Make Money With Condo Rentals

What are the advantages of investing in condo rentals versus houses? Simplified maintenance, and more cash flow in some areas. The catch? Some condominium complexes won't allow you to rent out units. The solution? Find one that allows it.

In many areas, the rental rates for condos and houses of similar size are about the same. Sometimes a two bedroom house will get just a little bit more than a condo. On the other hand, in a condo complex with a swimming pool, the rent might be the same or even higher.

The more important point is that while rentals rates are similar, purchase prices are often very different. When we lived in Tucson, Arizona, for example (2005), you could buy some decent two-bedroom condo units for as little as $74,000. To get below $160,000 for a two bedroom house you had to start looking at fixer-uppers, or in the bad parts of town.

The houses cost more than twice as much, but what did they rent for? The rent was a little more for a house. A little more rent, and you pay more than twice as much? There was no possibility of cash flow with rental houses in Tucson in 2005. It was at least possible to break even on a condo rental.

Each area is different in the relationship between the prices of condos versus houses. In some places the condos cost as much or more than the houses. But in most places, unless they are on a golf course or lakefront, they are less than houses of the same size.

Checking just now (January 2007) for example, I see that there are several 2 bedroom condos for sale in Austin Texas, for under $50,000. I'm not sure what the rental rates are there, but you don't need much rent to get positive cash flow at that price. And there no two bedroom houses listed for sale that cheap at the moment.

If you invest in condos as rentals, be sure that the complex you buy in allows you to rent out the units. Some only allow owner-occupied units. Others may limit the number of units that can be used as rentals. This is because banks will stop loaning on condos if more than a certain percentage in a complex are rentals. This can make it hard to sell, so be happy that they enforce these rules.

Also remember to take into account the condo association dues (sometimes called HOA fees, or home owners association dues) when accounting for your expenses. Relative to the purchase price and rent, your expenses may seem a little high compared with houses. On the other hand, since all exterior maintenance is usually included in the monthly fee, there are fewer unpleasant surprises with condos than with houses.

Follow the usual procedure in analyzing a potential condo rental purchase. Start with projected income, subtract all expenses, to arrive at the net income before debt service. When you can borrow what you need for payments less than this amount (leaving you some cash flow), condo rentals can be a great investment.

One other thing. Such a discrepancy between condo prices and the prices of houses doesn't necessarily continue. If interest rates rise, or housing prices rise too fast, more and more people will start to notice that condos are cheap by comparison. The demand thus created may cause condo prices to rise even as the prices of homes stop rising.