Which Has a Better Return on Investment, Condos or Single-Family Homes?

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 what's known as the cap rate.

Positive Aspects of Single-Family Homes as Compared to Condos

Some of the relative pluses of single-family homes over condos when buying for investment include:

• Appreciation potential. Condos are often considered easy, low-maintenance properties in which to park 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 primarily the developers.
• 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, raising your total cost burden over time.
• Ability to set a rental amount that leaves out ongoing service fees. 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, having to pay 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 about the same.
• No outside restrictions on use. Unlike with single-family homes, condo homeowner association rules (CC&Rs) might restrict how you use the property (for example, prohibit pets), 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 types of condos:

• Condo 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 were going to live in the condo yourself and the low-maintenance lifestyle that condo ownership presents was worth the added cost to you, there might be good reasons to choose a condo over 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.