Investing in used condominiums is a real estate investment approach that can make it easier to target higher yields with lower acquisition costs than newly built properties. This article explains the types of investment, advantages, disadvantages, tax effects, and key points for selecting a property in a structured way.
What is used condominium investment?
Used condominium investment is a real estate investment method in which you purchase a single unit or an entire used apartment building and operate it as a rental to earn rent income. The market for used condominiums continues to expand, and investors value the wide selection of properties and the relative ease of forecasting returns compared with newly built properties.
What types of used condominium investment are there?
Studio unit (sectional ownership) investment
This method involves purchasing one unit and renting it out. It is characterized by a relatively low barrier to entry, a smaller management burden, and strong liquidity. However, because properties in central urban areas are expensive to purchase, you should note that yields tend to be lower.
Whole-building apartment investment
This method involves purchasing an entire building, which can generate significant income when fully occupied. On the other hand, it offers greater flexibility for large-scale repairs and renovations, while also being a high-risk, high-return investment with larger initial capital requirements, maintenance costs, and disaster risk.
What are the advantages and disadvantages of used condominium investment?
Advantages
- Lower purchase prices can make higher yields easier to achieve
- With an "owner-change property," you can receive rent income from the first month after purchase
- There are many properties available, providing a wide range of options
- Historical data is available, making return forecasts easier to prepare
Disadvantages
- Initial repair costs may be higher than expected
- Because asset value is lower than for newly built properties, financing terms are often less favorable
Which is more advantageous: studio units or family-oriented properties?
Studio units tend to have shorter occupancy periods, but if they are in a strong location, demand is stable and vacancy risk is easier to contain. Family-oriented properties can support longer occupancy periods and higher rent levels, but if a unit becomes vacant, there is a risk that it will take longer to secure the next tenant.
Are there tax benefits to used condominium investment?
If a salaried employee incurs a loss through real estate investment, they may receive an income tax refund by offsetting that loss against employment income. In addition, real estate generally carries a lower inheritance tax valuation than cash, so it can also be effective for inheritance tax planning. However, purchasing a low-yield property solely for tax-saving purposes is risky.
What points help you avoid failure in used condominium investment?
Avoid areas with declining populations
Even if properties in suburban or regional areas offer high yields, there is a risk that tenants cannot be secured on a continuing basis. Central urban areas and locations near stations may make high yields harder to achieve, but they can significantly reduce vacancy risk.
Understand monthly fixed costs accurately
You should estimate cash flow in advance, including management fees, repair reserve contributions, fixed asset tax, and property management outsourcing fees. A plan that ignores these costs can lead to a loss-making investment.
Research the property's repair history and surrounding environment thoroughly
For any property under consideration, it is essential to investigate in advance the building age, repair history, repair reserve balance, and surrounding demand.
You may also want to read
- Avoiding risk in real estate investment with a second opinion | How to use expert support to prevent mistakes
- Four essential rules for avoiding overpaying in real estate investment | From proper rent evaluation to understanding leasing costs
- Real estate exit strategies in an era of inflation and rising construction costs | A thorough explanation of whether to sell or hold
Frequently Asked Questions (FAQ)
Q. How much initial cost is required for used condominium investment?
A. For a sectional ownership condominium, a common guideline is about 10% to 20% of the property price, including transaction costs and repair expenses. Even if full financing is available, it is ideal to keep 5% to 10% of the property price on hand as available funds.
Q. What is a typical gross yield for used condominium investment?
A. Around 3% to 5% is common for central-city sectional units, while 8% to 12% is common for whole buildings in regional areas. However, it is important to judge the opportunity based on effective yield after considering management fees, repair costs, and vacancy rates.
Q. What are the risks of owner-change properties?
A. The risk is that you cannot directly confirm tenant attributes, such as payment default risk and living habits, or the condition of the interior. You should make sure to gather information from the property management company and review any history of rent arrears.
Q. Is used condominium investment suitable for salaried employees?
A. Because loss offsetting can create tax-saving benefits, it can offer advantages for salaried employees with higher employment income. Even so, it is important to proceed only after understanding the burden of property management and the strictness of financing reviews.
