Are Condos Good Investments?

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Are condos good investments? It’s a loaded question and responses will vary. Asset class certainly matters. Most people think residential when they hear “condo,” and residential condos are, by far, the most numerous; however, the term “condominium” refers to a type of real estate ownership. Every asset class of commercial real estate can have a condominium ownership structure: office, retail, flex, industrial, and even land.

One of the most widely known and criticized aspect of condo ownership is the existence of monthly condo fees/dues. Condo dues cover the maintenance costs of the common elements of the property which can vary based on asset type, property type, services covered, etc. While condo fees will only increase in time, whether by inflation or mismanagement by the association, they also remove the responsibility of managing and maintaining the property from the owner. That has a value, but that value needs to consistent with the services provided and market conditions for the property to appreciate (not depreciate) in value.

All condominiums have an elected association that administers and enforces the bylaws, which contain conditions, covenants, and restrictions that govern the common ownership of the overall property. One of its duties is to assess and manage the funds derived from the condominium dues. Effective association management is crucial for the success/value of a property and its condominium units. They are responsible for efficiently and cost effectively maintaining the common areas all while keeping adequate reserves for repairs and renovations.

There is a common saying in real estate investing, “You make your money when you buy, not when you sell.” This old adage applies to condo investment as well. Commercial condo sales are much less frequent than residential sales and, thus, values can be difficult to assess using the sales comparable method. A better way to determine value is to apply a market leasing rate for comparable properties to the rentable square footage and then subtract real estate taxes, operating expenses, insurance, and utilities to compute the net operating income for the property. Once you have the NOI, you apply a discount rate based on market and tenant risk factors to calculate the investment value. Condo fees are considered operating expenses and, thus have a direct impact on the property’s NOI and value.

The answer to the question, “are condos good investments,” is “they can be.” Because condominium ownership involves shared control and responsibility, the efficiency and competence of the condo association is of paramount importance. Effective property and asset management on the part of the association have a direct impact on the property’s value. “Buying right” governs all good real estate investments and if the difference between the cost of ownership and net operating income generates an investor’s minimum return, the condo is a good investment.  So, don’t hate on condos. Good investments are not relegated to a specific asset class or ownership structure, they’re based on good financial, market, and investment analysis and an understanding of the implications of the type of ownership structure.

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