Worried about buying a condo because it’s risky? Or, perhaps you want to know how to use real estate as a potential investment tool. Either way, there are four key areas that will affect your risk – and your reward.
If you want to avoid risk – do what we suggest below. If you want to gamble for a higher investment reward, do the opposite.
To minimize your risk, choose:
- A condo on the lower-end of your price-range – you are also betting that you can afford your place long-term
- A neighborhood that’s established vs. an up-and-coming neighborhood that…may never fully up and come
- A building with a strong association and decent savings – so you won’t be called upon for a special assessment
- A newer building or unit that will have less risk of needing costly, age-related repairs
Housing bubbles exist, but most parts of the country are still fairly bubble-free after the housing collapse. That’s a very important risk factor – and currently it’s in your favor, whether you’re looking for a home or for an investment.
How much risk did I take in my housing purchase? On a scale from 1-10, probably a 3. So, not very much. Before deciding on the place my husband and I now own, we looked at a place that was above our price range but seem primed to make a profit in the future – but decided against it. Because our home would represent our largest asset (and cost) by far, we didn’t want to overextend ourselves and end up risking essentially our life savings on one investment.
Instead, we chose a less expensive unit in a stable building in a neighborhood that wasn’t popular 20 years ago, but started making waves around 10 years ago. All that said, I’m still watching the numbers and hoping that my neighborhood and building will grow in value so that I can recoup my investment and add a little extra on top. That said, one thing to realize is that the amount of money you make on your condo isn’t based just on how much the property goes up (or down) in value. There are also realtor fees when you buy and sell, which need to be factored into the total cost of the transaction, as well as property taxes and Association dues.
And then there’s the dreaded costly repairs, which can cut against your bottom line quite significantly. And, I’ll be honest: even though I knew that every time something broke, I’d need to call the someone else to fix it (or fix it myself), after living with landlords (and my lovely parents) my whole life, I don’t think I fully understood the implications. For instance, our handy man, who’s very good, has a $150 one-hour minimum – which means we need to wait until we have several issues before we call him out, or else the one issue really needs to be worth fixing immediately. Or, to take another example: our central A/C unit broke the first time we used it (nice lie, previous owners) and we needed to pay for it out-of-pocket then-and-there or we’d be sweating up a storm come the first heat wave. Turns out, buying a new A/C and fixing a part in our ventilation system costed $3,000 – and we got multiple quotes to be sure we couldn’t go any lower. To put that in perspective, that’s more than two-month’s rent in our old apartment.
Not everything is measured in money, of course. There are risks and rewards related to feelings of comfort. My condo is a lot ‘nicer’ than my rental. And I’m never going to be kicked out (unless, you know, I stop paying the bank). I get more for my money, especially considering Chicago’s tight rental market these days. Plus, my condo comes with a parking spot – and I can paint the walls whatever color I like. Oh, and UPS and FedEx packages are safely delivered inside – and I know my neighbors are reliable and care about our building as much as I do.
For me, these amenities offset the risk. But, it’s still a risk – just ask the millions of homeowners with properties still underwater from the recession. In the end, I would suggest thinking hard about what the real purpose of your purchase is; it can be easy to start dreaming big, but is often best to start small.