You don’t have to purchase an entire building to become a real estate investor. In fact, many investors use single condominium units as massively profitable investment vehicles. Thanks in large part to their relatively low purchase prices and strategic locations, condominium units often represent a great investment for investors hoping to rent out the unit and use it to generate passive income.

While there is a significant amount of red tape that can make investing in a condo challenging, when done correctly, you can use a condominium unit to generate a high amount of passive income.

What to know about condo investments

Investors considering purchasing a condominium unit need to understand: The condominium industry is highly regulated, and may be difficult to break into as an investor.

Depending on the building you’d like to purchase a unit in, you’ll likely have to work with a local governmental entity, a condominium management company and the building’s ownership. Before you even think about investing, you need to possess a thorough understanding of all the entities you’ll have to work with in order to purchase and rent out a condominium unit.

In addition to the red tape associated with condo investing, it can also be more challenging for investors to secure financing for condo purchases. Because of this, you may be required to pay for your condominium in cash.

It’s worth noting, condos also appreciate at a slower rate than traditional real estate investments. Anyone who owns a condo must also pay association fees, which can dramatically eat into your own profits and reduce your ability to earn money from your investment.

Conducting research well in advance will spare you the inconvenience of unexpected fees and other challenges that may arise while purchasing and renting out a condo. Ultimately, a little extra research will help you ensure your investment is a profitable one.

Here are the variables you need to consider

When you’re thinking about purchasing a condo as an investment vehicle, there are many factors you need to take into consideration. If you don’t carefully research your prospective investment, you may end up stuck with an unwanted condominium unit that doesn’t meet your needs. Even worse, it could turn into a money pit!

While the specific considerations you take into account prior to purchasing a condominium will largely depend on the unit itself, here are some of the initial factors you should be looking at as you approach a for-sale unit:

Understand the condo fees: First and foremost, you need to possess a thorough understanding of the condominium fees the building’s management and ownership will charge, and what these fees actually cover. These assessments are charged on a monthly, quarterly or annual basis. They usually include services like grounds maintenance and lobby staffing. Sometimes, condominium fees also include property taxes and shared utility expenses.

Define the unit boundaries: This is a point of confusion that can be challenging for many condo owners to navigate. Before purchasing a unit, you should have a thorough understanding of exactly where the unit boundaries begin and end. For instance, some units only include the interior walls; others may include the exterior walls, a balcony, patio or the rooftop.

Freehold vs. traditional: While the exact definition of a freehold condominium varies from province to province, in general, it not only includes the unit, but also the land the unit sits on. Freehold units are much more valuable compared to traditional condos, which only include the interior of the unit and a small portion of exterior space. Freehold units provide the owner with more autonomy.

Association rules and restrictions: Virtually every condominium building is managed by a condo association. These management companies tend to impose strict rules and bylaws that can make you feel like you’re the one renting the property, and not the other way around. Be sure to read through all of the association rules and guidelines before agreeing to a purchase, and don’t be afraid to ask questions.

Reserve fees and building repair policies: Every condo building should have a savings account dedicated to making repairs whenever necessary. You should be able to access notes about these reserve fees, and how they’re allocated in case a large repair is necessary. You should also be aware of how the condo management levies special assessments, in case the reserve fees aren’t extensive enough to complete a repair.

Local regulations: Increasingly, cities are imposing rules on the way investors can make money off of condominiums. Be sure to look into the way condos are treated in your target market. For instance, you may not be able to list your condo as a short-term rental in certain jurisdictions.

Guest and pet policies: Many condo associations restrict the number of guests residents can host, and impose time limits on the duration of their stay. Additionally, they may not allow pets inside the building. These factors can impact the unit’s value on the rental market. Be sure to ask about guest and pet policies and the way they’re enforced, before agreeing to purchase a unit.

Ensure you’re allowed to rent: While most condominium management companies allow investors to buy up condo units and rent them out, there are some management associations that prevent condo owners from sub-leasing. Be sure you’re allowed to rent out the unit at all before you agree to purchase it.

Consider alternative investments: Condos may seem like a cheap way to break into a dense, urban market, but there are some drawbacks associated with using them as your primary investment vehicle. Consider other investment opportunities before looking into condo ownership.

Condominium investing is a great way for investors with limited capital to begin their journey toward financial independence, and start generating passive income. If you’re a first-time buyer looking for an easy way to get into the real estate game, however, you may want to think twice about purchasing a condo first. Hidden fees and a number of other drawbacks can make condominiums a challenging first-time investment.