry of deeds office. You will be required to submit your declaration and even pay condo conversion tax (depending on your location). Once this is done, you can then start selling your condos as separate units.
Pros and cons of condominium conversions
Advantages of condo converting
- Easiness to sell condominium units: Getting a buyer for an apartment complex is not easy. Converting your property into condos makes it more affordable, especially for first-time buyers interested in buying condo.
- Flexibility: Since each condo is a separate unit, it can be sold or financed individually.
- Potential tax savings: Rental apartments usually have a higher assessment value. Converting them to condos, therefore, allows you to enjoy tax savings.
Disadvantages of converting condominiums
- Professional fees: Condominium conversions require different professionals such as a realtor, a lawyer, a surveyor, an accountant, a tax consultant, and an engineer. The conversion costs paid for all these services can end up being very high.
- Duration: The process of condominium conversions can be very lengthy and could take up to two years before it is fully completed.
- Vacating the property: With the laws protecting tenants, evicting existing residents might take a long time. You might even be required to pay their relocation costs.
- Holding costs: The longer tenants take to move out, the greater the holding costs. Holding costs includes utilities, taxes, condo insurance, and debt service.
Conclusion
The process of condominium conversions can be very lengthy and expensive. And there is no guarantee that your application will be approved. Before you begin the process of condominium conversions, be sure to do your due diligence on what is required. In addition, you need to consult relevant professionals early enough in your journey.
To start looking for small multifamily for sale to convert into condos, sign up for Mashvisor now.