Is a condo a good first rental property investment?
InsightInvesting Strategies

Is a condo a good first rental property investment?

There are many, many condos out there.

As an investor here in Dallas with HomeVestors, I believe they are a viable option for any investor to consider, not only here in Dallas, but across the U.S., but they do have some unique aspects that the investor must consider and understand.

This discussion is relevant for our audience of part-time, weekend or new investors because there are some unique advantages to a condo as your first investment property.

Is a condo a good purchase for a first-time real estate investment property - The weekend real estate investorI am not going to label the condo as better or worse than a single-family house as your first investment. I would rather explore the differences.

As I have seen in my experience as an investor—and initially as a part-time investor in my early days—condos may be good investments, but they do behave and perform a little differently. And, the investor must be aware of theses differences in order to ensure they achieve their desired investment results.

Why the condo is appealing to a new investor

A condo investment was appealing to me when I was in this position over 10 years ago when I started.

Is a condo a good investment for a first-time real estate investment purchase blog by Kevin Guz for Personal Real Estate Investor MagazineCondos have a lower cost of entry. That may be very exciting, interesting or perhaps easy for that first-time or new investor who may not have a lot of money or is trying to mitigate some risk so as to limit his or her exposure.

A low-cost investment like a condo versus a house could be very fitting. So the condo could be compelling to that investor.

It may also be a question of availability, depending on your market.

Today, many housing markets across the U.S. are very hot, especially here in Dallas. We are seeing a market like we’ve never seen before. Homes are more difficult to find—and much more difficult to purchase—just because of the numbers of offers and the amount of competition. Traditionally the condo market is not as hot, and there is more availability.
So it may be easier to find a condo that is appealing to you in price, location and quality. It might be a very compelling or interesting investment.

Let me share some things I have learned during my time as an investor—starting back as a part-time investor and now as a full-time investor. I do own several condos today in my rental portfolio, and they all perform very well.

I did not purchase them deliberately—so to speak. They more or less came across as investment opportunities that I was not necessarily looking for. But the numbers looked good, and they worked. So I did purchase them, and I still own them today, and they continue to perform well.

Some of the advantages of these condos I own

No. 1 – Low risk

They are a nice low-cost-of-entry option for those with limited cash to spend or wanting to limit their risk. In most markets you can find a condo that is very inexpensive, especially compared to a single-family house. There are condos out there with one bedroom and one bath. And, they may be located near universities or retirement areas where that type of a condo is appealing.

When they are that small—I am talking 500, 600, 700 square feet—they are very affordable, and you can find great deals on them. That is a definite “pro” for the new or part-time investor or someone looking to get started and cut their teeth with limited investment and limited risk.

No. 2 – Low maintenance and risk

I have also found there is limited maintenance exposure. If you are considering getting into real estate investing but you have a busy career that really limits your time and availability, you likely are concerned about buying a rental property because you do not have time to do or manage the repairs yourself.

You may not have the time, you may not have the interest. And,  you may be concerned after hearing horror stories about maintaining a rental property. A condo mitigates maintenance.

When you have a condo, you eliminate exterior maintenance like paint, shutters, brick, siding, landscaping and roofing. You mitigate a lot of your exposure to maintenance and repairs. Whether at the point of purchase for your initial tenant, or down the road as you are maintaining it for existing tenants, it is easier to maintain.

You are typically confined to maintaining what is inside those four walls.

No. 3 – Availability

If you are a busy executive or busy full-time employee, you do not have a lot of time to hunt for properties or to move fast when purchasing a property due to the competitive pressures in most markets today.

The condo market is likely not as competitive and you can move a little slower, do a little more due diligence, and you are going to find a greater availability of options when you go to purchase one. That may also be appealing to you.

No. 4 – Easier to inspect and buy

Condos are relatively easy to buy in terms of inspecting and assessing them in terms of potential repairs.

Because of their smaller size and because they are in a larger maintained complex, you are really eliminating a lot of the structural or conditional risks that you may find with a house.

You may not be dealing with foundations or a bad roof or some of the things that linger with some single-family homes.

Let’s talk about the cons:

No. 1 – Transient tenants

Through my personal experience as an investor over the years, at least in my market of Dallas, tenants of condos are a little more transient. The tenants in my single-family homes seem to stick around for a while.

They may have been condo renters in the past, but now that they have moved up the financial ladder and they are able to rent a single-family residence with a yard and garage and more space. They stick around and do not move as much compared to a condo tenant, at least in my experience.

Sometimes the condo renter is a student or a young professional, and it’s a very temporary living circumstance. They may only be there for a year, and then they’re off to their next living arrangement. They may be buying a house or moving into a larger house as their family expands. So be prepared— the condo tenant may be a little more transient of a tenant.

No. 2 – Slower appreciation

I find in my experience —and this could be different in your market—the condos appreciate a little slower.

The great thing about real estate it does traditionally appreciate over time but I have found that condos lag a little bit when compared to how a single-family residence appreciates in value. If appreciation, in addition to monthly cash flow, is a key component of your investment strategy, take this into consideration when looking at a condominium investment.

No. 3 – Appliances

Also be prepared—when you rent a single-family house, a lot of tenants do not expect to find a washer, dryer and a refrigerator. Your condo tenant expectations may be different.

They may expect the condo to be fully turnkey—almost like the mentality of an apartment renter. They may expect to see a fully functional washer, dryer and refrigerator.

And though those are not costly appliances, you do expose yourself to the purchase of those. And more importantly, you expose yourself to the maintenance of those appliances. Those are three elements that do require maintenance, could break down or may require some attention.

No. 4 – The homeowners association

From my personal experience, the concept of homeownes dues is something a new investor could easily overlook. Do not underestimate the impact homeowners dues will have on your cash flow model when you become a condo investor.

Each month you have to pay the homeowners association (HOA) of that condo a certain amount of money, and it’s easily several hundred dollars. You as an investor could fail to recognize that. So do your due diligence, talk to the homeowners association, get the exact bylaws, amendments and covenants and review them. Understand exactly what you are getting and exactly what you are paying for.

If you fail to estimate or uncover all that information you could very quickly find yourself owning and renting a condo that is cash-flow-neutral or cash-flow-negative. You may figure your rent, minus your expenses, equals your profit, but if your HOA fees are not factored in, they can easily absorb a significant portion—if not all—of your monthly profits for that condo.

This is one of those most important elements that I have learned that really differentiates a condo from a single-family house. For this reason,  you really have to dig deep and understand before you make the leap and purchase that first condo as a rental property.

To sum it up, the great part about investing in condos is that, depending on the market, they may have:

  • Lower complexity.
  • Lower risk.
  • Better affordability.

But keep in mind they have some unique nuances:

  • The HOA and the impact of the HOA dues on your cash flow.
  • The potential transient nature of tenants.
  • The posible lag in appreciation over time.
  • The quality of the complex: Despite how good you are as a landlord and despite what a great unit you have, some of the things out of your control are inherent in the complex and the complex management.

Listen to Kevin talk more about this subject here on blogtalkradio.com.


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