Condominiums are traditionally the most volatile of real estate investments. Ask anyone who bought condos in the 1970s or 1980s (or in 2005-2007) and they’ll show you the financial scars on their backs.
Condos have made a strong comeback in recent years because of the popularity of purchasing second homes, particularly in resort areas. Whether this trend will continue is uncertain, but keep in mind that condos are generally a tougher sell in most areas than single-family homes. And because condominiums involve a homeowner’s association, you’ll have to deal with management issues, rules, and costs that may be out of your control.
When buying condos consider your prospective tenant or buyer when you resell. Is this priced so high that your pool of buyers is limited? It may be in the median price or below, but how many people live in one-bedroom condos? Is the development so old that the HOA (homeowner’s association) dues are high and will continue to rise as the development ages and needs repairs?
For the most part, condos tend to fit into two categories – rentable and livable. Cheap condos that rent well often don’t appreciate much in value. You can get away with buying a $50,000 condo and renting it for $500/month forever. In 20 years, it may barely have appreciated above inflation. A different condo near downtown or the beach may rent for negative cash flow and appreciate 10 – 15% per year. On short, the normal formulas that apply to single-family homes aren’t as consistent with condos, which is why investors need to approach condos with extreme caution.
Look for Limitations when Buying Condos
Be aware that some homeowners association rules restrict the rental of units, so make sure you check the limitations before you purchase a condo that you plan to rent. Also, many lenders have limitations on financing condos, such as a requirement that a certain percentage of the units be occupied by owners.
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Attorney William ("Bill") Bronchick, host of Legalwiz.com, has authored six best-selling books and is sought nationwide for his 25+ years of real estate and legal knowledge. He has been interviewed by numerous media outlets, such as CNBC, TIME Magazine, USA Today, Investor Business Daily, Forbes, and the LA Times, to name a few. William Bronchick is the co-founder and past President of the Colorado Association of Real Estate Investors and the Executive Director and founder of the College of American Real Estate Investors. Click on the "About" link above for more information on William Bronchick. Frank Pulley is an experienced real estate investor and foreclosure specialist. He is the director of William Bronchick's Coaching and Mentoring Programs. For more info, contact [email protected]