Are Condos a Good Investment?

So, you just got back from a relaxing vacation at a beachfront condo and you’re wondering, What if I owned my own vacation condo? You could plan getaways to those sunny shores whenever you want and earn extra income by renting it out!

Or maybe you’re buying your first home, but you aren’t ready to fool with the yard work and repairs that come with buying a typical house—not to mention the overall higher price tag! So you’re thinking about buying a condo instead.

Either way, you’ll want to know if a condo is a good investment of your hard-earned money. What exactly do you need to know before you decide to buy one? Well, you’re about to find out!

Are Condos Worth It?

Let’s cut to the chase: Yes, condos are a fine investment. You just don’t want to get a junky one that’s poorly managed. Not sure what a junky, poorly managed condo looks like? We’ll help you be smart about condo shopping so you can spot the flowers among weeds. (More on that below.)

But if you’ve been overwhelmed by house hunting lately, the lower price tag of a condo might help you breathe easier. Don’t get us wrong: Buying a condo is still one of the most expensive purchases you could ever make. But a condo is typically tens of thousands of dollars cheaper than a single-family house.

For perspective, the bigwig number crunchers at the National Association of Realtors found that the U.S. median sales price of a condo was $257,100 in May 2019, while single-family homes were $280,200—meaning condos were $23,000 less expensive.¹

Do Condos Appreciate in Value?

Yes, condos generally appreciate in value. That’s true of any piece of property—as long as it doesn’t have wheels or come from a trailer park. But, if you’re trying to decide between a condo or a house, keep in mind that a single-family home is usually going to grow in value faster than a condo will.

For example: From 2017 to 2018, the median price for condos grew by 3% while single-family homes grew by over 5%.² Now, that’s not the same for every situation. If you find a condo in a cool location and a single-family house in a lousy location, the condo will probably appreciate faster. So just make sure you find a cozy-looking condo in a sweet location and you’ll be fine.

Is a Condo a Good First Home?

Okay, so let’s say you’re buying a condo as your first home. Compared to other types of properties, condos are unique. So, make sure you sort through what makes them different before you decide to live in one. The biggest thing you’ll need to decide is whether or not you can put up with the homeowners association (HOA).

So what is an HOA? Well, it’s basically a set of rules and fees designed to maintain the value of a condo complex. It keeps everything in tip-top shape and looking pretty. The HOA is made up of owners who actually live in their unit or a group of outside investors—which would include you! Every month or quarter, the HOA collects a fee from each unit that gets stashed in a piggy bank fund until it’s time to handle maintenance and repairs for shared items like roofing, parking and pools.

Here are the pros and cons of condos:

• Pros: A condo lets you skip the hassle factor by delegating boring stuff like maintenance and repairs to the HOA. That also means those costs are shared with other residents, so you’re not stuck paying the bill solo. Also, if you’re a people person, condos usually offer a great community vibe.

• Cons: A condo’s HOA could go one of two ways: It could be so poorly managed that big repairs (like rooftops, siding and parking) get neglected for so long that the HOA board suddenly tags each unit with a huge bill to make up for HOA fees that were too low. On the other hand, your board members might be so drunk on so little power that they’ll drive you absolutely nuts by nitpicking every little thing—like how you park your car crooked or choose the wrong color for your curtains. You’re also not in control of HOA rates or how much they go up from year to year.

If the pros outweigh the cons for you, your next step is to make sure you buy a condo the smart way. Ask questions about the HOA, like what the rules are and how well it’s managed. Find out if expensive features like HVAC systems and shared amenities are up-to-date and are on a schedule for regular maintenance. See if you can contact previous owners about what they thought of the community and why they left. One-by-one, you’ll weed out the junky ones.

Are Condos a Good Investment for Rental Property?

If you want to build and maintain wealth, don’t jump into investing in a condo or any type of property without first following Dave Ramsey’s 7 Baby Steps. These financial milestones set you up for success so that investing doesn’t interrupt your other money goals. For example, we don’t recommend for you to invest in a condo unless you’ve already paid off your own home and pay for the investment property with 100% cash. It’s not worth having a second mortgage hanging over your head.

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Once you’re clear on that end, you’re ready to buy a condo! When you’re first starting out, it’s a good idea to invest in a local piece of real estate, as opposed to a long-distance one. That way, it’ll be easier for you to keep an eye on it as you gain experience handling a rental property. To make sure you don’t get stuck with a clunky condo, follow these tips:

Make sure there are more owners than renters. Ask about the current “owner-occupancy rate,” which is just a fancy way of saying how many owners live there as opposed to renters. If over 50% of the occupants are owners, the condo is probably a good investment.

Since renters don’t really have skin in the game, they often don’t care as much about the property and shared common spaces as owners do. And having more renters than owners usually goes against the guidelines set for normal financing options. That means the head honchos who make up lending rules for FHA, VA and conventional loans won’t approve a buyer for those common types of mortgages.

So, the condo values are going to drop like a rock! Why? Well, at that point, the only people interested in the condos will be cash buyers and investor buyers. And those types of buyers are bargain hunters who are only looking for the cheapest deal. That will kill your condo appreciation!

Make sure the HOA is well-managed. Remember, the HOA is a big deal when it comes to condos. So, learn as much as you can about the condo’s HOA before you buy one as a rental property. Here are some questions to ask:

• What are the reserves for maintenance (roof, paint and parking lot)?

• Does the HOA collect enough to pay for bills?

• Is the HOA actually paying the bills?

If your condo checks out in those areas, then put it through one final test. Ask yourself, Is this a condo I would want my family to live in? If there’s any reason you wouldn’t want to live in the condo, then your potential renters will probably feel the same. If you think your family would love living there, then you found yourself a good investment, baby! Buy that condo!

Is a Vacation Condo a Good Investment?

Let’s say you want to buy a condo near a favorite vacation spot. Just imagine: You’d have your own private getaway on the beach. You could say “So long!” to those brutal winter months without moving away from family and friends. And, when you’re not using it, it doubles as a vacation condo you can rent out to others. Cha-ching!

Now, if you buy a condo near a beach, lake or tourist hot spot like the Grand Canyon or Disney World, then you’ll have yourself plenty of renters to choose from at any time of year. But, because you’ll have a revolving door of renters instead of one occupant and you won’t be living near the property, you’ll probably need to hire a management company to handle upkeep and administrative work for you—and that can cut into the profit.

The plus side is that you can charge more per stay than the monthly rate for a single-tenant condo. And you can use the space yourself anytime you want.

Ready to Buy a Condo?

Whether you’re buying a condo for yourself or as a rental property, there are lots of details to consider. Lift off some of that weight with the help of a real estate agent. You can find the best ones in your area—or near your vacation spot—by using our Endorsed Local Providers (ELP) program. Our team vets and coaches agents from all over the country to make sure we only recommend ones who get the job done right and give you the same trustworthy financial advice you hear from us.

Find an agent today!

Listen to what Dave says about condos: