Many investors are wondering “Is buying a condo a good investment?” Although this may seem like a straightforward question, it is difficult to answer without knowing more details about the specific investment property of interest. Any potential income generating asset may turn out successful or unprofitable.
Besides the property itself, this all depends on several factors. The most important are your financial capabilities, market forecasts, and your willingness to invest time and effort into the property.
So, are condos a good investment? Here are 7 things you need to consider to find the right answer.
Rising Interest Rates
Before buying a rental property, you need to know all you can about financing the purchase. The Federal Reserve will raise interest rates for the US housing market once again. However, the rise in interest rates will not be as dramatic as the rise in 2018.
Factor in the increasing interest rates into your financial plan before purchasing the income property so that you are able to make a smart and financially beneficial investment. If your financial plan including the rise in the interest rate still gives you positive cash flow, then the answer to the question “Is buying a condo a good investment” is one step closer to “yes.”
Related: Invest in Real Estate Now as Investment Property Mortgage Rates Are Rising
Condominium Association Restrictions
When you are buying a condo for investment purposes, you need to think about the limits of using this rental property. Condo associations have a lot of power and may limit your condo investment strategy significantly.
Often times, condos are found in upscale areas or vacation destinations making them great Airbnb properties. However, since your condo will technically be part of a shared space with the other owners, you are not free to do as you please with the investment property. This means condos for rent may be used only in restricted ways. If you are thinking of renting out your condo in unconventional means rather than a traditional rental, think again. This is just one example of condo restrictions but it might make you wonder “is buying a condo a good investment?” once again.
Affordability
Although mortgage rates are rising again this year, buying a condo to rent out remains the more affordable option when compared to single-family real estate investment properties. Condos will be quite a bit cheaper to buy.
This is important because you’re likely to face vacancy when you first gain ownership of the property. You won’t be making any rental income to cover your mortgage payments until you manage to find a tenant. If the mortgage rate is affordable, however, it means you can handle paying it off from your pocket in case the property takes a couple of months before being rented out.
However, is buying a condo a good investment just because of its affordability? Of course not! You need to think about the investment property as a whole and not just one factor when making a decision. For example, although priced lower than single-family investment properties, it can be a little more difficult to get approval for mortgage loans for condos.
Property Appreciation
The question “Is buying a condo a good investment?” becomes harder to answer when we think of the resale value. Condos appreciate in value very slowly when compared to single-family rental properties, which is one of the reasons that condos are cheaper. While single-family properties usually appreciate significantly within a few years from the purchase date, this is not the case for condos. If you are thinking about buying and holding your investment property to sell for a significant profit, condos may not be your best bet.
Related: How to Force Appreciation on Your Income Property
US Homeownership Rate
Homeownership rates in the United States have been relatively stable for the last fifty years. However, recently they have hit an all-time low. On top of that, most homeownership takes place in rural and suburban areas. This means that there are more renters looking for condos and apartments in the city.
Many believe the shift in lower homeownership is due to the cultural shift in the United States. Baby boomers and millennials alike are choosing to rent rather than own their homes. Elderly people are selling their single-family properties and moving to smaller and more practical condos and apartments. Millennials, on the other hand, are choosing to focus on careers and other life events rather than marriage and settling down, which puts homeownership low on their list of priorities.
This is great news for you! You will have a wider pool of potential tenants for your condo income property. Once again, the answer to the question “Is buying a condo a good investment?” is closer to “yes.”
Tax Deductions
Another factor to consider is the ability to deduct expenses related to this type of real estate investment property. It is logical to think that repairs and any expenses paid towards a rental property are tax deductible. However, this is not quite the case for condos.
When owning a condo, you are only responsible for the repairs done to your own unit, making these expenses tax deductible. However, any condo fees you pay to the condo association are not deductible for tax purposes. The condo association uses condo fees to maintain and repair common areas within the building.
Location of the Condo Investment
Condos are often located in very safe areas of the city. On top of that, there are usually a lot of amenities within close proximity of the buildings. This will make it easier to advertise the rental property to potential tenants as it immediately becomes more appealing.
Related: 15 Best Places to Buy a Condo for Investment in the US
The Condo Investment Property
Before you start looking for investment properties, stop thinking: Is a condo a good rental investment? Instead, start thinking whether the specific condo you are interested in is a good investment. It needs to provide a good ROI, period.
To ensure you find such a property when you begin investing, use an investment property calculator. Property calculators, like the one offered by Mashvisor, use real estate investment analysis to calculate all relevant margins for you before you buy. This will let you know what expenses, income, and ROI you can expect from your investment property to give you the best real estate investments. To learn more about how Mashvisor will help you make faster and smarter real estate investment decisions, click here.
After weighing all of the previous points, you should have your answer. So, is buying a condo a good investment for you this year? If so, start looking for one right now. Click here to get started.