Buying a Condo as an Investment Property? Here Is What You Need To Know

Buying a condo can be an excellent way to start investing in real estate if done correctly.

With government-subsidized 30-year mortgages and tax-deductible mortgage interest, buying a rental property is by far the most accessible way for people to invest in something with tangible leverage. It’s no surprise that there are thousands of sites like Bigger Pockets dedicated to real estate investing in all of its forms. 

But, even if you start Googling like mad, you won’t see very much about investing in condo rentals. They have historically been an unpopular choice for real estate investors for a couple of reasons:

  • Condos have homeowners association (HOA) fees that make them more expensive to own on paper and make it more challenging to satisfy the 1% rule (which basically states that the monthly rent from a property should be 1% or more of the purchase price)
  • Multi-family properties (duplexes, triplexes, apartments, etc.) have built-in advantages of scale. With a duplex, you have two units to rent out or live in, but only one roof, water heater, etc.
  • SFH (single-family home) and multi-family are both generally easier to remodel since you can do whatever you want within code. The HOA at most condos will have significant restrictions on what can and cannot be changed in a condo (e.g., flooring).
  • In some cases, HOAs restrict the number of units in the building that can be rented out.

Why Would Anyone Buy a Condo as a Rental Property?

These criticisms of condos are fair but don’t take them out of the running quite yet.

There’s one big problem with single-family homes and multi-family properties that new real estate investors often run into: if you live in a large, popular city, chances are single-family homes, and multi-family properties are really, really expensive.

The median home price in San Francisco is $1.6m, and more importantly, for first-time investors, there are only a few homes available for less than $700k

The median condo price is $1.25m, and there are over 30 listings under $700k currently. 

If you want to own physical real estate in an expensive city, condos are basically the only game in town.

Although many people don’t like condos as investments, the truth is that you can turn a nice profit owning and renting out a condo even with big, bad, scary HOA fees.

Condos also have a unique benefit beyond their more accessible pricing. Although HOA fees are annoying, they are there for a purpose: most of the time, the HOA will pay for the exterior, outdoor, and common area maintenance, making your job as a homeowner significantly easier.

How To Start Investing in Condos

Ready to get started with condo investing?

You need to start with the right neighborhood, the right financing, the right business plan, and the proper paperwork before jumping in. 

Buy a Condo in the Right Part of Town

Before you jump all-in and buy a condo, you want to make sure you are buying in the right place. The goal is to find a neighborhood that is on the upswing, with rising or stable prices over the past year or so.

This might seem counterintuitive, but a neighborhood with flat or declining prices likely has that trend for a reason. You have a better chance of riding a trend on the upswing than picking a community that is due for a turnaround. 

Other tangible and positive things to pay attention to include planned redevelopment nearby, new or expanding employment opportunities, and extensive public transport, or plans for public transportation.

Are You Going to Remodel Your Investment Property?

If you are, it’s essential to find a neighborhood with a large difference between the lowest-priced and highest-priced condos (per square foot).

For instance, if you see a new condo in a neighborhood that is for sale for $1000 per square foot, and an older condo across the street is for sale for $400 per square foot, the difference is $600 per square foot. This “price differential” is a decent stand-in for the maximum possible profit on a per square foot basis that you might stand to make with a remodel, although it will likely be much less than the full differential.

Why is that?

Well, even if you remodel a condo entirely if it’s in an older building with fewer amenities, it won’t command the same price as a fancy new condo.

Get Your Financing Set and Stay Away From Pmi

Like any home purchase, you’ll need to line up financing if you don’t have enough to purchase the property outright.

Unfortunately, even with the lower costs of condos compared to single and multi-family homes, it can still be challenging to find enough for a 20% down payment. That would ordinarily mean you would be headed for PMI or private mortgage insurance.

PMI isn’t a huge deal, but it does add an additional payment to your mortgage every month, which makes it harder to make money off of your condo. That’s why it’s so essential to avoid PMI even if you don’t have 20% to put down.

Luckily, there are some other options that you can pursue so you can get around PMI and secure financing for your first condo purchase.

Many lenders have no or low down programs available that you can take advantage of at any time. Some of these programs even allow you to put 0% down – obviously, you’ll have a higher monthly payment, which will make it harder to get cash flow positive. Still, it allows you to jump into the market without a considerable outlay. 

Here’s a list of lenders with programs for low or no down payment in conjunction with no PMI.

Other Ways To Get Around Pmi When Buying a Condo

You can also use an equity partner like Point or Unison to front you a portion of the down payment in exchange for a percentage of the upside in home appreciation over time.

These programs don’t often allow for renting your home out, so if you plan on renting your condo, you probably will need to pursue more traditional funding.

Be Conservative in Your Business Plan and Stay Cash Flow Positive

As with all rentals, you must stay cash flow positive in your new rental condo. This basically means that all of your expenses on the unit will be covered by the rent you expect to take in (with some room to spare for surprises and vacancies).

Although you will make some paper profits due to principal pay down, depreciation and whatever appreciation might come your way; you don’t want to be shelling out money every month for a unit you aren’t living in.

If you’re having trouble figuring out what you can charge for your rental, my advice is to stay as conservative as possible if you see a comparable listing for $2000, pencil in $1850 at the most when you are doing your due diligence. 

Make Sure You Are Aware of Condo-specific Documentation

In addition to the normal due diligence that you would do before purchasing a single-family home, there are some condo specific things that you need to look out for. Here are the most important ones:

Hoa Reserves and Reserve Study

Any condo association will have something called “reserves,” which are set aside to fund future maintenance and capital expenditures to the common areas and facilities (like elevators, halls, roofs, parking lots, etc.).

The beautiful thing as a condo owner is that you usually don’t have to pay for the upkeep on those things out of your pocket. Still, the condo association must have enough set aside to address the expenses that they expect in the future. 

Keep in mind that seemingly large amounts of reserves can go frighteningly fast. An elevator replacement, for example, will rarely cost less than $200k, and it can be much much more expensive.

Siding and roof replacements on a large building can also be incredibly spendy.

Nervous about trying to figure out “how much is enough”? You shouldn’t be. If the condo association is responsible, they will have completed a reserve study sometime in the past 2-4 years that outlines the expenses the association expects and whether or not the reserves will be able to meet those expenses.

If there is no reserve study or the reserves are low, run away. Runaway quickly.

Special Assessments

Remember when I said that condo owners don’t have to pay for the maintenance and upgrades to the common areas and facilities (except through their HOA fee)?

Well, that was only partially true.

If the reserves are too low to fund necessary improvements (e.g., fixing a leaky roof or an elevator that doesn’t work), then the association will need to levy a “Special Assessment.” 

All of the owners in the building will pay out of pocket to make up the deficit. If a condo is for sale, the realtor is required to disclose special assessments, but be sure to ask if there is a current special assessment, or they expect one in the future. 

Take a Close Look at the Common Areas

There are some things that you just can’t see on a piece of paper. Even if you have a great reserve study and you’ve got confidence that the building isn’t going to fall apart around you, it’s still a good idea to stroll through the halls, laundry rooms, common areas, use the elevators, etc. 

If you see worn carpeting, flickering lights, dirty common spaces, haphazard and flimsy fixes, cracked windows, exposed siding, mold, or other concerns, you may want to step back from the purchase. If the visible components of the building aren’t in great shape, you can be pretty much guaranteed that the things you can’t see are in even worse shape.

Combine what you see with the reserves on hand, and you’ll get a pretty full picture of what you can expect as an owner in the building.

Lead Paint, Vinyl Windows, and Popcorn Ceilings

Watch out for older buildings where you might have to spend a lot of money upgrading the interior of your unit.

Popcorn ceilings can be particularly expensive due to asbestos remediation requirements. Dealing with lead paint during remodeling can also add up as extra precautions need to be taken.

Make Sure You Have the Right Documentation When Buying a Condo

Since condominiums are legally more complex than SFH or multi-family properties, you want to be sure you have all of the right documentation before buying a condo. As annoying as it is, you will want to look over all of this in detail, as well.

  • Declaration of condominium
  • Articles of incorporation
  • Bylaws for the HOA
  • Rules of the Association
  • A copy of the most recent financial report for the HOA
  • The latest investment, replacement or capital expenditure report (this is called many things in different places, but you are looking for the condo boards plans for spending over the next ten years)
  • A copy of the condominium governance report
  • Sellers disclosure statement

Make Sure You Can Make the Changes You Expect To Make

If you are buying an older condo, chances are you will want to upgrade your carpet to hardwood, and maybe even add in-unit laundry.

Keep in mind that changes like these are often highly regulated by the condo association, and in some cases, you may not be able to make them at all.

For instance, hardwood floors may be banned due to noise for all of the units that aren’t on the ground floor. Not all HOAs are that restrictive but pay attention to these requirements.

Take the Plunge

If you’ve found a place in the right neighborhood, you’ve secured financing, have a good business plan, and you’ve checked all of the documentation you need, it’s time to decide whether or not you want to take the plunge into owning a rental condo. 

This last step you’ll have to make on your own, but if you’ve ticked all the right boxes, you can buy with confidence and put your first step on the property ladder.

Buying Condos Is the Easiest Way To Get on the Property Ladder in Expensive Cities

You now have the tools to get started finding your condo and beginning on the investing ladder – even if you live in a city with expensive real estate.

Even if you live somewhere with more affordable real estate, the hands-off nature of condo ownership might still appeal to you. After my own experience renting and remodeling a condo, I can tell you that you can make money with condos, and they are effortless to take care of compared to single-family homes or multi-family properties.

So, are you going to jump in head first or watch from the sidelines?