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Condo, condominiums (Thinkstock.com)

Condo, condominiums


Book excerpt

Does it make more financial sense to own a condo or rent an apartment? Add to ...

In the meantime, buyers should exercise common sense when buying property, whether for investment purposes or for personal accommodation. They must be in tune with the marketplace and the state of the economy. The most opportune and favourable time to buy is during a so-called buyer’s market, when many real estate products, including condominiums, are offered at cheaper prices. Buying when the market is high and “going with the flow,” hoping that prices will continue to rise, may not be such a good idea.You cannot predict to a fine degree of certainty when the market will level off and possibly take a downward turn.

Oversupply is one of the most important factors you should watch for when buying any real estate product. An oversupplied market is a buyer’s market. An undersupplied market is a seller’s market.

In our example of Mr. Jones and Mr. Smith, Mr. Smith did not lose any sleep worrying about mortgage interest rates or market conditions. If he elects to rent again, he presumably will save another $67,000 over five years as he patiently awaits the arrival of a buyer’s market to buy his own unit or remains in his rental unit, taking comfort in knowing that his future rental is pre-set and worry free.

As said before, the comparison of Mr. Jones and Mr. Smith applies equally to individuals buying condominium units with little or no down payment and those who purchase their units with a sizeable down payment. The only difference is that the former may lose their units and accumulate great financial liability if the market turns on them, whereas the latter may lose some or even all of their invested and earned equity but are in a better position to remain in their unit and weather the storm.

It is important to note that it is not disadvantageous to rent rather than buy, especially during times of inflated and unaffordable real estate prices. Determining whether to invest or rent in relation to condominium living should be a personal decision based on a clear understanding of the factors, quality information, and a clear perception of one’s values at the time of the intended purchase.

By learning about the cost of maintenance fees, realty taxes, prevailing interest rates, and the conditions of the market, you should be able to draw a reasonably sound conclusion about whether to buy or rent.

Apartment Buildings vs. Condo Buildings
Last, but not least, it is useful to compare apartment buildings and condo buildings.

Owners of apartment buildings are usually business savvy real estate professionals. Whether private person(s) or corporate entities, in most cases they have owned and operated apartment buildings for years. Many corporate apartment owners relegate the day-to-day care of their buildings to an inside or outside management team. They carefully monitor the management team’s performance to ensure that expenses related to maintenance and repairs are within projected budgets.

The owner can simply terminate the management team’s contract if the team does not perform in an honest, responsible, and professional fashion.

Properly run apartment buildings seldom exceed yearly expenses in excess of 55 per cent of the yearly income received from the tenants. These expenses include costs for necessary maintenance, repairs, periodical replacements, the superintendent’s salary, management fees, professional fees (such as legal and accounting), and the payment of real estate taxes.

What about major repairs that the reserve budget cannot meet? Apartment building owners may take out a mortgage loan, possibly in addition to existing financing, to cover these expenses. Or, if they are strapped financially or are unwilling to cover the expenses, they can sell the building in whatever state of repair it is in. In contrast to condominiums, the owners of apartment buildings can decide the fate of their building themselves.

Traditionally, the average markup on the sale of an apartment building has been about $5,000 to $20,000 per apartment unit. But what if the apartment building were improved and converted into a condominium? Each condo unit could be sold for hundreds of thousands of dollars more. This is why many apartment building owners decide to convert their buildings into condominiums. They often can qualify for a permit to make this conversion by performing very slight improvements. Unfortunately, such massive conversions are a major cause for the depletion of available affordable rental apartment units.

Who wins? The owners who convert their building into a condo. They are now worry-free concerning the maintenance of the building. These responsibilities have been shifted onto the shoulders of the unit buyers, who also become the owners of the whole property, including the land and the building, commonly referred to as a condominium complex.

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