Buying a condo is a great way to expand your real estate investment portfolio. In many ways, it is easier to acquire and manage than a house and lot. With that being said, a condo can be an excellent first investment for a beginner real estate investor—and even those with already a few assets under their belt.
But just like with any other investment, there are a lot of variables that come into play when you invest in a condo, specifically the expenses. Here are some of the most important costs that you need to consider before you delve into this kind of real estate investment:
The down payment
Similar to buying a home for personal use, the biggest obstacle for many real estate investors is the down payment. Unless you have a lot of capital to work with, putting even a 20% down payment can take a huge hit on your finances. For this reason, it is highly advisable to allow yourself enough time to save up for the down payment and find a solid source of capital that won’t put you down in interest.
For small-time investors, one of the best ways to acquire enough money for the down payment quickly is through working with a hard money lender. Unlike traditional financial institutions, hard money lenders won’t have you jumping through multiple hoops to secure a loan. However, the downside is that hard money loans usually come with higher interest rates. But if you would like to go the traditional route, it may take you a little more time and effort to acquire a loan, but you would likely get lower interest rates in return.
Condo insurance
Some parts of a condo are outside of the coverage of a regular HOA’s master policy, such as the unit’s appliances, fixtures, interior, and the belongings inside it. Condo insurance will help protect your investment in case of any untoward incident, such as a fire or an accident on your property that leads to a lawsuit. To determine how much you need to set aside for insurance, get a quote for condo insurance before you chase a prospective investment.
HOA fees
Similar to a traditional house or apartment, you would also need to pay for homeowner’s association fees. Although this cost may seem negligible at first glance, it can definitely add up every month. Hence, it’s always a good idea to factor in this cost when figuring out your expense plans, especially when determining how much you will charge for rent.
In many cases, condo owners pass the HOA fees to tenants. You may opt for this option if you wish, but to ensure that HOA fees are paid regularly without a hitch, have a buffer so that you can pay it off in case the tenant does not pay rent on time.
Vacancy expenses
In the most ideal situation, you will have tenants occupying your condo rental at all times. However, this is not always the case, and many beginner investors make the mistake of assuming that their rental will stay occupied easily.
Don’t make the same mistake; factor vacancy expenses into your budget plan in case the condo stays vacant for longer than a few weeks. These expenses include utilities, the mortgage, HOA fees, condo insurance, housekeeping, and the costs for advertising the condo to potential tenants.
Repairs and replacements
Just like any other rental, a condo—even when new—will need repairs and replacement at some point. To avoid having to pay for breakages that are the tenant’s fault, ensure that expectations are clearly outlined in the lease. For example, you would want to specifically indicate that you will not be responsible for condo failures that stem from a tenant’s improper use of the facilities.
In turn, you must give the property a thorough inspection before the tenant moves in to determine what kind of repairs or replacements you will be obligated to make, e.g. a leak due to a pipe that was already worn before the tenant moved in.
To save money on repairs, it always a good idea to fix potential issues before they become real problems. A great way to do this is to have a repair specialist inspect the rental and perform preventive maintenance before the new tenant moves in.
Investing in a condo can take a lot of money, but having one as a rental can allow you to reap a great ROI. In any case, it’s best to be prepared with the costs before investing in real estate, both the major and minor ones.
