Congratulations! You have decided to purchase a residential investment property. Now you have to decide what type of residential property to buy.
There are several types of properties but the most common ones that people choose from are single-family homes or condominiums. There are slight variations of each such as villas and townhouses but for a general examination of the important differences it will be sufficient to focus on the main two classifications.
Buyers of investment properties must consider many of the same things that owner-occupants must consider. Of course invariably the most important consideration has to do with cost. So the basics of cost in regards to this comparison involve a few factors.Purchase Price
Lets start with the big one. In general you can get more square footage per dollar for a condominium than for a single-family home. Of course there are always exceptions to this but in general you will pay more up front for a house if the square footage is equal. The only exceptions may occur with high end luxury condominiums but as a rule you would not be well advised to purchase a luxury property for investment purposes. With an investment property your ultimate goal is to generate a high positive cash flow so ideally you would want to have the lowest cost paired with the highest income. So in terms up-front purchase cost a condo will give you more bang for your buck. But does that mean it is necessarily the best property type for you and your investment goals? In order to determine what is best for you lets look at the other factors.
Taxes and Fees
Second in terms of cost considerations are the taxes and fees for the property. There is a major difference in how this works for condos and houses which involves how insurance is paid. On a single-family home you will need to carry a homeowners policy (and sometimes a flood policy) whereas in a condominium you will only pay for the HOA fees which will include the property insurance. Typically homeowner’s insurance is going to be quite a bit more expensive than HOA fees. There is a slight difference in that HOA fees only cover the building and so they do not cover damage to the property from inside the unit, so typically it is advisable to purchase an additional contents and liability policy, but even if you add this to the HOA fees they are still much less than a normal homeowner’s policy. It is possible to reduce your expense on a homeowner’s policy by making improvements to the property that mitigate damage from windstorms and other natural events but a homeowner’s policy is still going to be higher.
Maintenance
In a condo you are only responsible for maintenance on the interior of the unit although there is an exception that we will discuss in a bit. So most maintenance issues are going to be of the minor variety such as clogged toilets, weak or old cabinets, broken tiles or wood floors and minor electrical issues. Since many of these cost less than $100 to repair the tenant should be responsible for them, although it may behoove you to have problem items replaced yourself when switching tenants. The largest ticket items in a condo would usually be your appliances such as refrigerators, a/c units, washers, dryers, etc. And if you buy right they should last 5-7 years.
In a house on the other hand there is almost always something that needs attention. Particularly if your property is more than 20 years old, which is the case for most houses in heavily populated metro areas. Major expenses range from painting to lawn maintenance to tree roots, concrete, lights stairs, doors, windows and the biggest one of them all: The Roof! The only advantage to pay for all of these major items yourself is that you get to make the decisions on what kind of materials you want to use and when you want to make the replacements. Even though deciding when to make a repair or upgrade is often the result of need, the wise investor will save money by replacing things before they go bad.The exception to this rule has to do with special assessments in condominiums for major repairs. Basically whenever a major repair needs to be made a to condo building, the board will decide on who to contract with and how to structure the required assessment that each individual unit owner must pay. The major down side to this is that unless you are on the board you will have no say in what contractor is chosen or how the assessment will be charged. This can be a big deal because if a board decided to charge an assessment over a short period of time the costs could be very high. This is the control that you give up for the convenience of a condominium.
So if your goal is to minimize out of pocket costs and you don’t care too much about being in control of the major decisions being made then condominiums are definitely your best bet. And for novice investors with 1-3 properties it is probably best to start with a condominium.
But there are other major benefits to investing in a single-family home.
Better Appreciation and Less Fluctuation
In a healthy real estate market single-family homes will appreciate in value more steadily than condominiums. Since condos are typically at a lower price point they tend to be more susceptible to changes in the market and whenever there is a boom or bust they are the first to have their prices sky-rocket or bottom out. This is important for a wise investor who pays attention to the market because they can buy up lots of properties in a boom before the price is over inflated and they have time to sell if they notice the price has reached its peak. Additionally, over the long term single-family homes will almost always have a higher appreciation rate than condos or other attached properties such as villas and townhouses.
More Control of Decisions / Fewer Chefs in the Kitchen
This is a big deal! Most investment condo owners can rattle off a series of Home Owners Association and Condo Board nightmares that they have experienced. I have personally encountered a sweet old lady who was the treasurer on the board of a condo I owned who just happened to be embezzling close to $10,000 a year from the budget for over 15 years! It took me and and a couple other investors poking around the books to notice the discrepancy. She is now sitting in jail after illegally profiting close to $200,000 from unit owners hard earned money. I have had several other condos where board members and presidents were hiring the contracting companies of personal friends and family members. So if you are going to buy a condo you need to make a commitment to attend the board meetings and exercise your rights to review (and have your lawyer review) your condo documents and financials. If you don’t you could be getting robbed while you sleep.
Tenants Staying Longer and Having Pride of “Home Ownership”
Most tenants who rent in condos are not planning to stay there for more than a couple of years. Of course there are exceptions like the retired couple who have become empty-nesters and just want a simplified life, but for the most part condo renters will be in and out. Why? Because if you are not of retirement age there is a good change you have a family and parents want a yard for their kids to play in so they would rather rent a home. And they also need some consistency in their crazy family lives so they want to live somewhere for at least 5 years while they build up the credit and capital to buy their own home. They may even make you an incredibly profitable offer on the home they are renting from you because they have become used to it and can’t see themselves living anywhere else! And in general when you are living in a house you have a pride of ownership, even if you are not technically an owner, you want your yard to look nice so that you can invite friends and family over for birthday parties and barbecues. This all translates to a higher quality tenant in single-family home.
So who is the winner?
Like so much in life it depends on multiple factors, not the least of which are your personal goals as an investor. The good news is you have a friend in the game, give Real Property Management a call and we will be happy to discuss your personal real estate investment goals with you free of charge. Either way we know you will see the benefits of running your investment property business like an actual business instead of like a hobby.
Thanks for reading!
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