Is a luxury condo a smart investment?
Have you ever considered the idea of buying a luxury condo as your next investment? Since condominiums are often less expensive than a single-family home, they can be affordable investments for those who are short on cash or new to real estate investing. However, they sometimes get a bad rap for their investment potential.
However, as with most things in real estate investing, a lot of preparation and attention to detail can enable anyone to make a profit. Here are some things to consider about condos as an investment.
Hard math trumps dumb luck
The reason people sometimes end up losing their shirts over a condo investment is almost always because they didn’t understand the costs involved. Those who are new to land ownership tend to focus primarily on the rent they can collect, not giving full credit to the costs they will also incur.
In addition to your mortgage costs, you’ll also have property taxes, insurance, and possibly mortgage insurance, as well as maintenance and repairs. On top of that, you may also incur advertising costs to find tenants, legal fees if a tenant needs to be evicted, or the expenses of a property management company if this type of work doesn’t sound like your cup of tea.
If after subtracting all of these costs from the income you believe, based on extensive research, you can collect, you’re still getting a more attractive return on your investment than you would in an index fund, then it generally makes sense to buy.
An example
As an illustration, suppose you find a condo for $55,000 that you can pay cash for. Rental prices for a similar condominium are approximately $750 per month or $9,000 per year, giving you a return (before expenses) of 16.4%. Now let’s talk about expenses. Taxes, insurance, and maintenance and repairs on such a property will generally cost just under $2,000.
If the property is vacant, you will not only lose the $750 in rent you collect each month, but you will also incur a $250 advertising fee to find a new tenant. Also, once every few years you could have a bad experience with a tenant or even an act of nature that could cost you $1,000 to $5,000 in legal fees and/or repairs.
After subtracting these fees, your net rent is now closer to $5,500 per year, giving you a return on investment of around 9%, which is still quite attractive.
Communities of Owners
Another big expense that many people don’t realize about buying condos is that there is usually a homeowners association that you will have to pay. Commonly known simply as an HOA, this organization is responsible for maintaining common areas such as landscaping, parking areas or garages, improvements, and anything else that may affect the value of your investment.
While for some, a condominium may be too risky, for the savvy investor, a condominium can be a great way to start investing in real estate.