Making a real estate investment is a large decision and can be rewarding. Buyers often face the question of what type of real estate to buy. Single family houses are often a good choice, though condos have benefits as well. A variety of factors impact what might make one option a better choice for you than the other.
Key Condo Investment Benefits
There are a variety of reasons a buyer might consider a condo to be a better investment than a single-family home.
Many condos may have tennis courts, pools, spas, weight rooms, basketball courts, picnic areas and even play areas for children. This could be a great selling point to a buyer and might increase the sales price when trying to maximize your profit. These are also great features if you plan on living in the property or renting it for investment purposes. In addition, a lot of condos have security features, such as a gated entrance. This could add value to your home as well.
Condo associations include maintenance, which is a great benefit for those who do not want to maintain a property. For example, if your condo needs a new roof, the association would pay a contractor to replace it. Or, the monthly cost of lawn care would be paid. This may be ideal for a buyer or renter looking for a low maintenance home.
If you chose to invest in a house instead of a condo, you would need to maintain the house. This means you will have to pay out-of-pocket expenses, such as a new roof, monthly yard maintenance, plumbing repairs, heating or cooling repairs and more.
If less maintenance is what you are looking for, a condo may be a better investment, especially if the monthly condo fees are less than the monthly fees of keeping up a house.
According to Zillow, statistics show that the average condo value was $206,000 as of December 2016 versus an average value of $192,000 for houses. Both types of dwellings have consistently shown an increase in value since 2012.
Keep in mind that these are averages that are impacted by a variety of things. When determining value of a condo or a house, many factors need to be taken into consideration. Local home sales within a few miles, desirability, the number of bathrooms and bedrooms, square footage and age are several factors that can change the value of a home.
When investing in real estate you would do so either to sell it for a profit, rent it for cash flow or live in it yourself and take advantage of the equity. If you plan on using it as a rental, the most important factor is cash on cash return. When determining cash return, use the following formula:
$1,300 Rent - $433 Monthly Expenses = $867
$867 - $567 Mortgage = $300 Net Income
$3,600 Yearly Net Income / $70,000 Cash Equity (down payment, other cash put into the property)
= 5% Cash on Cash Return
Note: Monthly expenses should include taxes and insurance if not included in your mortgage payment, condo fees (if applicable), maintenance, trash service and any other costs required to keep up your property. Calculate the expenses at 33.3% of the monthly rental rate if you are unsure of the exact fees.
Determining if a House May Be Better
Of course, for some buyers, investing in a house makes more sense than purchasing a condo. Key factors that could indicate that a house might be better for you include:
Ability to Add More Value
Although condos might keep up with the value of a house, you may find it might be more difficult to add more value to your initial investment than with a house. It's simple to increase the value of a house.
With a house, you can choose to add on a bedroom or even remodel a kitchen, both of which could significantly increase the property's value. With a condo, though, you are more limited. You can't add on to the structure and the condo association may even have rules governing what you can and can't do in terms of remodeling.
Easier to Rent
When you own a house, you have the freedom of making rules, such as if you can rent out the property. The covenants, conditions, and restrictions (CC&Rs) govern all uses of the condo, including the ability to rent it. Prior to making a condo purchase, you should view and make sure you understand the CC&Rs.
Some condo associations may not allow the homeowner to rent the condo. In this situation, owning a condo would not be the better investment if you wanted to use it as a rental. Additionally, keep in mind that if you own a condo and decide to rent it, you will need to charge rent that is high enough to cover condo membership and maintenance fees.
More for Your Money
You own more when you own a house. When you own a condo, you do not own the land and you share walls. When you own a house, you own the land and the entire structure. So, if you are investing the same amount of money, you own more buying a house rather than a condo. Owning more equals more value, which could indicate that purchasing a house is a better investment than a similarly priced condo.
Keep in mind when that noise issues with neighbors are more likely with a condo than a house. This is because there is no land separating the condos as there is with a house. Therefore, noise may be a nuisance to whoever is living in the condo. This could result in problems finding or keeping tenants if using a condo as a rental investment or problems selling it. If you are considered with the impact of noise, a house may be a better investment option for you.
Each Situation Is Unique
Every property is different, so you should compare each factor with each condo or house you are considering. Each property will have its own strengths and weaknesses that need to be considering when deciding which option is a better investment for you.