When Are Condos a Good Investment?

Buy a Condo lg (2016)

Updated for 2019

In the Ottawa market, condos are rapidly becoming the go-to properties for everyone from first-time buyers to baby boomers looking to downsize.

A few years ago, there was a large number of condos on the market, but not quite enough interested buyers. This made the condo market a little slower.

But with the introduction of the mortgage stress test rule changes in 2018 and the lower than usual inventory numbers Ottawa is experiencing, they’re once again a hot commodity. In fact, condo sales were responsible for much of the market’s growth in 2018 – just look at these fall numbers!

Whether you’re looking for a home of your own or an investment property, condos can be a smart investment. I work with real buyers and sellers every day, and I know what’s selling and what’s not. In this article I will be letting you in on just some of the secrets to making a condo purchase work.

What Does “Condo” Mean?

Before we get into the details, let’s be clear what we mean when we say “condo”.

Most people immediately think of a high rise apartment. But it’s important to remember that a condominium can also be a townhouse or stacked townhouse (one condo on top of another). They can even be in communities with a mix of these home types.

Who Should Be Looking at Condos?

In my experience, there are a few different buyers that would find condos a worthwhile investment.

1. First Time Home Buyers

Condo townhouses can be much more affordable than freehold homes if you’re a first time home buyer.

If you’re new to real estate, it’s important to factor in that you’ll need to do upkeep and make cosmetic improvements to the home, thinking about the future resale value. Buyers are really choosy these days: they want beautiful turnkey properties and are picking units with better finishings, even when they cost more.

Other factors that need to be in place to make this investment work:

  • The home is not too far from downtown or your desired location.
  • The home is near mass transit.
  • Make sure any condo you consider buying has a good reserve fund. That’s a pool of accumulated funds from monthly fees, set aside for larger future expenses. If the reserve fund doesn’t have a lot of money in it when you’re looking at the condo (particularly if it’s an older condo), there may be a jump in condo fees down the line when a major renovation is required.

Along with being a greater starter home, the right condo could be a good investment as a future rental property to start your real estate portfolio. This is especially true if it’s a townhouse, as those kinds of rentals are in high demand right now.

2. Boomers and Seniors

Baby boomers, 55+, seniors, and especially snowbirds are the perfect buyers for condos. Healthy adults whose kids have left the nest are also moving to adult lifestyle condos – if the price is right.

If a senior wants to “age in place” (avoid retirement homes by having a home with senior-friendly design) condos are a great option. Senior-oriented communities not only have a great balance between independence and socializing, but many of these communities have features like hair salons, weekly social events and grocery stores right on the site.

Snowbirds love condos because it means they can lock the door and head south for six months with no maintenance worries. Condos are also more affordable investment than a single-detached home, which means if you own (or are looking to purchase) your sun-soaked paradise property as well, it’s more financially viable.

3. Parents of University Students

Parents who live outside of Ottawa sometimes do the math on residency fees for local universities, or the rental costs to pay down someone else’s mortgage, and decide they would rather not let that much money go out the window.

Instead, they buy a small home for their child to live in, with the plan to either sell it or rent it after graduation.

There are a few things you’ll have to do to make this work:

  • Buy resales, not new builds.
  • Just like for the first time home buyer, you want something with a great location and transit access.

4. Singles

Women over 30 are looking to be part of real estate ownership. They’re actually a significant home buying demographic, and they especially like stack units in the suburbs.

Recent divorces can also mean each member of a couple is left looking for a smaller, more affordable living option.

5. The Super Wealthy

There are some locations that will always be desirable for those with plenty of disposable income.

Frequently these condos are high rises located in the most desirable central neighbourhoods, have high condo fees of $2,000 or more, but have spared no expense on design and convenience.

With these locations, it’s about the company you keep: the other owners are often one of the main selling features. Executives and the very wealthy want to be part of a community with similar interests and get access to networking opportunities. Security and cultural experiences are also a major concern for the people who buy luxury condos.

Condos Don’t Work For…

1. People Who Buy High Rise Condos and Expect to Flip

The Ottawa market may be a lot safer than Toronto or Vancouver, but that doesn’t mean flipping a condo is a piece of cake.

The famous “3 year flip” that builders and their salespeople market to investors may work in some cases, but what happens when everyone in the building tries to do the same thing?

Here are some other key things to be wary of with new builds:

  • The perceived value of a new build condo can be much higher from the builder’s perspective than the Canadian Mortgage and Housing Corporation’s (CMHC). This means you may not be able to get the level of financing you want.
  • Condo fees often jump dramatically about 2 – 3 years after a new build. Builders can be really optimistic about maintenance costs, and the management gets a surprise once they see what really needs to be paid for day to day, thereby encouraging an increase to condo fees or applying a special assessment to owners.

2. People Who Don’t Understand the Rental Market

Ottawa’s rental market is competitive right now because more and more people are choosing to wait to buy, so any well-maintained rental is going to get some interest.

But no matter how high the demand, the key to the rental market is a location that works for your target renter.

For example, lower income renters need a fair rent value and are typically looking for utility inclusive properties plus transit access.

What About the Condo Fees?

Condominiums do have levels of shared expenses. Limited condos usually carry lower monthly fees, but only address the management, snow removal and ground maintenance of the corporation.

Full coverage condo groups can have higher fees, but will cover replacement costs, such as roof, windows and often additional amenities.

Where condos can get unpredictable is the monthly fee. If the condo has unforeseen expenses fees can go up over time. Fees also vary widely: they start from a minimum of $100/month with an average of $250 to $300 for town homes and stack units to $500 to $1000 for high rise buildings.

Monthly costs can be even higher for elite locations with full security, amenities and premium finishes on everything.

How to Tell if the Fee is Reasonable

Condo builders and managers often make the argument that any money a condo owner spends in fees is money a single family detached homeowner should be putting towards maintenance and future repairs.

Be diligent on the math, as condo fees can sometimes add up to much more than you would spend to get things fixed on your own, even factoring in the big ticket items like new roofs over time.

As well, as your agent it is imperative that we enlist a lawyer to look into the status of the condo. When there is a shortfall in the budget of the reserve fund, condominiums have the right to apply Special Assessments to owners in order to bump up the operating costs/maintenance of major items. This can be hundreds of dollars to thousands.

Making a Condo Purchase Work

Buying a condo can be complicated these days. You have to weigh a lot of factors, understand the needs of your target renter or eventual buyer, and make sure you crunch the numbers. Most importantly you have to know the market inside out.

There are a lot of great opportunities out there, and I can help you find them. Having the 30+ member Paul Rushforth team behind me means I spend more of my time actually buying and selling homes than most real estate agents. As a result I have a much clearer picture of what’s happening in the market right now.

Isn’t that the kind of advantage you want on your side?

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