Written by Andrew Goodman
Question: I have been looking to purchase in Bethesda for the past several months and have been running into condo townhomes. Can you explain the concept behind them and if they are a good investment?
A condo townhome, in my opinion, can be examined just as if you were purchasing a typical condominium. Essentially they are the same except with the style of living of a townhome.
The PROS to purchasing a condo or a condo townhome are:
- Cheaper in sales price
- Community amenities
- Low maintenance
The CONS to purchasing a condo or condo townhome are:
- Condo fee
- Condo board rules, regulations, and restrictions
Now if you consider a condo townhome and a fee-simple (not with condo ownership) townhome equal, then it really comes down to dollars and cents, the property’s appreciation and long-term investment potential. With a condo, there are several negatives that could hinder its affordability as well as its investment potential.
Tax Deductibility– A condo fee is not tax deductible. However, your loan interest and real estate taxes are. If you were to put the monthly obligation of your condo fee towards your monthly payment on a fee-simple property, you could be approved for a loan significantly more than the property with a condo fee. You’d increase your tax deductibility, potential savings per month and be able to afford a potentially superior property.
Loan Requirements- Depending on the loan product you are trying to obtain, there could be requirements that a condo does not meet. For instance, if you are trying to obtain a FHA loan, the condo complex must be FHA approved. If it is not, you will potentially have to put down more money to obtain a conventional loan product. The management company of the complex must also complete a condo questionnaire, which generalizes the complexes current financial status. If the condo’s financials do not meet the criteria of the lender (such as investor concentration, number of condo fee delinquencies, etc.) then the lender may not loan on the property.
Management- With a condo, the association and hired management company are essential. You want to make sure that you read the condo docs thoroughly to make sure you are protected. Most people check to make sure pets are allowed, if you can do certain things to the condo or if you can rent out the condo. But you also want to to make sure there are enough cash reserves to cover maintenance and any emergencies that could require attention. If there are not enough cash reserves, a special assessment may need to take place (each condo owner would be required o pay a certain amount to the reserves) or there could be an increase in each owner’s condo dues.
A fee-simple property is the better buy from an investment standpoint when looking solely at monthly obligations. However, condos do provide a convenience factor and a “worry-free” style of living. There are some intriguing factors that do encourage the condo purchase.
Amenities– A condo complex typically provides its residents with more amenities than a townhome community thanks to a HOA. Trash removal, snow removal, common ground maintenance, are all usual amenities included in a condo or HOA fee. However, some (now most in Bethesda) condo complexes offer exercise rooms, pools, party rooms, concierges, valets, etc.
Maintenance- In a condo, the owner is only responsible for everything inside of that specific unit’s walls. Some condo complexes stretch the owners responsibilities so be sure to refer to the condo docs of the property.
So if something happens below, above, or next to the unit, the condo owner is not responsible. This is taken care of by what’s called a master insurance policy, which is included in your condo fee. In a fee-simple property, the owner must maintain everything from the roof, foundation, yard, etc. Some condo complexes have an engineer or a handyman on site that can tackle most issues within your unit, which is an added convenience and money-saver that can repair a small issue before it becomes a big one. With a condo, the condo owner is only required to obtain condo insurance, which normally runs about $250-$300 a year, where a fee-simple property a homeowner will be required to obtain homeowners insurance, which typically runs $700-$900 a year.
From a financial and an investment standpoint, a fee-simple property trumps a condo. However, most condo owners purchased their condo due to the items I explained above.
In Bethesda, condo’s are typically purchased for real estate’s No. 1 factor: Location, location, location. The condo lifestyle isn’t for everyone, but for the “on the go” homeowner it may be perfect.