Preparation for Condo Investing
Six red flags to look for during the process of condo investment.
Condos can be a great investment, especially for busy real estate investors. Condos require less maintenance than single-family homes and offer nearly equal value.
As of March 2022, the median single-family home value had increased by 15% from the year before, while the median condo had increased in value by 12%, according to the National Association of Realtors.
Condos are typically less expensive, making them a great point of entry for a fledgling investor who may not be ready to take on a single-family home or buy an apartment building. Condo investors can also reap some of the same benefits as buying a single-family home, such as buyer rebate programs and eligibility in tax-deferral strategies like a 1031 exchange.
However, like any investment, you have to do your due diligence. Before you take out an investment property loan, look for these six red flags so you don’t get stuck with a dud.
1. A Noisy Unit
Condo occupants live in close proximity to their neighbors, and if the unit isn’t properly insulated and soundproofed, noise problems could negatively impact occupiers’ quality of life. Renting a noisy condo can be tough, and if noise is a chronic problem, it could lead to frequent tenant turnover and constant complaints to the property manager.
If you’re considering investing in a condo, try to view it at a time when neighbors are home. Can you hear music or television through the walls? What about children or pets? If such activity is audibly noticeable, it’s a safe bet that the unit is going to have some sound.
2. High Fees
Every condo comes with homeowners association (HOA) fees, and those fees can vary widely between buildings. Fees pay for utilities, staffing, building maintenance, and repairs — as well as a reserve fund if the property needs emergency work. Condo fees can average between 60 to 80 cents per square foot, depending on where the condo is located. As a general rule, the more amenities a building has, the more fees you’ll pay. However, fees that are much higher than average could indicate poor management. The costly fees could be a sign that the building needs a lot of work that can’t be covered by the reserve fund.
As a potential buyer, you can ask to see the HOA’s financial documents. That will show you how much the HOA is charging, how it’s spending the money, and how much is in the reserve fund. If some owners are withholding their fees, that’s another red flag. It’s usually an indication of trouble in the building.
3. Dirty Common Areas and Outdated Amenities
Carefully examine the building’s common areas, including the fitness center and swimming pool. If common areas, such as hallways and lobbies, aren’t clean, that’s a big red flag. It can be a sign of lax property management.
The same applies to the amenities. If the fitness center has old machines with “out of order” signs on them, or it looks like the pool has been closed for months, something isn’t right.
Even if you personally don’t object to slightly subpar maintenance, if you’re using your unit as a short-term rental investment, grimy hallways and stagnant swimming pools will get you nothing but negative reviews from tenants.
Before you close the deal, you should always have a licensed inspector examine the unit, just as you would with a single-family home.
4. Substandard Construction
A lot of developers have joined the condo gold rush, and inexperienced or rushed contractors may have built poorly-constructed properties. When you view a unit, look for signs of shoddy construction — cracks in the ceilings or walls, walls and floors that don’t quite meet, windows and doors that stick, and gaps around windows or doors. Ask if there have been any building code violations.
You may want to look into the developer’s history to see if the company is associated with problematic buildings. Before you close the deal, you should always have a licensed inspector examine the unit, just as you would with a single-family home.
5. No Parking
One of the most common complaints among condo owners is a shortage of parking. Many condo buildings have very limited parking for guests and may even aggressively ticket and tow violators. Look for properties that provide generous guest parking. If you buy a property that has limited parking, make sure your tenants understand the situation, or they (and their guests) could be hit with expensive tickets and towing charges.
6. Is It a Good Fit?
When you’re considering a condo, take note of the other owners. You’ll want to make sure the building’s culture is compatible with the prospective tenants in your rental market. For example, if your local rental market is dominated by college students, it’s not wise to buy an investment rental in a building that caters to retired couples. Not only will your tenants feel out of place, their lifestyle may result in a steady stream of complaints from neighbors.
As important as amenities, fees, and parking can be, culture fit is one of the most important factors in tenant satisfaction, and by extension, the ongoing success of your investment.
Luke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers, and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the L.A. Times, and more.