Condos as Investment Properties: a Few Caveats

Posted by Julian Yates on Tuesday, December 30th, 2014 at 3:52pm.

There are pros and cons to owning any type of investment property, but here in the recovery phase of the Great Recession, condo ownership has become a popular choice. The reasons for this are pretty simple. With many ex-homeowners and renters downsizing their lives, condominiums offer a more affordable and low-maintenance alternative to renting an entire free-standing home. For a person investing in property, this means a bigger market of renters.

But there are some cons to owning a condominium as an investment property that should be considered before you sign on the dotted line. It is easy to get caught up in a market frenzy, but by now we should all know the results of not doing your homework before buying any property -- especially if your goal is to make money. The good news is that many of these negatives can be easily avoided. 

Overbuilding

With the housing market just beginning to heat up again, you may not have considered the potential for new condos to go up in the area you are looking to buy into. Since we have seen how readily condo developers are willing to overbuild (take Miami, for instance), it is important to look at the area around the prospective property and assess the potential for condo construction in the future. If there are a few buildings in poor repair or vacant pads of land close by, there is always the possibility that developers could put up new condos in direct competition with your rental property. This is rarely the case with free-standing homes in well-established neighborhoods where new construction is very rare. If you find a condo in a well-built area with lots of long-established housing and businesses, you have a much greater chance of always finding renters.

Rental Caps

Before you buy, make sure you ask about a rental cap. This is a limit on the percentage of rental to owner-occupied units, often put in place because banks prefer not to issue loans on condos that have a high ratio of renters. Even if there is no rental cap, keep in mind that this could change at any time, leaving you in a very tough spot if you lose a renter. A higher rental cap could also make selling the property difficult, as it will drastically decrease your pool of buyers to those who either have cash or will risk loans with higher interest and/or penalties. This obviously could have a negative effect on the value of your investment property.

Maintenance

Having someone else take care of much of your property's maintenance for a set monthly fee can be a big plus, but the flip side of this is that you're not in control of the quality of the work that is done. If the condo homeowners' association is not run well, the common areas around your condo could fall into disrepair, drastically affecting the rental appeal of your property. Poor maintenance could also result in costly repairs and increased fees.

And What About Those Fees?

Condo fees, often refereed to as Home Owners Association (HOA) dues, should be a big factor when you consider a specific condo for a rental property. Even if your rental income will cover both the mortgage and the monthly dues, remember that if you lose a renter and have trouble finding someone new, you will be responsible for both.

With a little due diligence and the help of a qualified Realtor, however, a condo can be an excellent investment. The affordability of most condos means if things go south, you won't be on the hook for such an expensive mortgage and you are less likely to be hit with expensive repairs out of the blue. Just remember: “Choose wisely, Grasshopper.” 

Click here to explore condos available for sale in the Sarasota area. If you'd like more information about investment, rental, and/or vacation properties, get in touch with Julian directly via the Sarasota Property Finders Contact Page.

 


Sarasota Area Real Estate Specialist

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