So George a reader of the blog asked the following question in a comment.
Condos rent like crazy it seems, but appear to be poor investments compared to multi-unit purpose built buildings. On the surface, they have very little room for error or interest rate changes and an extremely low cap rate. Is this still correct or have times changed? Congratulations on your booming business! Competence and diligence always conquer. Your blog is a wealth of information for newbie investors. Thanks!
Do you believe condos a good entry point into the market? I have been trying to get into real estate investing for years but lacked the confidence until recently. I have a home suite that is going very well, but have been looking at duplexes (not up/down ) and quadraplexes. (I have shied away from condos). Admittedly their cap rates are very low as well. I have just become confident enough to take the plunge after reading several books, using your cap rate calculator (that’s an eye opener! ), finding some good blogs ( yours, million dollar journey, and canadian money forum in particular) that have veteran insights. I don’t like REITS as I think they are just another stock. I ‘m curious about your view as a rental specialist.
A sound argument could be made that the same applies to multi-unit purpose built buildings as well. The cap rate is extremely low and does not usually include deferred maintenance or capital projects required. Condos do not have such a luxury, the reason cap rates are low is because of maintenance fees and reserve funds. So from day 1 you are saving for the new roof that’s getting old rather than waiting till it starts to leak before “discovering” that old roofs need to be replaced for example. I think there are a lot of factors to consider when calculating the cost of building operations that many people do not consider.
My Favorite Investment Property
I’ve had the opportunity to look at and evaluate performance of rental properties over the years and my favourite kind of property is the lowly townhouse. There are a few costs to look at from a management perspective as a rental property.
- Landscaping and gounds maintenance
- Exterior maintenance, siding, roof, etc.
- Vacancy and turnover
- Lower Purchase Price
Landscaping and Grounds Maintenance
In most of these condo townhouses, landscaping is provided as part of the maintenance fees, but you get economies of scale. It will usually cost between $100 to $ 200 per month for these services if you don’t do it yourself as the landlord. Tenants are not required by law to do it and if you do try to get them to do it and the Landlord & Tenant Board gets a wind of it, they can get an abatement of rent.
Roofs, siding, windows, fences are all usually included. This is part of your maintenance fees. The condo boards are pretty good at keeping the place looking uniform and preventing “that guy” from painting his house pink.
Vacancy and turnover
These properties tend to be fairly stable, people stay for a longer time, in most cases they are 3 bedrooms and your target market is a family. Most families are concerned with their children’s school etc. and do not move as often as young professionals in one bedroom condos. Many times, your property will stay empty between tenants at least for a little while so less turnover equals less vacancy equals more money for you.
Lower Purchase Price
Townhouses generally have a lower purchase price than detached houses, but provide a similar level of rent but for much less capital outlay. You also don’t have to deal with basement tenants and the epic tenant fights that occur. So you kind of dodge a bullet there.
All in all, in my opinion you get most of the benefits of the detached house for less money and you enjoy high quality stable tenants paying relatively high rents.
Townhouses are my favorite rental property for all these reasons.
Have a happy week!