Are condos a good investment? A guide for rental property owners

In the complex and evolving landscape of real estate, a variety of property types can suit different investors' needs, goals, and risk tolerance. Among these, various investment properties condominiums, commonly known as 'condos,' stand out as a distinct category worth your attention.

Condos represent an intriguing blend of homeownership and community living, with unique advantages, potential drawbacks, and strategic considerations. But exactly what is a condo? How does it differ from other property types? And most importantly, as a savvy real estate investor, what do you need to know before investing in a condo?

This guide discusses condominiums, exploring their characteristics, the pros and cons from an ownership perspective, and key considerations for real estate investors. We'll provide insights beyond the surface-level understanding to equip you with comprehensive knowledge to inform your investment decisions.

Our goal is to empower you with the tools, knowledge, and confidence to navigate the condo market effectively, potentially unlocking new avenues for growth in your real estate portfolio.

What is a condo?

A condominium is a residential property within a larger building or complex. Unlike a detached single-family home or townhouse, condos are often part of multi-unit structures. They share walls and common spaces with other units, and they are typically located in densely populated areas, like urban centers.

Ownership and structure

What differentiates condos from other types of multi-unit residential properties, like apartments, is the ownership structure. When you own a condo, you're buying a living space and a piece of the larger property. Your ownership extends to your individual unit and a shared interest in the entire building and common areas such as the hallways, rooftop terraces, swimming pools, tennis courts, or gyms.

In essence, condo ownership gives you a two-fold investment: a private living space and a fraction of a potentially valuable community property. This unique structure necessitates an understanding of condos' management and maintenance, local market dynamics, and the legalities involved.

Homeowners association (HOA)

To handle the responsibilities that come with shared ownership, condo owners typically form a homeowners association (HOA). The HOA, comprised of unit owners, oversees condo association rules and the maintenance and administration of the common areas. It also establishes and enforces rules for the community.

Real estate investors can appreciate the nuances of investing in this property type by understanding what a condo is. It's not just about owning a unit; it's about participating in a shared community, which comes with benefits and challenges. The following sections will delve deeper into these aspects, comprehensively understanding condo life and investment.

Pros and cons of condo investing

In the world of real estate investment, condos can present unique opportunities and challenges. Here, we examine condominium ownership's key advantages and potential drawbacks, providing a balanced perspective to help you make informed decisions.

Advantages of owning a condo

• Affordability: Condos are often more affordable than single-family homes, especially in highly sought-after urban areas. This makes them an accessible entry point for new real estate investors or those looking to diversify their portfolios.
• Fewer maintenance responsibilities: With a condo, you share the cost and responsibility for maintaining common areas with other owners. The HOA usually handles tasks like lawn care, snow removal, and exterior repairs, freeing up your time and energy.
• Amenities: Many condos have appealing shared amenities like gyms, swimming pools, rooftop terraces, and security systems. These can make your property more attractive to potential tenants, possibly leading to higher rental income.
• Community living: A condo complex often comes with a built-in community. This sense of community can appeal to specific demographics, such as young professionals, retirees, or small families — making it attractive to potential renters.

Disadvantages of owning a condo

• HOA fees: These fees can significantly impact the profitability of condo investing and might pose financial challenges if they increase unexpectedly or special assessments are levied. It's essential for potential condo buyers to thoroughly research and understand the HOA fees associated with a particular property before purchasing.
• Less control: Because condos involve shared ownership, individual owners often have less control over their property. There can be restrictions on renovations, pets, rentals, and more.
• Potential for conflict: Living in close proximity and sharing common spaces can lead to disputes among residents. As an owner, you might need to mediate these conflicts or face complaints from unhappy tenants.
• Resale challenges: Depending on the market conditions and the popularity of the condominium complex, you might face challenges when trying to sell the condo. Prospective buyers will look at the overall health of the condo community, not just your individual unit.

Real estate investors can better assess whether a condo aligns with their investment strategy and risk tolerance by understanding these pros and cons. In the following sections, we discuss key considerations that every rental property owner should know before diving into condo ownership.

Key considerations and potential risks when investing in condos

Condo investing can provide profitable opportunities. However, it's important to consider potential risks and challenges impacting your return on investment and overall profitability. Here are some factors and associated risks to keep in mind:

Understanding the HOA rules and regulations

HOA rules can significantly impact your ability to use your condo as a rental property. They may restrict the number of units that can be rented, set standards for tenant behavior, have monthly fees, and even impose restrictions on the rental agreement itself. These rules could potentially limit your rental options, thereby affecting your income.

Misunderstanding or overlooking these rules can pose a significant risk to your ability to generate either passive income or rental income and may lead to unexpected complications or financial loss. Therefore, thoroughly understanding these rules before you invest is essential.

Assessing the condo fees (HOA fees)

Condo fees, or HOA fees, are a major part of owning a condo. These fees go towards maintaining the exterior of the property and its amenities. However, they can vary widely and may rise unexpectedly. The risk of increasing fees can directly impact your cash flow and profitability.

On a positive note, such maintenance and community amenities can command a higher rent or condo fee if the market permits. Assessing the current condo association fees, their historical increases, and what they cover is vital to forecasting your potential expenses and mitigating any financial surprises accurately.

Evaluating location and demand

The location of the condo can significantly impact rental demand and potential income. While proximity to amenities, public transportation, and local attractions can boost rental rates and lower vacancy times, changes in the neighborhood or city's economic conditions can create risks.

Also, especially in urban areas, condos often see high demand, leading to fewer vacancies. However, they may also experience high tenant turnover, particularly among younger demographics. 

Understanding the local rental market, the demographic of renters in the area, and potential future development plans can help you gauge the profitability of your potential investment and the associated risks.

Planning for property management company services

When investing in condominiums, one of the key decisions is determining whether to opt for self-management or enlist the services of a property management company. The former can be cost-saving but requires significant time commitment and expertise, while the latter, although it comes with additional costs, can greatly simplify your landlord duties.

Whether you decide to self-manage or hire a property manager, Azibo can help. Azibo offers a suite of solutions designed to streamline rental property management for independent real estate investors. Our online rental applications and thorough tenant screening tools assist you in selecting ideal tenants. We also offer a rent collection solution that tracks payment status and provides tenants with flexible payment methods like debit cards, credit cards, and bank transfers to help ensure timely rent collection.

Moreover, Azibo provides specialized financial and accounting tools to optimize your business profitability and streamline tax prep. Our straightforward and efficient property insurance processes lead to potential savings of up to 25% off on your property portfolio insurance.

From lease generation in line with state-specific regulations to reliable property management solutions, Azibo brings the savvy real estate investors everything they need.

Understanding the housing market impact on condo investments

As an investor, understanding how the housing market affects condos is important for your investment strategy. Housing market conditions can drastically impact the value and rental potential of your condo or investment property.

1. Property values

In a booming market, the value of condos typically increases. This can provide a significant return on investment if you decide to sell. However, in a declining market, condos are often the first to lose value and the last to recover. Consider the market fluctuations and their impact on your investment value when buying a condo.

2. Rental rates and demand

Housing market conditions can also significantly affect rental demand for condos. In a hot market with rising property prices, more people may opt to rent, boosting demand for rental properties, including condos.

On the other hand, a weak housing market may decrease demand for rentals as more people can afford to buy homes. Understanding these dynamics can help landlords set competitive monthly rental rates and anticipate high or low tenant demand periods.

3. Competition

Finally, the housing market conditions will impact your competition as a landlord. When the market is strong, more investors will likely buy properties to rent out, increasing competition. In a weaker market, fewer multi-property owners may add to their portfolios, potentially reducing tenant competition.

Keeping an eye on market trends can help investors anticipate these shifts and adjust their strategies accordingly.

Are condos a good investment? Investing with confidence

Condominium investments can be profitable in your real estate portfolio when navigated with knowledge and prudence. Understanding what a condo is, the pros and cons of owning this property type, the impact of HOA rules, fees, and the fluctuating housing market are essential to informed decision-making in condo investments.

Recognizing the unique challenges and opportunities inherent in condo ownership can provide a competitive edge and ensure maximum profitability. Streamlined property management, as offered by Azibo, can further enhance your investment journey, making it more efficient and stress-free.

As we conclude our guide, we hope the knowledge you've gained will empower you to make smart decisions in the condo market. Whether you're a seasoned investor or a beginner, the world of condominium investment has a place for you. Moving forward with confidence and understanding can unlock lucrative opportunities in this distinctive corner of the real estate market.

Condo investing FAQs

Condo vs. apartment, what's the difference?

The key difference between condo units and apartments lies in the ownership structure. When you buy a condo, you own your individual unit and a share of the common spaces, like the gym, pool, and other amenities.

Condos are governed by a homeowners' association (HOA) that maintains common areas and sets community rules. On the other hand, an apartment is typically rented, not owned. Apartments are part of a building or complex owned by a single entity, often a corporation, and rented out to individual tenants.

How can HOA fees impact my return on investment when buying a condo?

HOA fees are a recurring expense that can eat into your rental income, thus reducing your overall return on investment. Investigating these fees when calculating potential rental profits and passive income is important. However, remember that these fees also cover maintenance of common areas and amenities that could make your condominium unit more attractive to potential renters.

What should I consider when selecting a location for my condo investment?

Several factors should be considered, including the property's proximity to amenities, public transportation, local attractions, and major employment centers. The quality of local schools and the overall attractiveness of the neighborhood are also important. Additionally, it's wise to research future development plans in the area as they could impact property values and demand.