Before you make a purchase, here's what you should know. For some people, purchasing a condo is a good investment, while for others, it is a bad one. So, how do you know if it's the right decision for you? By answering a few questions and performing some calculations. First, figure out how much annual rent you'll get and how much you'll spend. Expenses include things like real estate taxes, insurance, maintenance, and repairs, as well as legal fees if an eviction is required, advertising costs to find tenants, and repair costs if a tenant damages the property. Tip: Read John Reed's "How to Get Started in Real Estate Investing" for more information about the factors to consider when buying a condo.
Make a Calculation: A Condo Investment Example
Consider this scenario: You come across a condo for $55,000 that you can afford to buy right now. Rent will cost $750 per month ($9,000 annually). This appears to be a 16.4 percent return ($9,000 divided by $55,000). However, before you get too excited, consider the following costs:- The annual tax on real estate is $1,000.
- A year's worth of insurance costs $400.
- Maintenance and repairs are estimated to cost around $300 per year.
- The condo will be empty for about one month per year (at the cost of $750).
- You'll need to spend $150 per year on advertising whenever it's vacant.
- You estimate that once every five years, you will have a bad experience and will have to pay $5,000 in legal fees and additional repair costs (roughly $1,000 per year).
- These expenses add up to $3,600 per year (roughly $300 per month). Your net rent is now $5,400 ($9,000 minus $3,600), which equates to a 9.8% net rental yield, which is still a good deal.
Other considerations include condo assessments and association dues
You'll also require to find out if the condo you're looking at has association fees and how often you'll have to pay assessments, which are costs incurred to maintain the condominium's common areas. Landscaping, parking lot and parking garage repairs and maintenance, improvements to the building's exterior, and expenses associated with any common areas such as a main lobby or entranceway could all be included in the assessment. Before calculating the expected return on your condo investment, you should include these costs in your expense estimate. Before investing in real estate, you should evaluate your assumptions' realistic. Here are some more questions to think about when deciding if buying a condo is a good investment:- Is your condo located in a high-demand rental area, such as near a college?
- Is it in an area that is becoming more or less popular?
- Is it possible that a major employer in the area will close, lowering rental demand?
- Is it possible that a new condo development will be built nearby, forcing yours to make costly improvements in order to compete?
Most Commonly Asked Questions (FAQs)
How do you fund a condo purchase?
To finance a condo, you'll need to meet the requirements for a condo loan designed for investment purposes. Because your lender will examine the entire condo property, condo loans are generally more difficult to qualify for than standard mortgages. Investment property loans typically require a larger down payment.If I buy a condo as an investment, what can I deduct?
Condominium expenses are similar to those of other investment properties in terms of deductibility. These expenses include mortgage interest, repairs, depreciation, insurance, and taxes.When it comes to condo investments, how long should I keep them before selling them?
The perfect time to invest in real estate is determined by a variety of market factors as well as your own financial objectives. You might want to sell in a few years if you're looking for a quick profit. If your primary goal is rental income, however, you may want to keep the property for longer.