More on condominiums

By Francisco J. Colayco, Ph.D

If you intend to rent out your condominium, you need to project your income and costs and assume that there will be times when the unit will be vacant and will need repair. Rental rates normally over around 5% of the market value of the condo unit provided rental income is constant throughout the 12 months in a year. Vacancy rates therefore have a very strong impact on the effective return on the rental property. In considering buying a condo unit for rental purposes, you must assume at least a 20% vacancy rate over the life of the property.

The condominium requires you to live in closer proximity to others and that could be difficult. At the same time, it gives you better security because you can leave your unit and it will be more secure (if it is a good condominium, of course). It is all a matter of personal preference. There will always be a group that will prefer an individual house and a group that will prefer a condominium.

Many who have cash to invest like to buy condominiums that they will have their children inherit eventually. In the meantime, they believe that the condominium will bring them some income in the meantime plus even increase in value. However, as children grow older, more and newer condominiums will be built. Your choice may not be your children's choice.

As a financial investment, condominiums do not generally perform well compared to stock mutual funds or even balanced mutual funds and other types of securities. Except for a few notable offerings, the costs of owning condominium units drag down the resale value. Physical depreciation of units, monthly membership and maintenance dues plus real estate taxes imposed on condominium owners can be quite substantial over the economic life of the unit. There is also the issue of capital gains tax and the VAT applicable when the unit is sold. All these taxes have to be paid before you can transfer the ownership registration of the condominium unit to the buyer. If you include all these ownership costs and the reduced rental earnings due to the 20% vacancy rate, the percentage net return per year when you sell the unit (assuming you can find a buyer) can be very disappointing. Simply put, the cost of acquiring a condo unit is not your only cost. The cost of ownership and the cost of selling are real costs to the owner. And these generally make condo units marginal investments.