Buying a Condo as an Investment

Buying a condo as an investment property is a route that many people take to make money. Depending on where you live it can be a worthwhile investment that can pay off or it can be a big mistake with dire financial consequences. Your challenge is to essentially crunch the numbers to get an idea of what you will be getting into. The success of buying a condo as an investment property depends on several factors. Take a look at some of the factors to consider when you are buying a condo as an investment property.

Key Factors to Consider When Buying a Condo as an Investment

When shopping around for the condo that suits your taste, there are some factors that you should pay attention to. Financing, location, amenities, occasional expenses and unknown risks are a few of the considerations which may impact your decision.

Purchase Price

Often we are tempted to purchase based solely on the price. But when it comes to purchasing property one should assess the purchase price based on the price per square foot. For example, a 1000 square foot condo may be priced at $125,000, but a 500 square foot condo may be priced at $100,000. Which is the better deal? Yes, the 500 square foot condo has a cheaper purchase price, but at $200 per square foot it’s more expensive than the $125 per square foot of the 1,000 square foot condo. The purchase price may also factor in legal fees, which in turn may impact your choice of financing.

Financing

Do you know how you will pay for the condo? Whilst some people may be able to pay cash for a condo, others will have to get a mortgage or a loan. Either way, your budget may have an impact on the property that you ultimately purchase. And, if you are paying by a mortgage, you have to factor in that monthly cost when you are calculating your rental fee. Depending on the location of your condo, you may have to pay a bit more for a premium property.

Location, Location, Location

When buying a condo as an investment, buyers are sold just because of the location. And this makes complete sense. Prospective renters are usually motivated by the location of the property depending on their tastes. Is the condo close to the city and in close proximity to businesses? Is the condo close to the beach with a view overlooking the ocean? Also, as a buyer you should be considering how the location of the condo will impact current and future resale values.

New Construction or Older Home?

The shiny new condo looks like it is definitely worth the extra money. There is a fancy kitchen with a large sink, the bathrooms are spotless and there is an amazing view of the ocean. In comparison, the slightly older property needs updating, but is priced considerably lower than the new property. As a prospective condo buyer, you should be very cautious about how you spend your money. One one hand, the new property is upgraded, but can you remodel an older property for a fraction of the price for and get the same effect?

Amenities

When purchasing a condo, one should also pay close attention to the amenities that come with the property. Often, the amenities can be determined by the location of the condo. Condos in the city or on the beach may be tight on space and some amenities might be costly extras. Condos in the country side, might have more room and certain amenities might be included in the purchase price. Popular amenities include community pools, laundry facilities, gyms and fitness centres, security, parking, tennis courts and landscaping.

Homeowners’ Association Fees

There is a misconception that when you purchase a condo, that is it. This is not true in some cases. Condos, just like single family homes require the same amount of upkeep. The difference is that with a home, the responsibility lies with the homeowner who will perform the upkeep. With a condo, the upkeep comes in the form of an association or maintenance fee which is due monthly or annually. Depending on where your condo is, the maintenance fee may include upkeep of the common areas of the building (e.d. gym and pool), amenities and utilities such as air conditioning, heating, electricity, water, and condo insurance. In some condos, the maintenance fee only includes upkeep and the other bills are separate.

Taxes and Insurance

As a homeowner you will be taxed annually for your condo. Taxes are usually calculated on the value of the property and will vary from location to location. You will also be required to pay insurance. Condo insurance policies will protect your investment in the event of a disaster. Whilst your HOA fees may include condo insurance, it may only cover the common areas of the condo. It is your responsibility to insure your condo and the contents.

Property Management Fees

If your condo is not located close to where you live, you may have to enlist the services of a property management company to oversee the property. As a condo owner involved in the rental business, you will have a number of property management tasks to juggle. Marketing the property, monitoring payments, responding to tenant concerns and overseeing renovations are some of the jobs that may pop up are some of the tasks that can be delegated to the property management company.

The What Ifs

The what ifs are those occasional (sometimes unknown) expenses which may or may not occur, but should be factored into your decision. Because you are buying a condo as an investment, you will have to factor in marketing and advertising costs to reach potential clients. Also you may need the services of a lawyer to draw up rental contracts or to assist in the eviction of a delinquent client. These fees are very unpredictable, but you should be aware that you may need them. Other unknown expenses include repairs and maintenance and a back up mortgage fund in the event there are no tenants.

Is Buying a Condo as an Investment Worth It?

Let’s take a look at an example which includes some important calculations which can help you to determine if buying a condo as an investment is worth it.

A two bedroom, two bathroom, beach view condo in the Caribbean is priced at USD $220,000. The mortgage details below were calculated using a mortgage calculator on Dave Ramsay’s website:

  • Loan amount: $200,000
  • Down payment: $20,000
  • Payback Period: 25 years
  • Annual Interest Rate: 5%
  • Estimated monthly payment: $1,169.18

In addition to the monthly mortgage payment, there are other expenses to be factored in:

  • Maintenance and repairs: $600 a year, $50 a month
  • Homeowner’s association fees: $600 a year, $50 a month
  • Property Taxes: $2,500 a year, $208 per month
  • Property insurance: $1,000 a year, $83 per month
  • Property management fees: $900 a year, $75 per month
  • Marketing fees: $250 a year, $21 per month
  • Vacancy (One Month): $1,169.18

When you add these fees together, the monthly cost of the property is $2,825.36. Therefore your monthly rental should be at least $5,650.72. This is easily attainable if you can get the property rented (with all of the amenities) for $2,000 a week!

Based on these figures, this purchase will result in positive cash flow, which means that it is a good investment. However, these calculations do not take factors like competition from other condos in your building and adjoining areas, whether the condo is really worth the asking price and demand for rentals in the area. A real estate agent would be able to assist you with your search and answer any questions that you may have.

If your mortgage application was denied, here are a few steps that you should take to get ready for your next attempt.

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