Investing in a Condo vs. House: The Pros and the Cons
Real estate investors should find the answers to many questions before they are able to make the right investment. One of these questions is: “Which property type makes for the best real estate investments?” Investing in a condo vs. house has become one of the major dilemmas for property investors in the past couple of decades. While condos are becoming more and more popular, mostly due to demand driven by millennials, they offer many disadvantages which real estate investors should take into consideration before deciding to invest their money in them.
Houses, on the other hand, are a classic real estate investment which has been making investors rich for many years now, but this doesn’t mean that they are a problem-free investment either. To help you evaluate whether investing in a condo vs. house is the right option for you, we show the pros and cons of both property types from an investor’s perspective. Let’s start out.
Investing in a Condo
The Pros of Investing in a Condo
Condos have been growing in popularity since the 1960s, and millennials are currently driving the high demand for them. All this is happening for a reason as condos present some important benefits over other property types. Let’s have a look at what the pros of investing in condos are for real estate investors:
- Easy to Maintain
One of the main headaches which landlords encounter and a factor which makes many people give up the idea of investing in real estate is the work associated with owning a rental property. This includes regular maintenance as well as unexpected repairs and fixes required to keep your property going. A big chunk of this problem is solved when you invest in a condo because the HOA will take care of all the maintenance and repair work related to the common spaces and the outside of the building. While you will still need to do some work inside your rental property, you will not have to arrange with your neighbors to work on the outside. The HOA will take care of this.
- More Amenities
Many times condos come with more amenities than other types of properties including a swimming pool, a gym, a beautiful garden, etc. A property with these amenities is likely to attract more rental demand than a property without them. Moreover, offering such extras will allow the landlord to ask for a higher rent. So, that’s definitely one of the advantages of investing in a condo rather than a house.
- More Central Location
As we all know, location location location are the three most important factors in any real estate investing decision, so the location should be taken into consideration when deciding whether to go for a condo or a house. Generally, condos tend to be located in more central locations than houses, which means that you will have more demand from working individuals and small families. In addition, you can charge higher rent for a property which is located closer to job and school opportunities than for a property in the suburbs.
- Lower Prices
Whether you are a new or an experienced real estate investor, you are probably working on a budget. Property price is of crucial importance when you look for an investment property to add to our real estate investment portfolio. In most housing markets, condos are cheaper than houses.
For example, according to data from Mashvisor, an advanced real estate analytics tool, in Miami condos are 82% cheaper than houses. Similar trends are observed in other housing markets within Florida and beyond. Another fantastic condo research tool is Precondo, which will help with condo analytics for our friends in Canada. Let’s have a look at the average condo and house prices in some of the major real estate markets across the US based on Mashvisor’s data:
Average Condo vs. House Prices in Top US Real Estate Markets
|City||Average Condo Price||Average Townhouse Price|
|Long Beach, CA||$511,800||$592,600|
|San Diego, CA||$420,100||$655,200|
|Palm Springs, CA||$308,200||$544,400|
|Las Vegas, NV||$173,800||$232,700|
Source: Mashvisor, June 2018
Of course, there are markets where condos are more expensive than houses. For example, in Los Angeles the average condo price is $827,800, compared to an average house price of $615,700. Nevertheless, in general, condos are more affordable real estate investments than houses, and investors should definitely keep this in mind when deciding in what type of property to invest their money.
The Cons of Investing in a Condo
Now it’s time to look at some of the downsides of investing in a condo as opposed to a house.
- Condo Fees
There is no free lunch in the business world, and real estate investing is no exception. As we said above, the HOA provides the maintenance and repairs of the outside and the common areas of a condo complex, but this comes at a price. According to Realtor.com, condo fees range between $100 and $700 in most cases, though they can run much higher. But even $100-$700 is a pretty high number for a landlord to pay each and every month. This is an immediate drop of $100-$700 in your monthly rental income if you decide to invest in a condo as a rental property.
- Restrictions on Use
The HOAs associated with condos not only take care of the property and collect money for that work but also establish very strict rules on anything and everything related to the residential units within the complex. Sometimes the rules are so strict that they actually prohibit the use of condos as rental properties. So, before you decide to buy a condo as an investment property, you should study the HOA rules which apply to this specific condo very carefully and assure not only that they allow renting out units now but also that they will not change for the worse in the coming years.
- Harder to Sell
Even if you buy the best investment property, things change, and in a couple of years you might end up looking for options to sell your rental property. It doesn’t have to be that you decide to opt out of the real estate investing world. It might be that you want to sell your current rental property in order to use the money as down payments for two or even three new properties.
So, when you buy a condo, you should keep in mind that this property type tends to be harder to sell than houses or apartments. The reason for this is the fact that until now many people do not want to deal with all the restrictions and fees associated with owning and living in a condo.
Investing in a House
The Pros of Investing in a House
Next, in our analysis of investing in a condo vs. house, we will have a look at the advantages which houses offer as investment properties.
- Higher Natural Appreciation
Real estate appreciation is one of the two main reasons why investors decide to go for properties rather than stocks or other types of investments. The first reason, of course, is the monthly cash flow. Natural appreciation is the increase in the value of a real estate property which happens over time. As cities grow and real estate properties become relatively scarcer (mostly due to the fact that land is a limited resource), they increase in price. While all property types tend to experience natural appreciation, generally speaking houses appreciate more than condos. So, if you are going to invest $300,000 in a real estate property today, you better go for something that will sell for $350,000 tomorrow (a house) rather than $320,000 (a condo).
- More Options to Force Appreciation
While you are renting out your investment property and waiting for it to appreciate enough in value to make sense to sell it, there are certain things you can do to force even more appreciation on your asset. Real estate investors have more freedom to force appreciation on a house than on a condo because of the restrictions which condos face from the HOA. For instance, you can add solar panels to your house, you can repair its roof to make it more durable, or you can even repaint the outside of your house to a more attractive color to not only increase demand from tenants but to also push its value up. However, you simply cannot do that with a condo because of the restrictions imposed by the HOA. So, that’s one more factor you should keep in mind when you decide for what property type to go.
- Higher Rental Income
As houses are bigger and offer the comfort of living in your own space with no immediate neighbors, they rent out for more than condos. It is true that your monthly mortgage payments for a house will be generally higher than for a condo because of the higher property price, but remember that with a condo, you will also need to pay the monthly HOA fees. This means that houses have the potential to generate more cash flow and higher return on investment than condos.
Let’s have a look at the rental income for traditional, long-term rentals in some of the major housing markets across the US for condo vs. house.
Average Condo vs. House Monthly Traditional Rental Income in Top US Real Estate Markets
|City||Average Condo Price||Average Townhouse Price|
|Long Beach, CA||$1,540||$2,430|
|San Diego, CA||$1,920||$2,550|
|Palm Springs, CA||$1,340||$1,630|
|Las Vegas, NV||$1,070||$1,070|
Source: Mashvisor, June 2018
Data from Mashvisor shows that in many of the major real estate markets across the US houses offer higher rental income than condos. Since the opposite can be true in some markets though, you should always conduct careful investment property analysis before putting your money in either type of property.
- Choice of Optimal Rental Strategy
While some real estate investors would only go for traditional (long-term) rentals, others would always go for vacation (short-term) rentals. Still others are flexible and choose their rental strategy based on demand in their location. Either way, it’s best to keep both options open as demand can change in the future. An important pro of investing in a house vs. condo in this regard is the fact that houses face much fewer restrictions in terms of short-term rentals. HOA rules can limit traditional rentals, but they are even more prohibitive of short-term rentals.
Cons of Investing in a House
As everything in the real estate investing world, buying a house is not a perfect option as it comes with some disadvantages.
- More Maintenance
If you decide to invest in a house rather than a condo, you will have to do all the maintenance and repair work on your own. True, you won’t be paying condo fees, but your actual involvement with your investment property will be more demanding.
A way to tackle this issue is to hire a professional management property company to take care of your rental property. While this will come at a fee similar to the condo fees, you can get the property management company to cover a much wider range of issues and services than the HOA. So, you can end up with a more hands-off experience as a landlord when investing in a house.
- More Expensive
Another major drawback of buying a house as a rental property is the fact that a house usually costs more than a condo. You have to take this into consideration when you look for options for financing an investment property, especially if you are a new and less experienced real estate investor with little cash. But again, this all depends on the specific housing market, so you might be able to find a decent house in which to invest that costs less than a condo in the same real estate market.
Investing in a Condo vs. House: How About Return on Investment?
At the end of the day, real estate investors are in the business in order to make money. This means that we cannot leave a discussion on the pros and cons of investing in a condo vs. house without going over the return on investment which the two options offer. Let’s have a look at the cap rates which traditional rentals and vacation rentals generate for each property type in some of the top housing markets in the US.
Condo vs. House Cap Rate for Traditional and Vacation Rentals in Top US Real Estate Markets
|City||Traditional Rental Cap Rate||Vacation Rental Cap Rate|
|Long Beach, CA||0.2%||0.8%||0.6%||2.4%|
|San Diego, CA||1.1%||1.3%||1.5%||1.0%|
|Palm Springs, CA||–||–||5.4%||3.0%|
|Las Vegas, NV||2.9%||1.7%||4.6%||3.4%|
Source: Mashvisor, June 2018
As you can see from Mashvisor’s data, it is not really possible to say whether condos or houses result in higher cap rate and thus return on investment as rental properties, regardless of whether you go for long-term rentals or short-term rentals. As many things in the world of real estate, it depends on the market. Thus, before you are ready to buy your next investment property for the maximum profits, you should perform both real estate market analysis and investment property analysis to know in what kind of deal you are getting yourself.
One of the beauties of the real estate investing world is the endless opportunities which it provides. You can choose from several rental strategies, from different property types, from thousands of housing markets, from millions of properties… But with variety, there come questions which you need to answer before you are able to make one of the best real estate investments out there, and one of these questions is whether it is better to invest in condos or in houses.
Unfortunately, this is just one more real estate question without a clear answer. It depends on the real estate market in which you want to invest, on the rental strategy for which you want to go, the budget you have at your disposal, and – of course – your own preferences as an investor and a landlord. So, before you buy your next real estate investment, consider the pros and cons of investing in a condo vs. house carefully, conduct the necessary analyses, and rely on data to assure positive cash flow and high return on investment.
Daniela Andreevska is Content Marketing Director at Mashvisor, a real estate analytics tool which helps real estate investors quickly find traditional and Airbnb investment properties. A research process that’s usually 3 months now can take 15 minutes. We provide all the real estate information in easy to understand visualizations.