Which has a better return on investment, condos or single-family homes?

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Question:

I’m looking to invest in a residential rental property, and trying to decide between a condo and a single-family home. Which one is a better real estate investment?

Answer:

As with all real estate investments, it depends—on the particular property, location, market, and other factors, such as the annual return you expect on the investment, or cap rate.

Some of the relative pluses of single-family homes over condos include:

  • Appreciation potential. Condos are often considered easy, low-maintenance options to park your money, banking on the idea that the condo will appreciate over the years and you will someday be able to sell it 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 generally 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) may restrict how you use the property, and may make it difficult—or even prohibit—renting your condo unit to others.

That said, some condos are better investments than single-family homes, including the following:

  • Properties 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 may 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 may 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 their 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 may want to buy a condo versus 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.

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