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Are condos a good investment?

A father with two young children walking in front of condo buildings in the city
Maskot/Getty Image
A father with two young children walking in front of condo buildings in the city
Maskot/Getty Image

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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.

Condos are in demand partly because they have historically been a comparatively affordable option amid skyrocketing home prices and rising mortgage rates. What about next year, though, and the years that follow? Are condos generally a good investment? Here’s what to consider.

Is a condo a good investment?

The answer to this question depends on many variables, chief among them how you plan to use the condo — do you intend to live in it or rent it out? Investing in a condo to generate passive rental income will obviously generate more money than simply purchasing it as your home. The direction the market takes over the coming years can also impact the value of your investment over the long term.

Another important thing to keep in mind is that a condo in one housing market can look very different from a condo in another. From an investment standpoint, location can be key.

“If you look at a condo in Phoenix or New York City, they can be completely different,” says Nate Martinez, sales associate and owner of the Nate Martinez Team with RE/MAX Professionals in Arizona. “There are high-rise condos that can have very high HOA fees, and there are more traditional two-story buildings that can feel closer to an apartment.”

In addition to those monthly HOA fees, the HOA’s rules are worth considering, as they may limit what you can and can’t do with the property. It’s not unusual for HOAs to prohibit condo owners from renting out their units, for example.

“It’s important to understand the bylaws,” Martinez says. “Over the years, we have had a massive amount of properties go into the Airbnb and vacation rental space. Some communities allow it, and some do not.”

Crunching the numbers

What if your goal is to rent the condo out to long-term tenants? Aside from understanding the rules, doing the math can help you assess the opportunity. Let’s look at a condo with an asking price of $250,000. If you make a 20 percent down payment and nab a rate of 3.13 percent, your monthly mortgage payment would be $857, or $10,284 per year.

Say you can rent the unit for $1,350 a month, bringing in $16,200 for the year. At first glance, this looks like an attractive investment: You’d earn $493 a month. However, there are other costs that will eat into that $5,916 annual profit:

  • Homeowners insurance: $600 per year
  • Property taxes: $2,100 per year
  • HOA fees: $2,400 per year ($200 a month)

After accounting for those expenses, you’d pocket $816 for the year. That’s not bad, but it doesn’t leave much room for the inevitable, sometimes unexpected costs of being a landlord. What if you need to replace the air conditioning unit, for instance, or run into a plumbing issue that needs to be addressed? While a condo can be a great investment as a rental property, these are real scenarios and costs that you’ll need to consider.

Think far ahead into the future, too: What might the condo be worth when you’re ready to sell? There’s no crystal ball here, but think about the neighborhood. Is it an emerging part of town, for instance, where home prices are likely to increase at a clip? If so, you might be able to sell the condo for a sizable profit as demand rises in the area.

Do condos appreciate in value?

Historically, single family homes have appreciated in value more quickly than condos. However, a variety of market factors are currently helping to drive up the value of condos.

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.

Investing in a condo as a primary residence

If you’re a first-time homebuyer, you might be thinking of a condo less as an investment and more as simply the most affordable path to homeownership. It’s true that condos are typically smaller than single-family houses, but with a smaller asking price to match, they can be the ticket to buying your first place.

“A first-time homebuyer who purchased a condo for $185,000 recently decided that the one-bed, one-bath condo was too small and decided to list it with me,” Martinez shares. “We sold it for her for $212,000 five months later, and now she has $20,000 to put into a larger place.”

If you’re considering a condo for your first home, know that there are implications when it comes to the HOA fees in relation to getting approved for a mortgage.

“Let’s say a buyer qualifies for a $400,000 mortgage with a 10 percent down payment,” Martinez says. “If the HOA fee is $200 or $400 per month, that takes away from your qualifying. If the HOA fee is higher, the lender may drop you down to a $350,000 loan. They take those HOA fees into account when considering your application.”

Investing in a condo as a vacation home

If you’re lucky enough to be thinking about buying a vacation property, a condo can be a smart investment. Vacation, after all, should feel somewhat carefree, which makes the proposition of a condo — paying the HOA to handle exterior maintenance, lawn duties and other tasks — especially appealing. “I like to say it’s trading dollars for time,” Martinez says.

To make the equation work for a vacation home, though, you’ll need to think about how much time you’ll actually spend using the condo, as well as account for the overall costs of owning a vacation property.

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.

Investing a condo as a rental property

If you’re an investor looking at buying a condo for passive income, it’s important to crunch the numbers in these two areas:

  • Cash vs. mortgage: Do the math of what you’ll pay and what you’ll earn. Will you pay all-cash or get a loan? If you’re paying for mortgage interest, think about how much extra you’re paying each month and whether you can make it up by charging higher rent.
  • HOA financials: “Make sure you get financials from the HOA,” Martinez says. “Ask if there are any upcoming special assessments.” These are one-time, but often considerable, costs owners must pay. If the HOA determines that every unit needs to pay for new windows, for instance, an owner could be on the hook for $10,000. That’s a huge extra expense that takes away from rental income.

Here are more tips on how to buy a rental property.

Bottom line

Whether you plan to buy a condo to leap into homeownership, rent out or use as a second home, this type of property can be a relatively affordable and worthwhile investment. Before you begin your search, be sure to have clear goals in mind from the outset, and run the numbers. It can be especially helpful to work with a real estate agent who specializes in condos in the area you’re looking to buy or invest in.

Written by
David McMillin
Contributing writer
David McMillin is a contributing writer for Bankrate and covers topics like credit cards, mortgages, banking, taxes and travel. David's goal is to help readers figure out how to save more and stress less.
Edited by
Senior real estate editor