Key takeaways

  • Condos are typically cheaper than single-family homes, but tend to appreciate in value over time similar to detached properties.
  • Condos can be a smart investment for first-time homebuyers, vacation homeowners and rental property investors.
  • The decision to invest in a condo depends on many factors, including how you intend to use the property and its location and HOA fees.

Condos are often a more affordable option than single-family homes, but that also might translate to less upside when it comes to resale. Given that potential outcome — and the fact that interest rates are higher now than they have been in recent years — is a condo a good investment? Here’s what to consider.

Are condos a good investment?

The answer to this question depends on many variables. Chief among them is how you plan to use the condo: Do you intend to live in it or rent it out? If you plan to generate passive rental income, for example, market changes in the coming years can impact the value of your investment in the long term.

A condo in one housing market can look very different from a condo in another, as well. 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 condo association’s rules are worth considering, as they might limit what you can and can’t do with the property. It’s not unusual for them to prohibit owners from renting out their units, for example. “It’s important to understand the bylaws,” says Martinez. “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.”

Along with understanding the rules, you’ll need to assess the opportunity by doing some math. Here’s an example:

Condo investing example

Let’s look at a condo priced at $340,000. If you make a 20 percent down payment and obtain a condo mortgage at 7 percent, your monthly mortgage payment would be roughly $1,800 or $21,600 per year. Say you can rent the condo for $2,600 a month, bringing in $31,200 for the year. At first glance, this looks like an attractive investment: You’d earn $800 a month, or $9,600 per year. However, there are other costs to account for:
  • Homeowners insurance: $600 per year
  • Property taxes: $2,100 per year
  • HOA fees: $2,400 per year ($200 a month)
After those expenses, you’d pocket $4,500 for the year, or $375 a month.

In this example, that outcome sounds appealing. It doesn’t leave much room for necessary maintenance, however, and the inevitable, sometimes unexpected costs of being a landlord. What if you need to replace the air conditioning unit, for instance, or the tenant runs into a plumbing issue? While a condo can be a good investment as a rental property, these are real scenarios and costs 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?

In general, real estate — including condos — tends to appreciate over time. As of late, condo prices have posted more gains than single-family homes: The median price of a condo increased 5.7 percent year-over-year in January, while the median single-family price rose 5 percent, according to the National Association of Realtors. That said, there are no guarantees with investments. Whether your condo appreciates in value depends on the local housing market, the condition of the property, your resale timeline (if you have one) and many other factors.

Buying a condo as a primary residence

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. If you’re a first-time homebuyer, you might think of a condo less as an investment and more as simply the most affordable path to homeownership.

“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,” says Martinez. “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, keep in mind 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,” says Martinez. “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.”

Buying a condo as a vacation home

There are benefits to buying a condo as a vacation property  — namely, the HOA fees cover exterior maintenance, lawn duties and other tasks. “I like to say it’s trading dollars for time,” says Martinez.

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 versus an 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: Will you pay all-cash or get a loan? Do the math on what you’ll pay and what you’ll earn. 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. The latter is especially important now that rates have gone up.
  • HOA finances: “Make sure you get financials from the HOA,” says Martinez. “Ask if there are any upcoming special assessments.” Special assessments 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.

Bottom line

Whether you plan to buy a condo to live in, 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.