With real estate prices increasing dramatically in some cities, it is no wonder many are looking to get into the market any way they can. Condos are an option for those who can’t afford a single detached home since prices are usually substantially less. But with the lower purchase price there are downsides to condos that any investor should consider.
The slump in oil prices had a negative effect on condos in Calgary, making it more difficult to rent them and taking longer to sell.
The two words that can send chills down the spine of any real estate investor are: condo fees. The fees usually charged each month and cover common living expenses such as heat, water, sewer, garbage pickup, snow removal, lawn maintenance and recycling fees. Some buildings even cover electricity through condo fees. This means that the higher the costs are to run the building, the higher the fees will be. If your neighbour insists on running his/her air conditioner 24/7 during the hot summer months – it will cost you money through increased condo fees.
Condo owners who rent out their units usually charge a flat fee for rent and pay the condo fees themselves. Owners of single detached homes, on the other hand, usually pass the costs of all utilities on to the tenants. The key difference with single detached homes is that the owner has control over the costs and isn’t affected by the decisions of their neighbours.
Another aspect of condo ownership that can cause frustration for condo owners is a special assessment. Condo corporations must have adequate reserve funding to cover any major unforeseen repairs that could occur. If the reserve funding is not adequate, a special assessment may be given to all owners requiring them to cover the difference.
Again, this is an aspect of condo ownership that depends on the control of others – mainly the condo board. If the board is great at handling the finances of the building, there usually won’t be any special assessments because there wouldn’t be a significant shortfall in the reserve fund. If the condo board doesn’t set aside enough money for future expenses, then there will likely be a special assessment for each condo owner when the 5 year reserve fund study is done.
Less Desirable Housing
While location is a huge factor in any piece of real estate, the fact is Canadians are used to having their own space and don’t want to give it up. A study conducted in 2011 showed that 74% of Canadians wish to live in a single detached home complete with a basement, garage and yard. Condos sometimes have shared yards and attached garages, but there are many restrictions on personalizing the areas to suit the needs of the people living there. Since condos are less desirable, in a market downfall they are usually the first to fall and the last to see prices recover.
Some condos have lots of rules regarding pets, parking, noise and even the age of people living there. In our condo, pets require approval by the board and must be 25 pounds in weight or less. Other buildings have age restrictions such as no one under the age of 18.
All these restrictions are great for some but essentially limit the market to a select few. For example, if you have friends from out of town who own a big dog, you’d have to find alternate accommodations for them while they were in town. This can be a big drawback for some that single detached homes don’t have to deal with.
However, that being said, there are some positives with condos:
- maintenance is handled by the board so there is no need to perform things like snow clearing or yard work.
- condos as an investment are “hands off” with much less to worry about (and possibly less stress). Most condo owners don’t need to worry about a failing hot water tank, furnace or any other major issues that a single detached home owner must deal with.
- condos can have better locations since apartment style condos are built up, not out. Being located near a major transit hub can fetch higher prices than houses that are further out.
Final thoughts: It’s ironic I would write an article advocating against condos as investments when I own one as an investment. If I could go back 7 years I would probably have chosen a single detached home, even though it was a significant step up in price. I know first hand how condos can be restrictive and it can be harder to get positive cash flows when condo fees are constantly increasing. They can be adequate for some investors, but overall in Canada single detached housing is more desirable and therefore in higher demand than condos.
Does anyone out there own a condo as an investment? If so how has it performed?