BACK
- Landlord
- Tenant
BACK
BACK
Should You Invest In Condos?
Condos can be a gateway to first-time home ownership, passive income through rental investing, or a vacation home in a great location. However, condos also sell for nearly $55,000 less than single-family homes on average and can pose significantly more barriers in the form of HOA fees and restrictions.
With this in mind, are condos a good investment in 2024? Which is better to invest in: a condo vs apartment? A townhouse vs condo? A condo vs a house?
This article breaks down the advantages and disadvantages of condos and will equip you with essential knowledge for making informed decisions concerning what type of property to invest in.
What is a Condo?
A condominium, often abbreviated to condo, is a residential complex comprised of individual, separately owned units. A condo owner usually owns the interior of their unit and potentially the structural components of exterior walls. However, all owners in a particular condo building will typically share certain common areas and amenities with their neighbors, such as pools or fitness centers, which are paid for by monthly HOA fees.
Condos are frequently confused with apartments, townhouses, and single-family homes. Below is an explanation of the difference between each of these property types.
What is the difference between condo and apartment?
Condos and apartments are similar in that both are multi-unit residential complexes. However, condo developments have individual owners who are part of a condo association, while apartment building units are owned and operated by a single owner, who rents out each unit to a tenant.
What is the difference between a condo and townhome?
Condos and townhouses are similar in that both are comprised of individual, separately owned units within a larger complex. However, the townhome definition differs slightly: Townhomes are multi-floored and share walls with an adjacent property, with each unit having its own entrance. These buildings are often tall, thin and attached to other townhomes in a long row. Townhouses are usually designed for high-density, urban areas, with a tall and narrow silhouette.
Some townhomes can qualify as zero lot line homes, which are pieces of residential real estate where the building comes very close to the edge of the property. Zero lot line houses are popular in urban areas since they make the most of the land and create the maximum amount of usable space on small lots. These properties tend to cost less than traditional real estate properties, but the proximity to neighbors can concern buyers. By contrast, condos cannot qualify as zero-lot-line homes.
What is the difference between a condo and single-family home?
Condo owners purchase only the space inside their condo unit, which is part of a larger multi-unit property usually organized under a condo association. By contrast, single-family homeowners own the entire property, including the land the house sits on. Single-family homeowners are more likely to have private outdoor space and can develop or build on the land as they see fit, whereas condo owners are restricted by HOA rules.
Understanding the nuances between condos vs townhouses vs single-family homes vs apartments is crucial for maximizing your investment potential. The difference between a condo vs apartment, townhouse vs condo, or condo vs traditional houses could change your real estate portfolio and your potential for returns.
Ways to Invest in Condos
There are three main ways to invest in condos.
1. Condo as a primary residence
For many first-time homeowners, condos can offer the benefits of owning your home without the asking price of a traditional single-family home. In July of 2023, the average listing price for a condo ($361,600) was about 15% less than the average price for a single-family home ($416,000). This will vary based on location and market trends, but in the right conditions, buying a condo as your primary residence could help you save on your down payment (despite condos often having higher monthly fees).
2. Condo as a vacation home
Condos also make great second homes. One benefit of condos over single-family homes as vacation properties is that the condo association is responsible for exterior maintenance, curb appeal, lawn care, etc. If you live far away from your vacation home, the ability to not have to worry about regular exterior maintenance might be very appealing. The downside in this case is that if the condo isn’t occupied for most of the year, it may not be worth the investment depending on the mortgage and interest payments.
3. Condo as a short- or long-term rental property
Lastly, many condo-owners are real estate investors. This strategy does not work for every condo, since some condo associations do not allow owners to rent out their condos and many restrict leasing to long-term tenancies only. However, if renting is allowed, a condo-owner can use the rental income they generate from the tenancy to fund their mortgage payments and condo association fees.
Why Invest in Condos: The Pros
We’ve already mentioned a few of the advantages of condos. Let’s look at the pros of condo investing in more detail.
Condos are generally more affordable than single-family homes.
As mentioned above, the listing price for a condo is about 15% less than the price of a single-family home, on average. Smaller square footage and the exclusion of the land value allows condos to be a little more affordable than most traditional houses. However, keep in mind that this difference may be made inconsequential if the condo is situated in a prime location in a hot market, for example, which would inflate prices and your monthly mortgage payment.
Many condos are in desirable locations.
Condos tend to be in high demand when located within walkable distance of public transportation, major roadways, and local amenities. Condo communities can be found in both urban and suburban areas and offer the benefits of ownership in addition to smaller living and proximity to retail and restaurants.
Condo owners are not usually responsible for exterior property maintenance, landscaping, snow/leaf removal, etc.
As a condo owner, you are only responsible for maintaining the interior of your unit and some utilities, depending on your condo association’s rules. The rest of the upkeep and maintenance for the condo is covered by your HOA fees – including landscaping and seasonal upkeep. For many condo owners, the tradeoff is well worth it.
Many condo owners get access to community facilities like gyms or pools.
Condo owners also get access to certain amenities traditionally associated with apartment communities, such as fitness centers, swimming pools, tennis courts, and more. Condo owners don’t have to maintain these amenities, but they do have to pay for them as part of their condo association or HOA fees.
Condos allow owners to build equity more affordably.
For many individuals who aspire to own a home, the initial expenses associated with purchasing one render the investment unattainable, leading them to opt for renting instead. However, those rent payments don’t build equity, and could lead to renters paying substantially more on housing over many years than they would if they could invest in a single-family home, which can be sold and liquidated later.
Condos give homeowners the opportunity to build equity without necessarily requiring as large of a down payment and closing costs as a house. Condos are generally more accessible for those who have some money saved for a down payment, but not enough to make single-family homes an option.
Risks of Condo Investments: The Cons
Like any investment, condos also have their downsides and risks. Let’s look at a few of these less appealing aspects of condo ownership.
Condos offer less space and privacy than single-family homes or townhouses.
By nature, condos are not as private as single-family homes because you do not own the land that the condo is on. Your condo could be a part of a multi-floor residential condo complex shared with many other condo owners. While a certain amount of space and privacy are a necessary sacrifice, you’ll also get community amenities and less maintenance responsibility in return.
Condo association fees (HOA fees) can be high.
Condo association fees can significantly reduce your return on investment (ROI) over time, affecting your bottom line. USA Today reports that the average homeowner pays about $200 per month in HOA fees, although some associations charge $300 or more. In expensive cities like San Francisco, condo owners are paying as much as $500 to $800 or more in HOA dues.
Factors that affect HOA fees include the cost of living in the area, local and state laws, and the specific amenities included in the condo community.
Owners must follow condo association rules and regulations.
Unlike single-family homeowners, condo owners cannot play by their own rules, at least not entirely. They must follow the rules and stipulations of the condo association. For instance, some associations prohibit owners from renting out their condos or renovating them in certain ways. Some associations allow owners to rent out their condos but specifically prohibit short-term tenancies.
Rental restrictions imposed by the homeowner’s association may limit your income potential, impacting the profitability of your investment. Legal disputes within the HOA could also disrupt your investment strategy and lead to unforeseen expenses.
Condos appreciate more slowly than single-family homes.
Condos do appreciate over time due to factors like location, walkability, and community amenities in desirable locations. However, the appreciation that most condos see is slower than that of an average single-family home. This is something to keep in mind if condos are part of your long-term investment strategy.
Financing a condo is a more involved process.
Financing a condo is more complex than financing a traditional single-family home. This is because the lender must vet both you and the condo association or HOA that operates the property. This often means more complex paperwork and/or extra documents.
As a first-time condo owner, expect the underwriting process for your loan to take longer, and build that extra time into your purchasing timeline.
Condo loans often have higher interest rates than single-family mortgages.
This one really depends on your individual situation, location, etc. But it is true that many loans for condos tend to have higher interest rates than those for single-family homes. Be sure to factor this into your calculations as well.
Considerations for Investing in Condos
If you’re considering investing in a condo, here are some primary considerations to keep in mind:
- Evaluate association fees and restrictions to make informed investment decisions when considering investing in condos.
- Association fees cover shared expenses like maintenance, insurance, and amenities. High fees can eat into profits, so inquire about fee increases and financial reserves.
- Restrictions set by the homeowners’ association (HOA) impact rental potential and resale value. Some HOAs limit rentals or impose strict rules on tenants.
- Consider the HOA’s financial health and management style to avoid unexpected costs or conflicts.
- Assess your willingness to comply with HOA rules and participate in decision-making processes. Understanding these factors will help you determine if investing in a condo aligns with your investment goals and risk tolerance.
So, Are Condos a Good Investment?
Each property type has its own unique features, advantages, and risks, and condos are no different. They can be an extremely lucrative investment choice in one market and an exceedingly poor one in another market.
By evaluating factors such as appreciation potential, rental income possibilities, and market trends, you can make an informed decision about whether a condo is a good investment for you.
One thought on “Investing in Condos: The Pros and Cons ”
Comments are closed.
More in Learning Center
Innago Releases Return Security Deposit Online Fea...
Renting your property to a stranger is risky. Even with the best tenant screenin...
September 18, 2023
The Common Areas Renters Most Want (And How to Mai...
A Landlord’s Guide To A Common Area When managing multifamily properties, ...
November 20, 2024
6 Types of Bad Tenants and How to Approach Each as...
A Landlord’s Guide To Bad Tenants Every landlord has experienced or heard ...
November 15, 2024
Investing in condos can offer a range of benefits and challenges that investors should carefully consider. On the positive side, condos often require less maintenance, offer amenities, and can provide rental income. However, factors like HOA fees, potential market saturation, and limited control over common areas are important considerations. Have you explored investing in condos yourself, or do you have insights into specific pros and cons that investors should be aware of? Sharing your experiences or knowledge can provide valuable guidance for others considering condo investments!