For years, the rule of thumb has generally been that buying a home is a smarter financial decision versus renting, especially if you plan to own the property for more than five years. This has been the case because you can deduct mortgage payments and taxes from your income tax, and home price values tend to increase over time, as opposed to rent payments which accrue nothing in your portfolio. With a condominium, it's no different.
However, if you purchase your condo with cash, you obviously will not be impacted by the increase in mortgage rates. The more you can put down at close, the better. Finding a condo in a town or city with lower property taxes will also make the deduction cap less of a hurdle.
Buying a condo that you plan to live in or rent out for more than five years was traditionally thought of as the best way to recoup your investment and sell for more than your purchase price. On the heels of the exceptionally inflated housing market of the past three years, this might no longer be the case. With housing prices at an all-time high in the past few years, the likelihood of selling for a significant profit in the next five to seven years has diminished.
This is especially the case in New York City, where some new buildings sold at a premium in recent years, featuring top-of-the-line amenities and cutting-edge technology and appliances. However, in five to 10 years, those properties will no longer be considered new, and there will be newer technology and appliances in newer buildings, so the chances of recouping your investment, if you paid a premium, are lower.
If you do decide to buy a condo that needs a complete renovation, the investment will ultimately pay off because of the exact reason that you got a great deal in the first place. Buyers and renters want a turnkey property; therefore, your home will more likely sell for a profit more quickly down the road. If you want to rent it out, that will be easier as well.
Whether a condo is cheaper to own or rent also depends on where you live. A Jan. 12 article in The New York Times compared median monthly homeownership costs versus the median rent in cities across the U.S., using a 2021 Lending Tree study. In New York City, San Francisco, Los Angeles and San Jose, California, the cost of homeownership versus renting had the highest differential, benefitting renters. Cities including Memphis and Nashville in Tennessee, Tampa, Florida, and Las Vegas had the smallest difference in cost between owning and renting.
When it comes to condo purchasing, buying an investment property that you plan to rent out, for a short-term or long-term rental, still makes good economic sense. If you earn any rental income on your condo, then the interest on your mortgage is considered a business expense and is not capped. Your property taxes are also considered a business expense and are therefore not subject to the $10,000 tax deduction cap.
While it seems that renting an apartment rather than buying a condo may be the smarter financial decision in many cases in the current market, there are certainly pockets of the market that can be a great investment now, such as investment or vacation rental properties in popular destinations or homes that need significant work.
Remember, not all decisions can boil down to a financially-motivated one. You are deciding where you want to live: Perhaps where you want to raise your children, work from home or commute, or become an active part of the community. Finding a condo where you want to put down roots and create memories need not be dictated by financial concerns alone. However, you just may want to rent temporarily in the area before you bite the bullet.
Purchasing a condo certainly has its appeal, as they typically come at a lower cost than single-family homes and are also often located in more desirable locations, such as city centers. They can also be a smart option for military personnel, who may move often and can use a VA loan to finance a condo.
But remember condominium laws vary among communities and some prohibit short-term rentals, while others prohibit renting in general. When doing your research, make sure your specific condo guidelines allow for the property to be used as a rental.
In general, condos appreciate in value at a slower rate than single-family homes. The median sales price of a condo was up nearly 10% year-over-year in October 2020, according to a report from Redfin. But the median sales price of single-family homes was up more than 15% in the same timeframe.
One of the main draws of owning a condo is price. According to the National Association of Realtors, the median sales price of a condo was $300,400 in April 2021, while the median price of a single-family home was $347,400.
For those interested in communal living, condos offer attractive amenities. Many condo communities include grilling areas, gyms, pools, and other common areas. These attractive amenities can make it easier to find renters for a condo or guests for an Airbnb.
While convenient and cheaper than single-family homes, condos come with their share of drawbacks too. HOA fees and rental restrictions are just a few disadvantages you might be leery of as an investor and condo owner.
Not every condo community allows you to rent out the condo. Or, you might be able to rent it out to long-term renters, but not be able to use it for short-term rentals like Airbnb. If you plan on renting out your unit, be sure to understand the limitations.
In addition to rental restrictions, there might be other restrictions in a condo community. Your homeowners association might limit the types of modifications you can make to the unit or the number of pets you can own.
It can be harder to get financing for a condo. Condo mortgage rates tend to be higher than rates for single-family homes, and the lender might have other conditions, like expecting a certain amount of the units in a community to be owner-occupied (i.e., there are more owners than renters) before offering you pre-approval.
If you're interested in purchasing a property to use as a rental or Airbnb that will generate passive income, a condo can be a great choice. Due to their ease of maintenance and smaller size, investing in a condo is great as they're easy to manage, and can bring handsome returns. The main things to keep in mind when investing in a condo you plan to rent out are the location, price, and projected rent. You'll also want to make sure the condo doesn't have any policies restricting your ability to rent out the property.
If you're buying a condo as a second home or vacation home you'll want to consider its potential to appreciate in price, as well as how much it will cost you compared to renting. If it's for a vacation home in a beachfront destination, it might have a lot of room to appreciate, making the condo a great investment. On the other hand, if you plan on using the condo as a second home in the country, you might be better off renting rather than buying.
Investing in condos makes a lot of sense if you want to start investing in real estate and earning passive income. Condos are great investments because of their compact size, which makes them less expensive and easier to maintain while offering higher returns on your investment. Buying a condo is the ideal choice for those just starting out with investment properties.
Near the beginning of the pandemic, plenty of real estate analysts wondered if an exodus from dense urban areas would lead to an abundance of empty condos. The appeal of condo living continues, however, with demand for condos driving prices to record levels. The average condo price spiked to $319,000 in February 2022, an increase of 14.6 percent from the previous year, according to Redfin data.
A severe lack of inventory is ratcheting up competition and prices for condos as well as other types of housing. According to Redfin, about 41 percent of condos sold above asking price in February 2021, up from 24.9 percent one year prior.
Still, houses remain slightly more competitive and valuable, with 48 percent of single-family homes selling above list price for the same time period, which was an increase from 38 percent from a year earlier. The reality is that while interest in condos has indeed increased amid the pandemic, many buyers still prefer single family homes.
There are also significant differences when it comes to getting a mortgage and paying taxes on a vacation home vs. a rental investment property. Considering all of these factors can help you make the most of your investment.
Condos are often much less expensive than single-family homes in similar neighborhoods. According to the National Association of Realtors, the national median price for single-family homes in 2020 was $314,300, while the median for condos was $272,200. 59ce067264