Buying a Condo as an Investment Property

Condos make good investment properties for a number of reasons, from more competitive pricing than comparable single-family homes to an easy lock and leave set up. However, there are some drawbacks, too, especially if you’re looking to use it as an Airbnb or other temporary rental.

Ultimately, condos make excellent investments when everything from the buyer’s desires to the unit, the building, and the location all align. If you’re looking to invest in a condo, there are a few things to consider before you sign on the dotted line.

Consider all the variables

Everything from cost to location impacts whether or not a certain condo is a good investment idea. Some are in gated communities with extra security (and extra hurdles for temporary guests). Some buildings are more exclusive and secluded while others are centrally located in a dense urban area.

While the cost of a condo is generally lower than a comparable single-family home, the financing situation can be more difficult to untangle. It can be harder to get a mortgage for a condo than a single-family home because many financial institutions come with their own requirements such as a certain percentage of the building being owner-occupied. Many banks will also consider whether or not a building’s HOA is involved in any ongoing litigation.

Despite these additional hurdles, many elements make condos superior investment properties. First, they’re lower maintenance than a stand-alone home. Condos don’t require yard work and many buildings have repair personnel on staff (even though repair costs within your unit are often your responsibility, at least cost-wise).

While HOA fees can add to the cost, they generally cover expenses that you’d be paying on your own in a single-family home. Some HOA fees cover garbage collection, water, building insurance, and even cable!

Finally, there’s the location element to consider. Especially when it comes to buildings in exclusive locales or urban areas, they often offer the option to live in a place that’s otherwise sparse when it comes to other residential options. Even though condos tend to appreciate slower than other types of residential real estate, they do tend to trend upwards and, depending on location, they can go for a premium over time as their location grows in popularity.

Ensure that all parties involved are aligned

When you select a condo as an investment property rather than, say, a single-family home or an apartment that you can hand off to a management company, the impacted parties go beyond just you and your bank account.

Almost all condos come with homeowners associations (HOAs). These entities, usually made up of a group of fellow owners, typically require that each resident pay HOA fees to collectively cover the costs of repairs and maintenance to the building. Not only do you need to factor these costs in when you run the numbers on your investment (more on that below), you have to ensure that the building rules set by the HOA allow for the uses that you want out of your investment property.

Short-term rentals can be difficult

Some HOAs ban temporary or short-term rentals like Airbnb. Others ensure that only a certain percentage of the building’s units can be rented out or otherwise lived in by anyone but the owner at any given time.

Then, there are local ordinances to consider as well. After the surge of temporary rentals that Airbnb brought, many cities across the United States began pushing back on them. Cities from New York to Minneapolis to San Francisco have set rules for Airbnb hosts. Some require that you obtain a rental license or business certificate in order to host temporary guests. Others limit stays to 30 days or more.

While it’s certainly possible to find a condo to invest in and use as an Airbnb, expect that your search for the right unit with the right HOA in the right city will take a bit longer than it would otherwise.

If you are able to — and want to — go the temporary rental route and plan to hire someone as a manager, you’ll have to make sure that the building allows them to have access to everything they need around the building to carry out their duties.

Run the numbers

Of course, you know that you need to consider the cost of your unit. There’s no one-size-fits-all rule, but in general you need to make sure the numbers work when you factor in variables like vacancy, maintenance costs, and special assessments (yep, there are special assessments for condo owners, too!). One conservative approach is to set 10% of your income from the property aside for vacancies and another 10% to cover maintenance and special assessment costs.

The numbers don’t stop there, though. You also have to factor in the costs associated with everything mentioned above: HOA fees, business or rental licenses for temporary rentals, condo insurance, potential additional insurance costs for short term rental properties, property taxes, and possibly more.

In the end, it all depends on you and your unique situation and the particular condos, buildings, and locations you’re looking at. Think of it as a puzzle that you’re building — you just have to assemble the right pieces and you’ll have a beautiful picture to enjoy for years to come.