Across the United States,
the emerging trend is people who choose to live in urban centers for the
lifestyle it offers; arts and culture, shorter commute times, access to public
transportation, and plenty of choices for restaurants, cafes, and shopping. This
“Smaller square footage but bigger life,” movement also leads these new
urbanites – spanning from Millenials all the way to retired seniors – to look
to condominiums as a home base. Condos are far less expensive than trying to
find single-family houses in densely populated cities and the utilities are
often lower. They require little or no maintenance, so owners can spend their
weekends with their friends and hobbies instead of mowing the lawn and tackling
long honey-do lists. Condos also commonly offer built-in amenities like
parking, swimming pools, work out rooms, and recreation.
1. A solid plan.
Whether an investor or
homeowner, everyone wants to make the most possible money on their real estate
investments. But too often, people purchase condos without a solid plan. That
plan should include a comprehensive budget that includes expenses like property
taxes, special assessments, condo dues, and all mortgage and utility costs. To
be conservative, estimate your costs to be 15% higher than they are now and if
you’re renting it out, factor in possibly vacancies and even evictions.
The most important part of
your plan should be an exit strategy. Do you plan to sell and move “up” to a
house in a couple years? Keep it forever and rent it out when you move? Or stay
there for the long term? Condos are often much harder to sell than single
family houses for reasons we document here, so you may be “stuck” in the
property for much longer than you think. Since the value of condos can be so
volatile and dependent on so many factors outside your control, don’t bank on
having significant appreciation. As an investor, it’s recommended you focus on
an income approach instead of capital appreciation, meaning you should make
sure it cash flows on a monthly basis instead of waiting around for it to rise
in value.
2. Special assessments.
If you own a condo,
“Assessment,” is a bad word because it means there are big improvements needed
but not enough cash to pay for them. Special assessments collect reserves for
future capital improvements like new roofs, windows, paving parking lots, or
HVAC replacement. Each owner is required to pay his or her pro rata share of
these expenses. Obviously, these assessments can up to tens of thousands of
dollars or much more, so request the condo’s budget before you buy and research
what improvements are coming – and anticipate an assessment at some point.
3. The condo association.
As a good rule of thumb, you
aren’t just buying the condo but the condo association as well, and your
experience as an owner will only be as good or bad as they allow. That’s
because almost every single decisions is dictated by the association’s bylaws.
A good association can protect your values and make sure everything runs
smoothly. But an association that is inefficient, absent, negligent, or just
plain abrasive can spin the condo community into chaos. Scrutinize their bylaws
before you buy, as they may have restrictions on renting the condo you need to
know about. It’s also a good idea you meet the association staff before hand to
feel them out, as well as request their budget to show you they have enough
reserves and how much debt they are carrying and the percentage of owners who
are not paying their dues. Also, knock on a few doors and talk to people who
already live there and see what they think of the association’s body of work.
4. Condo fees.
While single-family homes
may cost more, don’t forget that condos have significant monthly association
fees. These fees are collected by the association to cover the cost of services,
like trash hauling, exterior painting, and landscaping, etc. Condo fees also
cover the property’s master insurance policy, maintaining swimming pools and
fitness rooms, condo staff, and professional services like lawyers and
accountants when needed. These fees could range from a hundred dollars all the
way to a thousand dollars for luxury condos in big cities, but even the average
two hundred dollar bill should be anticipated and factored into the owner’s
expenses.
5. Improvements.
When you own a single family
home, you are free to improve the property and make as many upgrades as you
wish. Weekend projects like tiling floors, adding new light fixtures, and even
landscaping add up to better values over time. But with a condominium, there is
very little you can do – or are allowed to do – to improve your property. Other
than just painting your interior walls, every alteration or improvement usually
needs to be ok’d by the condo board, who has no interest in approving big
projects that will change the floor plan or make other units look obsolete. If
the condo board does approve a remodel, owners often make the mistake of over
improving their property, rendering it far different than other units. But when
it comes to sell, potential condo buyers are looking for conformity, not to
purchase the outlier, so it’s often harder to unload instead of going for a
higher price.
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