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
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.
Is a condo or house a better investment? ›
Ang says that in Los Angeles there is not much of a difference between houses and condos in terms of investment returns. Overall, though, Ang suggests that “condos may be the better option due their generally lower prices and higher rental yields.”
What type of investment property is most profitable? ›
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.
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.
Why do single-family homes appreciate more than condos? ›
Land is valuable, as there is a fixed supply. So, it's safe to assume that the demand for land will always increase. On the other hand, when you purchase a condominium, you only own the specific unit. No land = less value.
Why I prefer a condo over 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 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 type of property has the highest ROI? ›
What type of rental property is most profitable?
| Rental Property Type | ROI Potential | Ongoing Effort |
|---|
| REITs | Low | Minimal |
| Single-Family Homes | High through appreciation | High |
| Mobile Homes | Moderate | Low |
| Airbnb Rentals | High | High |
2 more rowsMar 4, 2024
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.
What type of real estate has the highest return? ›
Commercial real estate: Commercial real estate investments can bring about higher returns than residential investments due to the fact that you can get higher rents for them. Commercial properties regularly also have longer leases, bringing in a more stable income stream.
Condos can be difficult to resell because of the narrow pool of buyers interested in these properties. Families with multiple kids often want yards and some people may be turned off by the idea of living by someone else's rules. The costs associated with condo living also make the buyer pool smaller.
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 is the disadvantage of investing in a condominium? ›
Investing in condos have potential drawbacks that you must also consider. High monthly fees and restrictions on renting from condo associations can limit the returns an investor receives, as well as slow down appreciation compared to single family homes.
How fast do condos appreciate? ›
In general, condos appreciate in value at a slower rate than single-family homes. The median sales price of a condo was up nearly 6% year-over-year in January 2024, according to the National Association of Realtors. Median sales price of single-family homes was up 5% in the same timeframe.
Is a condo a good investment? ›
With lower purchase prices and more desirable locations, condos can certainly be profitable investment properties and enjoyable vacation homes. But keep in mind, condos can come with less control due to the community's homeowners association (HOA).
Why is single-family housing a huge disadvantage? ›
Higher maintenance costs. With more interior space and exterior elements, single-family homes tend to have more elements that require maintenance compared to other types of properties. Costly upfront investment.
Is it ever a good idea to buy a condo? ›
The Bottom Line. 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? ›
Because every structure is built on land. And it's the land that appreciates in value. So, if land appreciates and structures depreciate, what does this mean for condos? When you purchase a condo, you're making an investment in the building itself, not the land.
What are the pros and cons to owning a condo compared to owning a house? ›
Pros and Cons of Buying a Condo
| Pros | Cons |
|---|
| May be easier to afford than a single-family home | HOA and maintenance fees |
| Location, location, location | Abide by the HOA rules |
| Increased security | May have limited parking |
| Amenities like a pool and a gym | Less storage space |
3 more rowsAug 31, 2023
