Are you wondering if it's better to buy a condo or a single family house for a rental property?
The truth is that they can both be great investments, and they both can be horrible investments. If you do it right, renting a condo can be very profitable. But, there are a lot of things to consider. I'm going to show you the pros and the cons of buying a condo in this article. This will help you decide if buying a condo to rent out, is right for you.
Let's start with the Pro's of buying a condo…
Condos Are Less Expensive
Condos are less expensive than single-family homes. This can make condos a lot more affordable to investors. You usually need 20% to 25% down on an investment loan for a condo.
If you can find a condo at a low enough price you don't need that much cash to use as a downpayment.
Condos Are Smaller
Small is actually good when it comes to rental properties. You have less carpet to replace, fewer walls to paint, and less overall that can go wrong.
A condo is also simple because you only own inside the unit. The exterior of the building and the roof are the responsibility of the condo association.
This usually means that your maintenance costs and longer-term capex expenses costs are lower.
Insurance Is Cheaper
Landlord insurance for a condo is generally cheaper than landlord insurance for a single-family house. This is because your policy covers less. (Remember, you only own inside the unit.)
For example, if a bad hailstorm passes through your area and you own a single-family home, your insurance company is going to be buying you a new roof. That, in turn, is going to lead to higher insurance premiums.
But, if that same hailstorm destroys the roof of your condo building, the condo associations insurance policy would cover that.
The insurance company for the owner of the condo has a lot less risk. They pass on that savings to the condo owner in the form of a cheaper insurance policy.
No Lawn To Mow
When you own a single family home, you or your tenant, are going to responsible for mowing the lawn. If your tenant is responsible for the mowing, you are going to have to monitor the property to make sure it is getting done.
You will also be responsible for mowing the lawn when the property is between tenants.
With a condo, you don't have to even think about the lawn. The condo association will take care of the lawn mowing and lawn maintenance, for any common areas.
Big Repairs Are Not Your Responsibility
When the condo building needs major things done like replacing the siding, roof, or repaving the parking lot, that is not your responsibility. The condo association pays for all of those items.
All of those major repairs are very expensive. As the owner of a single-family home, you will have to budget for these items, to make sure you have cash available when they come up.
But, as an owner of a condo, you don't have to worry about any of those big things.
Property Taxes Are Less Expensive
Property taxes are usually determined by the value that your local government assesses the property at.
Because condos sell for less than single-family homes, they generally have a lower tax bill. Lower taxes means more profit for the rental property investor.
Now, the cons…
Condo Fees Can Be Expensive
The monthly fee that you pay to be a part of the condo association can be very expensive.
They are often hundreds of dollars per month. It costs the association money to maintain the common areas, pay for insurance and to put money in reserves for future repairs or upgrades.
Condo Fees Always Go Up
The cost of everything goes up every year. The costs to run the condo management company go up every year, the cost to pay employees goes up, insurance costs go up, the cost of maintenance goes up every year.
Because the cost of everything is always going up, condo associations have to raise their dues every year.
As an owner of a condo, you have very little control over how much the association decides to charge for dues.
The risk with rising dues is that if you can't raise rents to match the increase in dues, your property is going to be less profitable as time goes by.
If the condo association doesn't budget correctly for repairs, or they have a big expense that they weren't counting on, or the association is just mismanaged, they will levy a special assessment on the owners of the condo units.
Depending on the expense, this could be thousands of dollars that they will expect you to pay.
Financing a condo can be a little tricky. Lenders have a couple of concerns. They don't like condo developments that have a lot of investors, and they also don't like developments that have a lot of owners that are behind on their dues.
When buyers can't get financing, that limits the pool of potential buyers to only cash buyers.
Most buyers are going to need to finance their purchase, and when they can't get financing, they can't buy.
That limits the pool of potential buyers to only cash buyers, and that in turn drives prices lower. Lower prices are good when you are buying a property, but it can make it difficult if you need to sell, at some point in the future.
Approval To Rent
Most condo developments want to restrict the number of rentals in the community. It's in every owner's best interest to keep financing readily available.
Some associations will limit rentals to a certain number of units, while others ban rentals altogether.
This is something that you will want to investigate before you purchase a condo. You don't want to find out after closing that you will not be able to rent the property.
You need to really make sure that you are going to be profitable before you buy a condo.
Make sure that you know your numbers. (If you want to see the spreadsheet that I use when I'm evaluating a deal, you can download it here.)
The condo fee is a huge consideration when you are looking at buying a condo. Make sure that you set aside money to pay the fee when your property is vacant.
A few months of vacancy can cost you a lot of money. You have no rent coming in and you have to pay the mortgage and the condo fee.
Single-family homes may require a little more work, but they also tend to be more profitable. You also have a lot more control over the expenses with a single-family home.
The other benefit to a single-family home is that tenants tend to stay longer.
As a landlord, turnover is my biggest expense. Anything that I can do to get a tenant to stay another year or two has a huge impact on my bottom-line.
If you want to learn more about buying rentals, check out my Free ebook 5 Steps To Buy Your First Rental.
You can download it below, and I'll also send you other tips to help you buy your first rental property.