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Warrantable Condo Investments: Are They Good for Investors?

A new real estate investor who wants to become a landlord may consider many different types of rental properties, from single-family homes to apartments. This search for the right investment can also lead to warrantable condos. This post will explain what a warrantable condo is and some of the pros and cons an investor should consider before purchasing a condo investment property. 

Understanding Warrantable Condos 

Warrantable condos are a specific kind of condominium. At Lima One, we only finance warrantable condos as rental properties or fix and flips. 

What is a Warrantable Condo? 

A warrantable condo is a condominium unit that meets specific eligibility criteria set by government-sponsored enterprises Fannie Mae and Freddie Mac. They meet standards such as not being part of a timeshare and being a part of a development that is over 50% owner-occupied. These condos are considered less risky as investments by banks and other lenders. 

What is a Non-Warrantable Condo? 

A non-warrantable condo doesn’t meet these requirements set by Fannie Mae and Freddie Mac. These properties are often found in touristy areas or college towns and may operate as hotels or provide short-term rentals. Other issues, such as high delinquency of association dues or litigation, can lead to a condo being non-warrantable. 

Benefits of Warrantable Condos vs. Non-Warrantable Condos 

Warrantable condos offer several advantages for investors: 

1. Easier access to traditional mortgages or investment financing through a private lender like Lima One 
2. More competitive interest rates and favorable loan terms through institutional financing 
3. Enhanced marketability and potential resale value 

Investing in Condos: Pros and Cons  

When considering whether to purchase condo investment properties, real estate investors should take a clear view of the pros and cons. 

Pros of Buying a Condo 

• Lower cost compared to single-family homes 
• Variety of amenities offered in condo communities 
• Minimal external maintenance and repairs  
• Potential for appreciation while providing cash flow 

Cons of Buying a Condo 

• Association fees can be high 
• Rental restrictions may limit investment potential 
• Association rules may restrict modifications or pet ownership 

Do Condos Appreciate?  

Yes, condos can appreciate in value over time while also providing cash flow through rentals. However, appreciation rates may vary depending on location, market conditions, and other factors and may not match the appreciation of single-family homes. However, even if appreciation is more limited, a condo that provides strong cash flow can be a quality investment. 

Strategies for Investing in Warrantable Condos 

So how can an investor create a condo investment strategy? Here are some important tips. 

How to Find Warrantable Condo Properties 

To determine if a condo is warrantable: 

1. Check the U.S. Department of Housing and Urban Development's (HUD) website for FHA-approved condominiums. Note that a condo may meet Fannie Mae’s warrantability requirements but be verified by a third party. Lima One will accept third-party verifications from approved vendors. 
2. Consult with a real estate agent or lender experienced in condo financing. 
3. Review the condo association's documents and financial health. 

Financing Options for Warrantable Condos  

Warrantable condos typically qualify for loans with better terms, including lower interest rates and down payments. This makes them more accessible and financially favorable for investors looking for good investments. 

Lima One Case Study: Investing in a Hawaii Condo 

One example of a condo investment is this fix-and-flip project in Hawaii. An investor was able to flip this property with an after-repair value of $620,000—far below the median property price in an expensive area. This made the investment more accessible, allowing the flipper to make a profit without putting down as much of a down payment. 

Maximizing Returns on Condo Investments 

After covering the basics of condo investments, it’s time now to focus on how to make a profit with warrantable condos. 

Rental Income Potential 

Condos can provide steady rental income, whether through long-term tenants or short-term rentals like Airbnb. Be sure to check the condo association's rules regarding rentals before investing to protect your ability to achieve cash flow. 

Long-Term Appreciation  

While condos generally appreciate over time, it's important to research the local real estate market and choose properties in desirable locations to maximize potential appreciation. Make sure to analyze properties in terms of both appreciation potential and cash flow on a monthly basis. 

Exit Strategies for Condo Investors 

Consider various exit strategies when investing in warrantable condos: 

1. Sell the property after it has appreciated in value. 

2. Refinance to access equity for other investments. 

3. Convert the property to a long-term rental for steady income and cash flow. 

Conclusion  

Warrantable condos can be a good investment for new real estate investors looking to become landlords because they can add doors to a portfolio at potentially lower costs. Condos can offer investors easy financing, lower maintenance requirements, and the potential for both rental income and appreciation.  

Of course, it's crucial to carefully consider the associated costs, restrictions, and market conditions before making an investment decision. Lima One offers warrantable condo financing, and our loan consultants can help you run the numbers on your next condo investment. Schedule a call today to learn more.