5 lessons every condo investor should learn
If you're looking for a new investment property, buying a condo can be a clever decision. Condominium living has become popular across the world, with a number of North American and global markets flooded with fantastic options. Buying a condo is often much cheaper than buying a detached home, which makes it easier for new investors and young people to enter the market.
Unlike other forms of housing, modern condos are increasingly seen as a lifestyle choice. With fantastic locations and great amenities, condos have become the preferred option for people who are looking for a new way of life. The rise of the lifestyle market continues to create investment opportunities, with condos in some locations experiencing high levels of demand and strong capital growth.
If you're thinking about buying a condo for investment purposes, it's important to keep the following five lessons in mind.
Lesson 1 - Compare the alternatives
Before buying any type of property, it's important to compare your options. A property purchase is probably the biggest financial decision you'll ever make, which makes a considered and diligent approach absolutely critical. During the early stages of research, it's important to leave your options open and look at the opportunity costs involved with each potential decision.
Opportunity cost - Also known as the alternative cost, the opportunity cost is the loss of other alternatives when a decision is made.
When it comes to real estate, there are lots of potential opportunity costs to consider. For example, buying a condo or house may tie up your finances for years to come. To offer another example, the real cost of your monthly mortgage may be the lack of freedom to relocate or travel. Only when you've considered the alternatives can you move forward with confidence.
Condo vs house
Choosing whether to buy a condo or a house can be difficult, with pros and cons associated with each alternative. While detached homes are usually more expensive than condos, prices are less susceptible to downward swings and likely to appreciate faster. Saying that, however, condos can be a great option for young investors or people who want to diversify their portfolio. While the growth potential may be reduced, there are fewer barriers to entry and a greater ability to generate rental income in some markets.
Price is not the only difference between houses and condos, with condos associated with a unique financial structure due to the dual-ownership arrangement. Unlike a detached house, condo owners do not own the exterior of the building or the surrounding land. Instead, they have access to use these features in exchange for monthly condo fees.
Condo fees vs repair bills
While paying monthly condo fees in addition to your mortgage can seem like a bad idea, the value of this decision is largely dependent on the fee amount and how it impacts your lifestyle. Lots of investors are more than happy to pay monthly condo fees in order to avoid regular building maintenance and nasty repair bills. If you're planning on renting out your condo, monthly fees are really just a form of property management.
Condo vs condo
When you're in the market for a condo, it's important to compare multiple units and buildings in similar neighborhoods. Nothing exists in isolation, especially in highly competitive markets. There are lots of things to compare during this house hunting process, including the quality of the construction, the building amenities, the HOA structure, condo fees, the contingency fund, and of course, the price.
As always, it's important to weigh up all of the opportunity costs and make a decision that suits your lifestyle preferences and financial constraints.
Lesson 2 - Location is (almost) everything
Whenever you're buying property, the importance of location can not be underestimated. Geographical location drives demand and growth more than anything else, especially in the condo market. Whether you want to build capital over time or generate healthy short-term rental yields, buying into a condo community also means buying into a neighborhood and a city.
The location of the condo will have financial and lifestyle considerations for years to come, so take some time to compare neighborhoods in order to find the perfect fit for you. In many ways, this process is a game of price vs demand, with trendy inner-city condos generating higher rents and stronger capital growth, but at a price.
The ideal location should cater to the lifestyle needs of the residents. While some of these needs are universal, such as proximity to public transportation and shopping venues, others are specific to certain demographics, such as proximity to universities and schools. The following factors should always be considered:
Proximity to transportation
Proximity to employment
Proximity to schools
Proximity to shopping
Proximity to eating and entertainment venues
While lots of condo buildings are located in inner-city neighborhoods, not all areas have the same appeal. Along with researching property growth patterns in order to assess supply and demand, you also need to spend some time on the ground to see how somewhere feels. Do you feel safe at night? Can you easily walk to shops and transportation hubs? Is there anything to do in the area?
Demographics and population
When you're buying an investment property, it can be a good idea to choose a particular demographic first, and then find a neighborhood and building that meets the needs of this target group. For example, dedicated retirement condos can provide a great opportunity, as can buildings designed for young couples and families. While somewhere with a broad appeal will give you more options, a targeted mindset allows you to focus and tighten your search criteria.
Population growth also has a huge factor on property prices and rental yields. While the population is only going to get bigger, different areas in different cities are likely to have a vastly different experience. While you want to avoid overcrowding as a resident, as an investor, a growing population means increased demand and rising prices.
Lesson 3 - A condo is part of a community
Condos present unique opportunities and demands, so you need to be aware of the differences before signing a contract. Perhaps the biggest difference between a condo and a detached dwelling is the community nature of condo projects. This has a number of financial and lifestyle considerations throughout the lifecycle of your investment.
While you're living in the condo, you want somewhere that feels like home.
When you're renting it out, you want to appeal to quality tenants and command healthy yields.
When you're selling your condo, you want to attract market attention and minimize days on market.
Rules and regulations
The community aspect of condo living is not for everyone. While it's a long way from a hippie commune, there is often a pervasive community feel and a range of obligations to meet. Every condo building has rules and regulations, with individual residents expected to abide by these standards at all times. Before you buy into a community, it's important to meet the Board and read the HOA rules and regulations.
How does the Condo Board deal with requests and complaints from owners and tenants? Are there any strict rules or guidelines that may make you unhappy? Do you have the ability to sublet your condo and generate rental income?
Along with the rules and regulations, there is also the issue of condo fees. Payable each and every month to the HOA, these fees are designed to cover building maintenance and contingency fund management. Condo fees are an important part of community living, with much of the money generated designed to cover the cleaning and upkeep of shared building amenities.
Compare the condo fees to the number, type, and age of the amenities
Compare the condo fees to the size of the contingency fund
Compare the condo fees to the age and size of the building
Compare the condo fees to those of other communities in the same neighborhood
Lesson 4 - Understand market conditions
Just like any property deal, buying a condo requires a basic understanding of what drives the real estate market. While you don't have to be a financial expert, a simple knowledge of the basics can help you avoid making a bad decision. Condo values can change dramatically according to wider economic and property market forces, so there's really no excuse to not do your homework.
Supply and demand
As the fundamental force that drives the entire economy, a basic understanding of supply and demand is critical. You can get a fairly accurate picture of supply and demand by looking into the following data reports:
Capital growth - Average property prices and capital growth is released on a monthly, quarterly, and annual basis across neighborhoods and cities. While growth rates themselves can be very telling, being aware of multiple timeframes is where the real insights lie. For example, if a neighborhood has experienced strong historic growth but weak quarterly and monthly figures, the market may be slowing down. In contrast, low annual growth with strong monthly figures may give you a jump on a market that's about to explode.
Days on market - This metric can be used to good effect, especially when combined with growth rates and prices. If properties are on the market for a relatively short amount of time compared with other markets, this may indicate strong demand. If you want to dive even deeper, you can analyze time on market compared to construction growth and auction clearance results.
Rental yield - If you plan on renting your condo, this metric is obviously very important. Even if you don't want to generate rental income, this data can give you a good idea of underlying demand among certain demographics. Trendy neighborhoods that are still reasonably priced often attract younger renters, with rising rental yields often a sign of future capital growth.
Lesson 5 - Not all condos are investment grade
This may be a tough lesson for some, but if truth be told, not all condos make good investment material. A nice home does not necessarily make a solid investment, with real investment-grade properties needing to fulfill a number of additional criteria. A good investment property is not about the condo alone, but also about the market, the location, the price, and the overall ability of the property to generate capital over time.
If you're looking for the ideal lifestyle condo for you and your family, that's absolutely fine. If you want to generate capital and strong rental yields from a condo, you will need to take these factors into consideration:
Competitive price point
Appeal to the right market
High demand with relatively low supply levels
Located in an area with strong growth potential
Desirable up-and-coming neighborhood
Desirable amenities and community values
Relatively low condo fees to services ratio
Overall, buying a successful investment condo is a matter of research, hard work, and a little bit of luck. While there are oversupply issues in some condo markets, and capital growth can be compromised, there is still a lot of money to make if you choose carefully and wait for the right opportunity. Condos are normally much more affordable than detached family homes, which makes them a great option for new investors or those without a lot of working capital. Whether you want to buy a pre-construction condo or a resale, condos provide a number of lifestyle and financial opportunities for clever investors.