With the rise in the number of condo buildings, many investors now consider condos as opportunities for real estate investments. As with all real estate investments, the question is, “Is purchasing a condo unit a good investment? Let’s consider some key factors that will influence the Return-On-Investment (ROI) that you could expect with a condo investment.
One of the first aspects is the location and accessibility of the condo unit. As was mentioned earlier, condo structures are most common in urban areas. Of course, you can find them in smaller places as well, but for the purposes of investment, we will consider larger, urban condo developments. With this in mind, you want to make sure that the condo structure is close to transportation, such as subways and bus access. In addition, you should look for condo structures that are close to shopping centers, restaurants, and schools. The typical tenant or purchaser of the condo unit will be looking for convenience and the location will be a key selling point or renting point. Location is also an aspect that you cannot change regardless of how many improvements that you make. Remember…location, location, location!
The second aspect is the price range. Condo prices have a wide-range depending on which structure you consider. Condo units can vary from $80,000 for a single nearly-attached condo to $1 million for multi-unit condo buildings. The price does depend on the number of units, but other considerations of cost include the location (mentioned earlier), amenities within and around the complex, and furnishings available. When you consider the condo unit as an investment, you also want to consider who your potential buyer or renter will be. This is important because you want to purchase a condo development that either has the amenities they will demand or ones that you can add for a low cost.
The third aspect is the vacancy of the units. As we have mentioned, when investing in condos, many of the same considerations that you would use for apartments hold true. The vacancy rate is important if you intend to keep the condos as rentals. Your income will be made through the rental income, so your ROI will depend on how many units you have rented.
The fourth aspect is the additional living related expenses. Almost all condo units will have monthly dues. These dues will vary depending on the amenities and what exactly the dues will pay for. It is important to consider this as an investor who wants to hold the real estate and as one who wants to sell the units. As a holder, you would need to determine if the dues would be added into the monthly rent or if they would be paid separately by the tenant. For investors who want to sell the condos, they need to consider if the potential buyers would be willing to pay the dues for what they receive in return! Other expenses that need to be considered include taxes due, insurance, and unit maintenance fees.
Below is a sample condo transaction and the potential ROI of the investment.
Estimated cost of a 30 unit of condo
Estimated rental income per year
Vacancy costs (2 months)
ROI = (Net Income / Total Cost of Unit) * 100
47% per year or about 5 years
It is essential to have the numbers known before you make the investment. This example does not include any renovation budget either. If you purchase a rehab and flip or a rehab and hold, you would need to know the costs of such rehab as well since this will make it longer before your ROI is recognized.
In Lesson #2, you were introduced to three types of condos. Explain each type and discuss the pros and cons in terms of the investment in each.