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Condominiums as Investments
When the real estate market is stable, condominium values tend to rise at the overall rate of inflation, or slightly faster. Historically over the long term, condominiums have made excellent investments and have made many investors wealthy. While it is always important to negotiate a good price, it is equally important to anticipate market trends and sell before the market starts to decline. In this regard, there is no substitute for professional advice. It also helps to team up with a knowledgeable, experienced partner. Call us if we can assist you in acquiring an investment property or if you are interested in becoming a partner in an investment property.
Reasons most often sited why condominiums make good long-term investments:
- Condominiums tend to attract lower maintenance tenants who prefer to live in a community that has strict rules and a high level of maintenance. Tenants who are troublemakers tend to avoid communities with strict rules because they know they will not be able to get away with poor behavior. In short, rules create value.
- Generally, condominiums provide lower density housing than apartments located in the same area, and more amenities. This has the effect of reducing the vacancy factor that must be budgeted for any residential income property.
- Condominium ownership usually results in a more even cash flow than noncondominium rental homes because homeowner associations are required to set aside reserve funds each month for roof replacements, exterior painting, and other major expenditures.
- Over the long term, condominium values have tended to exceed the rate of inflation in most market areas.
- The use of financial leverage combined with inflation in the value of assets, makes condominium ownership an attractive long-term investment.
- Every monthly mortgage payment reduces the loan balance and increases the owner's equity or net worth.
- Federal and State tax rules permit the depreciation of the building improvements which generates an offset to the owner's income, thus creating a valuable tax shelter.
- Compared to single family detached homes, town homes and stacked condominiums almost always have a higher ratio of building value to land value, thus increasing the amount of depreciation or tax shelter generated.
- Owners of rented condominiums can take advantage of Section 1031 of the Internal Revenue Code permitting the deferral of capital gains and the utilization of those tax deferred tax dollars for investment.