Why Invest in Condos?
The Millennials are in the home buying years and have been the biggest home buying cohort in the US and Canada for a while. The baby boomers are still buying and Gen Z cohort is now in the mix as well. Couple this with a large influx of foreign immigration (expected to be close to 500,000 immigrants in 2023), there is going to be added demand for on the already limited housing supply for both rental and ownership. In my opinion, there is a real opportunity to benefit from this phenomenon in key Canadian markets based upon the current conditions.
Typically, condos will not appreciate at the same level of growth as a single-family dwelling (detached home) because the real appreciation is in the land and not necessary in the dwelling. But the key thing here is that condos have the lowest entry barrier for a buyer and a renter.
There are ways to invest in condos that can produce a highly profitable real estate portfolio (a topic for a future blog). A critical question to have answered is: what is your intended end goal of investing in the condo? Are you looking to buy and flip, invest as an income producing property for the longer term or something in between? These are very different strategies to employ based upon your overall objective.
Personal Real Estate Investing Experience
As an investor who has purchased properties across Canada, I have had seen a lot, so learn from my wins and mistakes. Many investment properties continue to work extremely well, and some were just okay. Only in one, did I lose money. The reason I chose to exit the property was because the property was not performing as well as originally projected and there was an opportunity to redeploy the funds into a better performing investment property.
As there are usually an abundance of condos for sale, your goal should be to get to a NO as quickly as possible without spending any money or a large amount of your time. With that in mind, I wanted to review the due diligence steps I have learned over the past 30 plus years of real estate investing. Due diligence is at the very core of my book Look Before You Leap, But LEAP!. That is why it has that title.
10 Essential Due Diligence Steps
1) Research the Condo Market
Analyze the condo market in the area where the property is located to determine if it is growing or declining. Look at recent sales data, vacancy rates, job growth, and demographics to determine if there is demand for condos in the area.
These seem like simple things to do, but they involve digging deep in your research as not all the pertinent information is always readably available with an internet search. Changes to the Official Community Plan (OCP), zoning, transportation infrastructure, etc. can and will affect rental demand, property appreciation, and potential future buyer demand should you wish to sell.
2) Analyze Comparable Condos
Compare the condo with other similar condos in the area to determine its potential value and rental income. Understanding the similarities and differences is critical to not only your acquisition, but also to communicate to your potential rental clients what sets your property apart. Here is a brief, but not an exhaustive, list of points of consideration when making your comparison: value, location, size, accessibility, age, exposure, and amenities within the unit, property, and area.
3) Review Financials
Obtain a complete financial history for the condo, including association fees, special assessments, and taxes. This will help you determine the condo’s potential profitability and assess whether it is priced appropriately.
What you are looking for here is red flags that could or would impact the viability of the property at an investment over both the short and long term.
4) Inspect the Condo
Schedule an inspection of the condo to identify any defects or issues that may need to be addressed. Look for structural damage, water damage, pest problems, and other issues that could impact the value of the condo.
Working with a professional inspector that specializes in condos can be invaluable as they generally will have more experience and specific knowledge related to this type of property. It is not just about the specific property but the common elements meaning the entire infrastructure of the building such as the roof, envelope, windows, doors, boiler or heating systems, elevators, foundation, water supply, fire suppression system, etc.
5) Review Condo Association Documents
Review the condo association’s governing documents, including the bylaws, rules and regulations, and financial statements. I suggest obtaining at least two years’ worth of condo documents. This invaluable info will provide insight into the management of the building and the financial health of the association.
The minutes will provide you all sorts of valuable info when you review them. Here are some questions that need to be answered in to get a good feel for how the property is run. Are the management and governing body (Strata council/condo board/board of directors) having regular meetings? What is the content of the minutes, and do the same issues regularly arise or are they dealt with quickly and completely? Are there complaints? If so, what is the nature of the complaints? Are there items of concern that appear to be chronic? Is the building maintenance being dealt with on a proactive and preventative basis or are there a lot of reactive and emergency repairs?
The financial statements are very important to show how the property is performing in relation to the budget and they also provide insight in the financial health of the overall property.
6) Check Condo Association Fees
Verify the monthly or annual condo association fees and determine if they are reasonable compared to other similar buildings in the area.
When you are comparing properties with similar number of condos and or amenities and because you have conducted the comparable condo research you will have a better feel for what would be the norm for the condo association fees (aka strata fees, monthly condo assessments, HOA fees).
7) Evaluate Condo Management
Consider how the condo is managed and if you will need to hire a property management company. Look for any red flags, such as high turnover rates or frequent maintenance issues.
This point was touched upon in #5, but understanding if you have high turnover with your property manager is a big red flag as the issue may lie with the relationship between the intended building and management company or internal issues within the management company and its staff.
8) Check Insurance Coverage
Verify the insurance coverage for the condo, including property, liability, and flood insurance.
Through your review of the condo association documents you should be able to discover of there have been any insurance claims within the period of the received documents. If there is nothing to reflect this, it is always prudent to ask if there have been any insurance claims in the past five years and what were they for.
Reviewing the insurance coverage document can reveal that there may have been an issue because of excessively high premiums or deductibles. It is one of the most important documents to understand and, if you need, get an experienced set of eyes to review it for you.
9) Conduct a Home Appraisal
Hire a professional appraiser to determine the condo’s market value and ensure that it is priced appropriately. In most cases, if you are getting a mortgage, an appraisal will automatically be done as the lenders will require it. If that is not the case, it is always worthwhile to get a market evaluation of the property. You could hire an appraiser, or you could request a (CMA) comparative market analysis from the knowledgeable licensed agent you are working with.
10) Perform a Risk Assessment
Identify and evaluate any potential risks associated with the condo, such as changes in the local economy, natural disasters, or legal disputes.
This point is a Biggy! This can prevent you from making a costly mistake. Many unseasoned investors wear rose-coloured glasses. They put most of their emotional and mental weight on the positive possibilities of the investment property which can be great. BUT due diligence is about uncovering the investment performance and external risks in addition to the potential upside. It’s the proverbial “land mines” that can cause severe damage or even scuttle your investment plans, performance, and your ultimate outcome!
As in life, nothing lasts for ever. Things, events, plans and even people change. This brings me to my final point to this blog and probably the biggest point in your due diligence process. This step should take place before you even buy your investment property. It is a simple but powerful question that needs to have more than one answer. The question is…What are your exit strategies?
You need more than one because have you ever noticed that life doesn’t always happen the way you planned. You need to be able to pivot when necessary. Are you going to sell, and if so what if the market timing isn’t ideal for when you want to sell. Who is your intended buyer if you want to sell? Are you considering never selling and having the property(s) as a retirement income source? What happens to the property(s) when you pass away? Are you buying to use them as substitute for a RESP, i.e. a college or university fund for your children or grandchildren? Is it a legacy for the family?
Have at least two or more exit strategies!
Taking these ten essential due diligence steps will give you the confidence (and results) to invest properly, and I am happy to mentor you through these steps! Email me and let me help you build your equity and income through strategically selected investment condos.