Do Condos Make a Good Rental Investment? 6 factors to consider.

Are you working to diversify your portfolio? Are you a fix-and-flip investor who's considering investing in rental properties? If so, condos can be an attractive option.

Condos offer many benefits of holding rental property, such as generating passive income, building equity, and potentially providing tax benefits. However, making some unique considerations when investing in condos would be best.

There are six key factors to consider before taking the leap. Let's uncover the basics and explore each one.

Condos — the basics

People who live in a condo own individual units. However, they share ownership of common areas, like gyms, pools and lounges. Each owner pays a monthly fee to help maintain these areas, providing residents with access to certain amenities.

Landlords of condos are only responsible for their unit's interior, while the condominium takes care of the building itself. Typically, these are built as tall buildings or attached homes, though a few are stand-alone homes.

The HOA or condo association is responsible for a condo complex's day-to-day operations and financial management. They create regulations for owners and occupants of the building. They also implement these regulations. Finally, they decide on the amount of fees payable.

Here are the two important points of note about condos as rental properties:

• As the property investor, you're only responsible for "walls in," and the condo handles the rest.
• The decisions made by the HOA or condo association can have a major influence on the financial success of the condo. Yet, you are not able to influence them.

Want to invest in condos? Here are six factors to consider

Condos can make good rental properties, but whether or not they are a good investment will depend on various factors. Let's look at some points you should consider:

• Location: The condo's location will play a significant role in determining its rental potential. Areas with high demand and limited supply of rental properties are likely to command higher rental rates and lower vacancy rates.
• Rental Market: You should also consider the rental market in the area. What is the average rental rate? What are the rental vacancy rates? What is the demand for rental properties? You can research this information online or consult a local real estate agent or property management company.
• Condo Association Fees: Condo owners must pay association fees for maintenance, insurance, and other expenses. These fees can vary significantly from one property to another and dramatically impact the investment's overall profitability.
• Rental Rules and Regulations: Condo associations often have rules and regulations regarding rentals. These include a minimum lease term and restrictions on the number of renters. You should be familiar with these rules before purchasing a condo.
• Property Management: If you do not plan on managing the property yourself, you must hire a property manager. Property management fees can range from 5% to 10% of the monthly rent, impacting your profits.
• Maintenance and Repairs: As the landlord, you are responsible for maintaining and repairing the condo. You should budget for these expenses, which can add up over time.

What about financing?

Real estate investors often partner with private money lenders (also called hard money lenders) to finance their real estate investments. This financing option is popular for a variety of reasons. Here are just a few:

• Speed: Real estate investment loans from private lenders can be approved and funded much faster than with traditional lenders.
• Flexibility: Private money lenders are often more flexible than traditional lenders. They will finance a wide range of properties. Loan terms are usually more relaxed, and credit history is often less important.
• Collateral-based lending: Private money lenders rely on collateral-based lending. Their decisions are based on the value of the property rather than the borrower's credit score or income.

Lenders, such as Kiavi, provide a variety of loan products. These products are tailored to meet the requirements of real estate investors of all experience levels. No matter what their investment strategy is. Let's take a look at a popular long-term financing offering for investing in a single asset rental, like a condo — a DSCR rental loan.

What is a DSCR Rental Loan?

Private money lenders typically offer a DSCR (Debt Service Coverage Ratio) loan for the long-term financing of rental properties. These loans are specifically designed for real estate investors to finance income-producing properties like rental properties.

Suppose you're looking to purchase a condo as a rental property investment. A DSCR loan is a good option. It allows you to borrow based on the property's income potential, not just your creditworthiness.

The lender will assess the property's cash flow to decide if it can bear the loan payments. This assessment is in addition to looking at your credit score and income.

DSCR is calculated by dividing PITIA (monthly principal, interest, taxes, insurance, and association dues) by the gross monthly rent. While it varies between lenders, anything above 1.2 is usually considered good, and anything above 1.5 is considered great.

To qualify for a DSCR loan with a private money lender, you must demonstrate that your income and cash flow are sufficient to cover the loan payments.

The bottom line

Condos can make good rental properties if they are located in a desirable area with a strong rental market, have reasonable association fees and rental rules, and are well-maintained. It's essential to weigh the pros and cons and research the local market and expenses associated with renting a condo before you decide to invest.