Buying a condo for rental income – Is it worth it?

The rental market is hot, so you may wondering if the time is right to become a first-time landlord. If you’re considering investing in condos for rental, here are questions you can ask as you narrow down the right condo investment property.

Can I rent this condo out?

It may sound elementary, but be sure to check with the homeowners’ association (HOA) of the condo complex to ensure you can rent out the condo unit in question — even if you know someone who has a rental condo in that complex. Some condo communities limit the total number of units that can be rented at any given time and in some cases, there may be a “waitlist” for condo owners who hope to rent their property.

After hearing news reports about the shortage of hotel rooms in the Twin Cities area during major events like Super Bowl LII, you may also be considering using the condo as a short-term rental on sites like Airbnb or VRBO. As with the longer-term leases, you should check with the condo’s HOA before purchasing a condo unit you intend to use for a vacation rental; there may be restrictions against this.

How does getting a loan change when buying a condo as an investment property?

If you are already a homeowner, when you take out financing on a second home, you may:

• Need a down payment of 20 percent or more.
• Have to prove to your lender that the condo can generate consistent rental income.
• Be approved for a loan at a higher interest rate than if you were purchasing an owner-occupied property.
• Have to shop around for a lender who is willing to finance investment properties.

Is this an ideal location for renting a property long-term?

As you consider buying a condo for rental income, you’ll want to select a location that’s likely to have short-term residents in the future. Many condo investors focus on cities and college towns, where renters and young professionals tend to congregate before they are ready to own a home.

But what about smaller towns, where properties can be more affordable? Is a condo in a small town or rural area a good investment? It depends. Property owners in North Dakota have made a mint during the recent oil boom, as their market’s rental rates grew to become the highest in the country.

But most small towns will never see that high influx of short-term residents, and it’s imperative that condo investors understand the inventory of the market and what renters are willing to pay before they buy an investment condo in a smaller town or non-metro area.

By checking Craigslist in smaller markets, you can anecdotally learn what landlords are able to charge and if there seems to be a shortage of inventory in the area.

How can I turn a profit renting the condo, when HOA fees and property taxes will likely rise in the future?

Before buying an investment condo, you’ll want to estimate your anticipated annual expenses in order to determine a rental rate that would help you turn a profit — and then research local rentals to ensure your would-be rental charge isn’t above the market rate for similar properties.

Expenses to factor in include:

• Monthly HOA fees.
• Anticipated property taxes.
• Any appliances, systems or fixtures that will need to be replaced prior to renting the condo.
• A budget for expected or unexpected annual repairs. This could include everything from an emergency plumber to ant traps to carpet cleaning.
• The cost of tenant turnover. Even if there is only a two-week lapse between renters, you could lose out on hundreds of dollars in rental income. As you take on a new tenant, you may also have to hire cleaners, painters and other vendors to get the unit in tip-top shape again.
• Landlord insurance, which varies from traditional homeowner’s insurance and specifically covers some typical liabilities that arise from tenant-occupied properties.
• A third-party rental management company, if you’d prefer to pay someone else to handle rental details.

What else should I take into consideration as I search for an investment condo?

Review the health of the HOA

You can work to minimize your risk by reviewing the “health” of the complex’s HOA. On occasion, the HOA may call for a special assessment, which charges the condo unit owners outside the typical HOA dues for a project or repair they’ve deemed necessary. Prior to buying a condo, check the HOA’s documents to see how often these special assessments have been called in the recent past. A healthy HOA will save money in their reserve fund so they can cover unexpected issues and avoid special assessments as much as possible.

Research the market

You’ll also want to pay attention to market volatility. Condos are a great investment in low inventory markets; when would-be buyers can’t find the right single-family home to purchase, a rented condo is a terrific backup plan. When there is a high supply of homes for sale, however, the value of condos can remain stagnant or drop, as these would-be renters turn their sights to affordable single-family homes they can purchase outright.

Understand a condo’s restrictions

Last, consider any restrictions the condo complex has in place for occupants. Allowing your condo renters to have pets can actually help you earn more money over time, so you may want to check restrictions on certain pets or breeds.

On the other hand, you may want a condo that includes certain restrictions. If you’d prefer your tenant not smoke in the unit, for example, you could narrow your search to condo complexes where the HOA already prohibits smoking in the units and on the balconies.

Key points and next steps

There is no foolproof way to guarantee that a condo will be a good investment, but many investors who buy and rent condos find ways to advantageously ride the waves of the market.

To best prepare for condo investment, ask yourself:

• How long do I intend to own and rent the property? How long will it take for the rental property to become profitable for me?
• Is this area a place where renters will continue to live, even if the market changes drastically?
• Am I able to pay close attention to the variables that could impact my investment — such as taxes and tax increases, local market values, and HOA dues increases and special assessments?

Ready to start investing in condos? Get connected with a condo specialist in your area today.

Additional resources to consider

How to finance a second home
Real estate basics: How rental properties make money
Is buying a condo a good investment?
10 questions to ask before investing in condos