It was a beautiful condominium. The layout was spacious and open, tons of natural light coming in, high-end finishings and appliances, the dining area overlooked the mountains, it was in a desirable neighborhood, and it even had a yoga studio in the complex. At first glance, the price seemed below market too. It appeared perfect. What a great spot to live, I thought – renters would clamor over this place. We had found our next investment property, right? But then that fateful number was disclosed… As a landlord, the most important rule to follow when buying your next investment property is what? Although important, it’s not the location of the property; nor the price tag. It’s all about cash flow. As a real estate investor and landlord, the most important aspect is that you get paid to wait. Accounting for the rent you will collect, and the costs to upkeep and run the property while servicing the mortgage, there should be a yield of roughly 5-6% annually in positive cash flow based on your investment (down payment).
Why Landlords and Real Estate Investors Don’t Buy Condos
The problem with investing in condominiums for rental properties are the condo/strata fees. You, the investor, have little to no control over that cost; and as the building ages, they get exorbitant. And they’re designed to establish a large contingency or reserve fund in case of the worst-case scenario… at least that is how they’re sold to the condo owners in the building. Reality is that contingency is built up over time in an attempt to make the building more appealing to new buyers, which is counterproductive in my view. A large monthly strata fee is more of a deterrent than a lower than average contingency fund. 90% of the time, condo fees are deal breakers as they kill your cash flow entirely, often pushing the property into negative cash flow for real estate investors.
It’s important to understand that although condos may be cool, centrally located to amenities and often have great city views; they’re designed to be sold to the end-user. They come with relatively minimal land value and, often, there is very little you can do to them (from a value-add perspective) that doesn’t require approval from the strata council. In some of the newer, higher-end condominiums there are rental restrictions as well (requiring units to enter a rental pool/cue). Not to mention, with all those people stacked on top of each other there is a high probability you’re going to have to step in when your tenant is annoying, or being annoyed by, the neighbours due to noise (or whatever else humans squabble over when they’ve been too close for too long).
Condo Fees are Deal Breakers for Landlords
Successful real estate investors aren’t caught up with the sizzle factor of properties. While nice finishings most certainly matter to renters, the money is made when YOU add that value, not the previous owner. You should be the one tailoring the property toward the end user because that vision and ability to create value is what pads your bottom line. And of course, you need to have a certain level of control over your monthly costs on a rental property, or at the very least they need to be predictable and reasonable.
Condo fees are cash flow killers, thus largely making condominiums bad investments for landlords. The most important aspect of investing in real estate and being a landlord is getting paid to wait.
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