Any residence with two or more units in the same building is referred to as a multi-family property or multi-dwelling unit (MDU). This kind of home comes in various structures, including the,
Co-Op or Condo: Which Should You Invest In?
Dated: July 15 2020
There are several investment decisions to make in real estate, and one of these is choosing between a condo and a co-op. Both have been considered excellent investment choices by investors. Thus, we can say that decision of which to choose boils down to personal preferences. That said, this post will attempt to describe both while highlighting the differences and similarities.
Without wasting time, let’s get to it!
What is a Co-op?
When a corporation owns a complex of residential buildings, it is called a housing cooperative or a co-op. An investor that purchases one or more residential unit in such a building has become a shareholder. This means that buying real estate comes with the right to occupy the unit bought as a shareholder. Your value of shares as a shareholder is measured by the cost and size of the apartment you buy. Co-ops are the order of the day in New Jersey, New York, and other top American cities. For instance, New York City has 720 Park Avenue, 839 Fifth Avenue, and the Dakota, among other co-ops.
What are the types of Co-ops?
The location you find a co-op determines how it is categorized. However, you will find the following types in the US and Canada housing market landscapes. Limited Equity Co-Ops are co-ops with restrictions on the selling and purchasing price of the shares. Leasing Co-ops lacks equity, considering that they are leased to the residents instead of selling them. The housing cooperative members can sell market Rate Co-ops at a rate acceptable in line with the market standards.
What is a Condo?
When an individual owns a unit within a complex of other residential units, it is called a condominium or condo. In this case, the complex residents all share common facilities like garages, tennis courts, yards, swimming pools, elevators, and gyms.
Are there any differences between Condo and Co-Op Investments?
The answer is yes. There is a couple of meeting and diverging points in condo and co-op investments. Let’s take a look at them below: The Board Approval Process Condos are known for their seamless approval process. Once the buyer is preapproved for a mortgage and can foot the associated expenses and charges, the title is transferred to them. In the case of buying a co-op, the approval process is the stark opposite. It starts with the request and provision of tons of paperwork, including the application. An interview with the co-op board follows this. Your application can be accepted or rejected, depending on your performance in the interview. So, approval is solely at the discretion of the co-op board.
A condominium is similar to family homes in terms of the purchasing process. The buyer is conferred with the ownership title at closing, backed by a legal deed. This puts the buyer at the driving seat of the property. They can do and undo, provided they are within the ambits of the sate and county laws. Owning a condo also comes with the advantage of accessing the complex’s shared facilities. Conversely, the buyer of a co-op unit is not the legal owner. While the housing cooperative remains the legal owner of the entire complex, the buyer is considered a shareholder. The buyer gets a corporation stock certificate, which grants them the legal backing to occupy the purchased unit within the complex.
You should be prepared to pay more for condos than co-ops. The same trend can be observed in other expenses like closing costs, mortgage tax, and title insurance charges. But, on the bright side, a condo will earn you better alternatives in terms of loan down payments. You will pay more in down payments for co-ops, alongside maintenance charges for a year or two. It does not end there – the board may demand a 3% of the purchase price as the flip tax. Facilities If you are interested in a property with a modern touch and best-in-class facilities like fitness studios, tennis courts, fire pits, steam rooms, or private cabanas, condos are your best bet.
Co-ops, on the other hand, are mostly old, pre-war buildings. Likewise, you will most likely find eco-friendly fixtures like low-flow water fixtures, LED light bulbs, heating and cooling systems, and carbon monoxide sensors in condos. This can increase your chances of finding suitable tenants to occupy the property.
An advantage of investing in condos is that you can sublet to others, provided such is allowed by the laws of the area. Although this is also feasible with co-ops, it is subjected to the strict guidelines of the co-op’s board in charge. In some cases, you may only rent out after occupying the property unit for a stipulated period. Other times, subletting may come with some charges. Tenants may be required to undergo a board approval process during which the board approves or reject their application.
Both types of investment attract maintenance and operation fees, payable monthly. The specific amount depends on the property size and the number of facilities on the ground. Likewise, both the co-ops and condos expect you to pay special assessments for development, especially when building a fence or a new facility. Property tax is also payable on condos (to the government), but this is always integrated into the maintenance fees of co-op properties.
From the points raised so far, it is clear that the better investment choice between condos and co-ops depends solely on personal preferences. That said, you must prioritize the potential return on investment in either case before making a decision. You should also consider your proposed rental strategy – whether Airbnb or traditional rental – when making a decision. Good luck!
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