Looking for a good return on your investment in a home? Consider how a condo compares to a single-family home.
If looking to invest in a residential rental property, you might be considering various options that should be suitable for tenants, among them condominiums and single-family homes. Which one makes for a better real estate investment?
As with all real estate investments, the answer depends—on the particular property, location, market, and other factors, such as the annual return you expect on the investment, or cap rate.
Positive Aspects of Single-Family Homes as Compared to Condos
Some of the relative pluses of single-family homes over condos include:
- Appreciation potential. Condos are often considered easy, low-maintenance properties in which to park your money, with the idea that the condo will appreciate in value over the years and you will someday be able to sell for a substantial gain. While appreciation potential is an important factor when investing, the annual costs involved in holding a condo often negate much, if not all, of the financial gain you'll get from appreciation, should you be lucky enough to own a property that does increase in value over time. Single-family homes tend to appreciate more than condos, partly because people have a hard time envisioning paying a higher sales price for a property where they have to pay condo fees. Many homebuyers would rather put that money into home improvements of their own choosing. The people who typically profit from condos are the developers alone.
- No condo fees. There's no getting around it: Condos typically cost more to own than a single-family home of the same size. Not to mention, condo fees (both monthly membership fees and special assessments) are subject to increases, increasing your cost burden over time.
- Rent limitations. Tenants interested in renting something other than an apartment are accustomed to mowing the lawn themselves, taking the trash to the dump, and the like. It is normal for them to pay rent and take care of these other tasks personally. Renters are not likely to understand, however, paying a higher rent to cover your condo fee, and they certainly won't pay the condo fee for you. Tenants will expect that if your condo is the same size as a single-family home down the street, and of the same quality, that the rent should be the same.
- No outside restrictions on use. Condo homeowner association rules (CC&Rs) might restrict how you use the property, and can make it difficult—or even prohibit—renting your condo unit to others.
Positive Aspects of Condos as Compared to Single-Family Homes
With all the above said, some condos are better investments than single-family homes, including the following:
- Properties that are selling for less than their assessment value. This could be an opportunity to get an asset that will appreciate more quickly.
- Packaged deals. For larger investors, opportunities to buy multiple condos can be advantageous. Sellers might be willing to drop asking prices on individual units for a buyer who takes several units. The new owner can then sell off the units separately, for a gain.
- Small condo buildings. There are times where a building with only three or four condos might have all of their units on the market at the same time. An investor who purchases all of these units doesn't have to pay a condo fee to anyone else because they've become the association, in effect. This investor can therefore manage costs more significantly.
If you are going to live in the condo yourself and the low-maintenance lifestyle that condo ownership presents is worth the added cost to you, you might want to buy a condo instead of a single-family home. But if you are looking to use a property as a college fund for the kids, retirement fund, or additional income generator, your money is much better served looking into opportunities for single family homes, multi-family homes, or commercial real estate.
FAQs
Condos typically appreciate over time, but these gains are cut into by the expensive fees. Houses on the other hand usually appreciate more in value over time. The main reason for this is people would rather pay a higher sales price for a property that doesn't come with fees.
Do condos increase in value like houses? ›
Condos are typically cheaper than single-family homes, but tend to appreciate in value over time similar to detached properties. Condos can be a smart investment for first-time homebuyers, vacation homeowners and rental property investors.
What type of investment property makes the most money? ›
High-Tenant Properties – Typically, properties with a high number of tenants will give the best return on investment. These properties include RVs, self-storage, apartment complexes, and office spaces.
What is the most profitable property investment? ›
5 Most Profitable Real Estate Ventures
- Residential Real Estate Development. ...
- Commercial Real Estate Investment. ...
- Real Estate Crowdfunding. ...
- Real Estate Technology ( PropTech) ...
- Short-Term Rentals and Vacation Properties.
Investing in a condo can be a smart decision, especially in an expensive real estate market. Condos often cost less than single-family homes and you don't have to worry about maintenance or repairs.
Is it hard to resell a condo? ›
Since condos can be a bit more cookie cutter than freestanding homes, you might have to work a bit harder to make it stand out (particularly if other units in your complex are for sale at the same time). To show your condo at its best, you'll want to clean it, make repairs, and declutter your possessions.
What is the disadvantage of investing in a condominium? ›
1. HOA Fees. One of the main disadvantages of condo ownership is the obligatory homeowners' association (HOA) fees. These fees are recurring monthly or annual costs contributing to the maintenance and upkeep of common areas, amenities, and the condo building's exterior.
How much will my condo appreciate in 5 years? ›
Real Estate Appreciation Formula
Therefore, If you hold the condo for five years, how much would it be worth? The appreciation value would be approximately 1.252, indicating a 25.22% increase in value over the period.
What appreciates more a house or condo? ›
Single-family homes tend to appreciate more than condos, partly because people have a hard time envisioning paying a higher sales price for a property where they have to pay condo fees. Many homebuyers would rather put that money into home improvements of their own choosing.
What type of real estate has the best returns? ›
Long-term rental properties can provide steady income, while house flipping offers quicker profits but requires more hands-on work and risk. Commercial properties like apartments and office spaces are more expensive but can yield higher returns over time.
Residential apartments are popular for investors due to their affordable pricing, low maintenance costs, and amenities like security, parking, and clubhouses. Villas offer more space and privacy but come at a higher price.
Where do the rich invest in real estate? ›
New York, Los Angeles, and London remained the top places with the highest sales in real estate in 2022. While ultra-prime properties, worth $25 million or more, saw higher sales in New York and London. In 2024, the luxury real estate market is expected to improve.
What is the 1 rule for property investment? ›
For a potential investment to pass the 1% rule, its monthly rent must equal at least 1% of the purchase price. If you want to buy an investment property, the 1% rule can be a helpful tool for finding the right property to achieve your investment goals.
What investments are better than property? ›
Liquidity. Shares are generally more liquid than property, meaning you can buy and sell shares more quickly. While selling a property could take longer, the benefits of investing in this asset class are seen in its long-term capital appreciation and rental income.
What real estate brings the most money? ›
Commercial properties are considered one of the best types of real estate investments because of their potential for higher cash flow. If you decide to invest in a commercial property, you could enjoy these attractive benefits: Higher-income potential.
Why would you buy a condo instead of a house? ›
Condos tend to come with lower price tags than single-family homes. They offer significantly greater independence than renting, but you aren't on your own when it comes to maintenance and repairs. Plus, owning a condo gives you the chance to build equity you can use toward a down payment on your next home.
Is it ever a good idea to buy a condo? ›
Condominiums can be a good investment for the right buyer in the right location when times are tough, though they can be harder to buy and sell than a detached house. Before purchasing a condo, be sure to do your due diligence and check out the HOA, CC&Rs, and any tax and insurance situations.
What is a better investment than a house? ›
As mentioned above, stocks generally perform better than real estate, with the S&P 500 providing an 8% return over the last 30 years compared with a 5.4% return in the housing market. Still, real estate investors could see additional rental income and tax benefits, which push their earnings higher.
Why do condos not appreciate in value? ›
On the other hand, when you purchase a condominium, you only own the specific unit. No land = less value. Also, it's likely that more condominium units can fit on single plot of land than single family homes, as condos are often built up instead of out. This higher supply of condos can in turn drive prices down.
