Condominiums seem like the ideal commercial real estate investment for beginners.
Condominiums cost less due to their size, and often there are a variety of units to choose from. At first glance, it might seem as though both of these factors offer new investors the opportunity to own several units by leveraging the equity of one property in order to purchase additional units.
However, there are unique factors to condominiums that make investing in them a challenge.
Monthly Association Fees For Condominiums
Condominiums offer services that are like the ones in single or multi-family homes. Fitness centers, swimming pools, an advanced security system are common to nearly all complexes. They may be convenient, but you need to pay for them.
In addition, owning a condominium means you become a part of a group of homeowners. You will need to pay additional fees when the board decides to fix the roof or upgrade the heating and air conditioning system.
Monthly fees can range from hundreds to several thousand dollars, and along with the added assessed fees, can devour any profit you may have been hoping to see.
Rules. A Lot.
Condominium associations are necessary in order to provide leadership and ensure that the required tasks for the successful upkeep are getting done.
In order to make sure that the complex retains the character and function it was originally intended for, there is usually a long list of bylaws governing what can and can’t be done.
Sometimes this may prevent you from upgrading a component you feel is crucial to renting out a property. Other times it may cause endless delays as you wait for approval from the board before the project can get underway.
In addition, there are often rules against renting out condominium units.
Some associations allow only a certain percentage of units to be rented per year, while others rotate between members wanting to rent their properties.
That might be fine if you plan on living in a unit before renting it out. But if you don’t plan on being an owner-occupant, or have bought several units in the same complex, you might find yourself diverting funds from other assets in order to cover the mortgage on this one.
When you buy commercial property, you also buy the land that the property occupies. This automatically decreases the value of the property, as you are only offering the condominium itself for sale.
Add this to the problem of trying to sell a unit in a complex where several other identical units are or sale, and you’re left with buyers who will either bargain you down on price (because there are five other units just like it), or be reluctant to purchase an occupied unit when they can get an empty one.
And although condominiums are less of a management hassle than say, multi-family homes, they don’t hold value as well as other commercial properties, leaving you to pray to the ups and downs of even the smallest changes in the market.
Difficulty Getting Financing Your Condominiums
In some cities, very small complexes may have a hard time getting financing. That’s because while the maintenance and special assessment fees remain pretty much the same, the number of units to which the cost can be spread out between is much lower. This increases the fees for each unit, making it harder to find renters willing to pay the higher costs.
On the other hand, income cities the opposite is true. Large complexes are riskier since they may take a long time to sell and don’t appreciate well. Banks will sometimes run a comparison between the number of empty units in the city overall, and the number in your desired property.
If the numbers don’t add up, chances are you’ll have a harder time selling later on.
If you’re a residential investor looking to get started quickly in the commercial real estate, avoid condominiums.
A better bet would be to find a private lender who can help you purchase a multi-family apartment building, which though more management intensive (unless you hire a property manager), appreciates quicker, is more stable in a volatile market, and is easier to secure financing.
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