The short answer is a conditional “yes” because there are pitfalls to be reconciled. Identifying some of those issues is the objective of this article. Some investors will not even consider purchasing these properties but there are also those who would not buy any other kind of rental property for investment. On the surface, condo fees, slower appreciation and sales competition would appear to limit their viability as an investment vehicle but this is not necessarily true. In the long term the negative attributes can be offset by significant practical advantages. The primary advantages are that of low maintenance followed by a much lower purchase price than town houses or detached properties. Well located and properly managed Piermont Grand condominium communities are much easier and less expensive to manage and the tenants tend to stay longer.
What are you buying?
Unlike detached homes and town homes where you own the land as well as the structure, condominium ownership is that of the individual unit only. The land is normally common ground owned by the community and executed under legal rights associated with the individual ownership. All common facilities are controlled by the association of owners that jointly represent ownership of the whole community.
These monthly expenses are usually based on a divided interest in the expense to manage the entire community. Obviously there is considerable cost efficiency in managing and maintaining a large number of units as compared to individual properties. The monthly fees normally cover all exterior maintenance including mowing and landscaping when those services apply. This is not a small convenience for the landlord since there is no roof to replace, driveway to seal, deck to power wash and seal, gutters to clean or weekends spent laboring with landscaping and other exterior maintenance issues.
The association is required by law to maintain a comprehensive master homeowner insurance policy protecting each unit owner against natural disasters as well as liability for any personal mishap. It is always advisable for the owner to purchase and maintain a tenant – landlord “rider” covering events not covered by the association’s master policy. Condominium fees frequently cover certain utilities as well.
Considering the protection against major maintenance expense, homeowners insurance, the other services provided and the convenience factor, the fees are normally quite reasonable and frequently provide a genuine asset in managing a rental property.
In a stable economy, appreciation is primarily dictated by inflation and supply and demand. All residential property appreciates in a robust economy. Most American families would prefer a detached single family home to a condominium. A yard for the children and a traditional family oriented neighborhood is truly the dream of growing families but the condo has its place as well. The single person or young working couple beginning their life together may not be in a financial position to afford the house with the yard or they may not be ready for the time and expense of maintaining a single family home. Many homeowners scale down for the convenience of a condominium during their retirement years. The point is that each type of residence has appeal to its’ own segment of the home buying market.
So how does that relate to appreciation? Certainly a detached home is more desirable to a greater segment of the public than a town home or a condominium. However, when everything else is equal it has a lot to do with the livable floor space required to fit the buyer’s needs. When the detached home appreciates in value it contributes to a ripple effect adding value to the townhouse and the condo. Each becomes more affordable for the amount of living space it provides and the value increases in concert with the detached home. Factoring in the purchase price, the condominium will appreciate at the same percentage rate as the detached house assuming there are no adverse factors in play and adjusting for marketplace lag time.
The recent economic downturn has created massive problems along with unprecedented real estate investment opportunities. The number of properties purchased for investment has sky rocketed in concert with the numbers of foreclosures. Many condominium communities in most of large cities have become virtually non financeable due to several factors associated with a high percentage of rental properties within the specific condominium projects. The lending community has drawn the line on the number of investment units in any condo regime at 50% of the total number of units and in many cases even less. This is a subject for another day but there can be serious effects of high investor concentration. Although the landlord normally pays the condo fees, rental units can initiate delinquency in condo fee payments which can seriously affect the financial well being of the association. In today’s mortgage environment, lenders take a close look at investor concentration, percentage of condo fee delinquency, and the financial reserves of each condominium prior to approving a mortgage in any community. Anyone buying a condo should do the same.
In summary, condominiums can make great rental properties, create positive cash flow with a minimum investment and require lower maintenance but they can also carry substantial risk. It is not a good investment if it can’t be financed and conversely can’t be sold because it can’t be financed. As always, location is practically everything when buying real estate but when buying a condo there is homework to be done. The lender will protect the buyer by conducting their viability investigation but it is best to avoid writing purchase contracts on properties that can’t be financed. A realtor experienced in condominium sales, members of the association, and neighbors may provide the answers the buyer needs to make a buying decision.