Investing in condos and townhomes can result in a lucrative exit strategy for those that know what they are doing. If for nothing else, investing in condos and townhomes is not unlike investing in their single-family counterparts: there’s no reason a sound strategy can’t pad your coffers with a little extra profit. It is worth noting, however, that condos and townhomes tend to appreciate at a slower rate than single-family homes, so the benefits tend to be the result of more long-term strategies that witness owners rent out their properties to capitalize on today’s historically high rent prices.
Are you interested in investing in condos and townhomes this year? If so, take a look at this primer before you take the leap.
The Benefits Of Investing In Condos & Townhomes
The benefits of buying condos and townhomes will depend drastically on what your exit strategy is. For the sake of this article, let’s assume you are buying one to rent out. If that’s the case, there are a number of reasons investors should covet the idea of buying a townhome or condo:
- Cash Flow: As the single most popular reason for investing in buy and hold properties, cash flow represents the difference in money coming in and the money going out. In other words, it is what you end up with after paying all of your expenses (not the least of which include your mortgage, property taxes, utilities and other miscellaneous expenditures). Say, for example, you have a rental property bringing in $1,500 a month and your expenses are somewhere in the neighborhood of $900 a month. The $600 difference represents a positive cash flow and, perhaps even more importantly, the key to becoming truly wealthy. What’s more, rents are historically high across the country, making the prospects of rental properties even more attractive. Asking rents are tipping the scales in favor of today’s passive income investors.
- Appreciation: Second only to the actual cash flow generated by a rental property, appreciation is a great way to profit as a passive income investor. The growth in value of your asset can really contribute to your bottom line over the lifespan of a property. That said, appreciation is in no way guaranteed. While homes tend to appreciate more often than not, appreciation should be seen as “the icing on the cake,” and never expected. In the event a home does appreciate, however, rental property owners could be in for a nice surprise.
- Loan Amortization: Amortization is a fancy way of saying that you are going to pay back a loan over a predetermined period of time. That said, savvy rental property owners — and I would assume every successful rental property owner — aren’t the ones paying down the loan. If they play their cards right, passive income investors will actually be able to pay their original loan using the rent they collect from tenants. Think about it; it’s entirely possible to pay down your mortgage using other people’s money. In doing so, you’ll benefit from positive cash flow every month (if you invested wisely) and build equity in a property without spending any of your own money. Before you know it, you’ll own the property free and clear.
- Tax Shelter: Unbeknownst to many new investors, rental properties are actually a great tax shelter. Thanks, in large part to rental property depreciation (or phantom losses), savvy investors can actually decrease their tax obligations come tax time. Otherwise known as rental property depreciation, the powers that be (the I.R.S.) actually allow qualifying property owners to write off a portion of the cost of the asset each year for 27.5 years.
- Passive Income: As its name suggests, passive income is just that: passive. It is entirely possible to sit back and collect rent checks without doing anything — that is if you have established a sturdy foundation ahead of time. With the help of a third party property manager, you won’t have to lift a finger. And while their services come at a price, I can assure you it’s well worth it. With the help of a property manager, you are free to add more properties to your portfolio without adding to your workload.
- Retirement Vehicle: It should go without saying, but the passive nature of a properly built rental portfolio is — in my opinion — the single greatest retirement vehicle. You see, most people don’t have enough of a retirement savings to live comfortably once they do actually stop working. Therefore, it only makes sense to supplement their golden years with more, and a passive income portfolio could do just that.
Investing in condos to rent can be a great decision. These benefits, and many more, could be yours if you invest wisely.
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How To Start Investing In Condos & Townhomes
If you are interested in investing in condos and townhomes, here’s a very basic step-by-step guide to get the ball rolling:
- Step 1: Do your homework
- Step 2: Formulate a sound strategy
- Step 3: Secure financing
- Step 4: Begin your search for the right property with the right numbers
- Step 5: Make an offer
- Step 6: Hire a third party property manager
Investing In Condos Vs Houses
Again, there are plenty of similarities between investing in condos and houses, but that doesn’t mean there aren’t differences that warrant your consideration.
As I already alluded to, condos and townhomes tend to appreciate at a slower rate than their single-family counterparts. As a result, more investors tend to buy condos and townhomes for their long-term viability. In other words, most townhomes and condos are purchased as buy and hold properties to rent out.
Investing In Pre-construction Condos
There are arguments for and against the idea of investing in pre-construction condos. That said, the direction you choose isn’t contingent on a universal answer, but rather a case by case scenario. You see, there are benefits to investing in pre-construction condos, and there are benefits to investing in existing inventory. What’s more, each option comes complete with their own drawbacks as well. The path you choose should really depend more on what you hope to get out of the property and what your endgame is.
Should I Invest In A Condo Or Townhome?
On the surface, condos and townhomes are more similar than they are different. That said, investors can’t ignore the differences that exist between the two types of properties. If for nothing else, it’s their differences that will persuade you to choose one over the other.
If you are otherwise unsure of which exit strategy to pursue, I recommend asking yourself a series of questions to help differentiate between the two. And to make things easier on yourself, here are some of the most important questions you can ask yourself if you are trying to decide between investing in condos or townhomes:
- What are the lender requirements for each? Does the financing you already have lined up favor one property type over the other? Condos and townhomes will have different requirements for borrowing money, so make sure the one you choose works for your strategy.
- How long do you plan on keeping the investment? History suggests townhomes have a better history of appreciation.
- Does the development have a rental cap? Some developments have a rental cap, which restricts the number of units that can be rented out. Pay special considerations to not only the rental cap requirements, but also HOA rules that could impact your investment.
- Which location is better? More often than not, the location of a property will have a huge impact on future performance. If you are choosing between a condo or a townhouse (all things being equal), you may want to consider the one in the up-and-coming location.
- What sort of HOA are you dealing with? Some HOAs are very strict, whereas others are nonexistent. Determine your HOA tolerance and factor it into the options made available to you. Purchase a condo or townhouse with an HOA may help its value, but future renters may not love the rules they will be expected to follow.
When all is said and done, investing in condos isn’t all that different from investing in townhomes; the basic tenets still apply. The idea is to purchase a home with positive cash flow; it’s a simple as that. However, there are several important questions you will want to know the answers to before you commit to one or the other.
Condo Investment Tips
If you are looking to invest in condos and townhomes sooner rather than later, may I offer you some of these tips?
1. Chose The Location Wisely: Seeing as how most condo and townhome investments are long-term strategies, it pays to pay special considerations to the location you buy in. That’s not to say location isn’t important with every other strategy (it is), but since they are typically rented out, it helps to buy a condo in an up-and-coming area. In fact, you could very easily argue that the area is a lot more important than the property itself. That said, I highly recommend doing your research before you buy. Ask local realtors how the prospects are. Try to identify any future projects in the area. Are there any schools or malls going in?
2. Don’t Ignore The HOA: Most condos and townhome developments come complete with a homeowners association (HOA). As such, it’s in your best interest to weigh your decisions with the HOA in mind. Some HOAs come with hefty fees and strict rules, whereas others may not exercise their powers at all. The said, there are certainly pros and cons to buying properties in HOAs. It is up to you, however, to determine whether or not they should impact your decision.
3. Amenities Are A Selling Point: The whole idea behind renting out a successful property is to create a sense of demand. In doing so, you see to it that your home doesn’t remain vacant, and that it can ask for competitive rental prices. That said, it’s my professional opinion that condos and townhomes come with an inherent level of demand. If for nothing else, most of them come with pools, gyms, parks and other amenities renters might find attractive.
- Though buying a condo or townhome is similar to buying a single-family property, there are certainly differences worth noting for long-term investors.
- Since condos and townhomes tend to appreciate at a slower rate, most investors view them as long-term exit strategies.
- Done correctly, investing in condos and townhomes can pad your real estate coffers quite well.