So you’re trying to decide whether to buy a condo or keep renting. It’s a huge lifestyle choice that will impact your finances and future.
Should you take the plunge into homeownership with a condo purchase? Or continue renting and avoid the debt and down payment?
There are good arguments on both sides. The right option comes down to your current life stage, financial capabilities, and future plans.
Below we’ll explore the key factors to weigh when choosing whether to buy a condo or rent. This guide will cover:
- The pros and cons of buying vs. renting
- Cost comparisons
- How location impacts the decision
- Building equity as an owner
- Renting out a condo for income
- Maintenance responsibilities
- And much more
Let’s dive in and explore which option may be right for you.
Buying a Condo vs. Renting: An Overview
First, a quick background on condo ownership trends in the U.S.
Condos make up about 10% of homes in America. First-time homebuyers are the most likely group to purchase a condo due to the lower prices compared to single-family homes.
So what are the key factors to consider when deciding whether to buy or rent?
Buying a condo makes the most sense when:
- You have stable income and employment. Lenders want to see you can make payments.
- You can afford the down payment and closing costs. This requires solid savings.
- You plan on staying put for several years. Ideally 5+ years to break even on buying costs.
- You don’t expect major life changes requiring a move. For example, marriage, kids, divorce or job relocation.
If these criteria don’t apply, renting may suit your needs better in the short term.
Benefits of buying a condo:
You build equity. The portion of your mortgage payment that goes towards the principal adds to your equity each month. Rent payments don’t build any equity.
** predictable housing costs.** Your mortgage principal and interest stay fixed for the term with a fixed-rate loan.
Tax perks. You can deduct mortgage interest and property taxes if you itemize deductions.
Benefits of renting:
More flexibility. You can move anytime after your lease is up, rather than having to sell.
Less debt. Renters don’t take on mortgages that take decades to pay off.
Easier process. Getting approved to rent an apartment is faster and easier than getting a mortgage.
In general, buying a home makes sense if you plan to stay put for several years. Renting makes sense if you expect or need to be able to move around.
Next, let’s do a deeper cost comparison between buying and renting.
The Costs of Buying a Condo
Buying a home requires significant upfront and ongoing costs. Here are the expenses to budget for:
Down payment – At least 3.5% to 5% down required for most mortgages. 20% down recommended to avoid private mortgage insurance (PMI).
Closing costs – These average 3% to 6% of the total purchase price. Includes fees for the lender, title insurance, transfer taxes and more.
Mortgage – Your principal and interest payment. Average around $1,600 for condos, which is often cheaper than rent.
HOA fees – Covers maintenance of shared areas. Average $200-$400 per month for condos.
Property taxes – Varies by state but average 1% to 1.5% of the home value per year.
Homeowners insurance – Typically $800 to $2,000 per year, more for pricier condos.
Repairs & maintenance – Budget 1% to 4% of the home’s value per year. You’re on the hook for plumbing, electric, HVAC issues, etc.
Condo buyers should have solid job security and emergency savings to handle these ongoing costs.
The Cost of Renting an Apartment
Renting comes with significantly lower upfront costs. There’s also more flexibility since you’re not locked into mortgage debt.
Here are the key expenses when renting:
Upfront costs – Typically first month’s rent and a security deposit equal to 1 month’s rent is required to move in. Some landlords charge application fees around $50 per applicant.
Rent – The average rent for a 1-bedroom apartment is around $1,500 per month, similar to average condo mortgage payments. But rents are rising fast nationwide.
Utilities – Renters need to budget electricity, cable/internet, water, etc. unless included. Some landlords cover water or heat.
Renter’s insurance – Optional but smart for protection. Usually $15-$30 per month.
Moving costs – Expenses to move at end of lease. Potentially first month’s rent and deposit at new place.
The main trade-off is less flexibility buying versus less stability renting long-term. Next let’s look at how location impacts the buy vs. rent decision.
How Location Impacts the Buy vs Rent Decision
Housing costs can vary drastically between different areas and cities. This factors into whether buying or renting makes more financial sense.
In expensive major metros like New York and San Francisco, rents and home prices are astronomical. Most residents have no choice but to rent.
But in smaller cities or the outer suburbs of bigger ones, buying a home or condo is much more affordable.
To determine the better deal, compare:
- Average mortgage payments – Talk to a lender to see estimated rates and payments based on condo prices in your area.
- Average apartment rents – Check online listings to see typical rents for your desired size apartment and amenities.
- Commute times – Factor in transportation costs if buying further out.
As a rule of thumb, buying tends to be more realistic mid-way between the urban core and suburban periphery of a metro area.
In far outer suburbs, prices get low enough that buying often wins outright. However, weigh your commute time and costs.
Either way, buying has the benefit of building equity over time. Renting doesn’t build any equity or ownership stake. So even if rents are lower in the near-term, buying often pays off long-run.
Building Home Equity as a Condo Owner
One of the biggest perks of homeownership is building equity. Here’s how it works:
Your down payment serves as initial equity in the condo. Say you put 10% down on a $200,000 condo. You’d have $20,000 in instant equity.
With each mortgage payment, the principal portion builds additional equity. If your payment is $1,000, and $200 goes to principal, you’ve added $200 in equity that month.
Appreciation also builds equity. If the condo value increases by 10% in a few years, your equity would grow by $20,000.
This equity can be tapped in a cash-out refinance or home equity line of credit (HELOC). The funds can be used to pay off high interest debt, remodel your condo, or cover other major costs.
Down the road when you sell, you keep all of the equity earned. This can serve as your next home down payment or add to your investment portfolio.
Renters miss out on this wealth-building component of housing. Equity is the main reason why buying often wins out long-term.
Renting Out Your Condo for Passive Income
Owning a condo gives you the option to generate rental income. There are two main approaches:
Short-term rentals – List your condo on sites like Airbnb for nightly or weekly stays. Typical for vacation hot spots. High upside potential but more volatile occupancy and overhead.
Long-term rentals – Tradtional 6-12 month leases. Preferable for reliable, predictable income. Involves tenant screening and property management.
Short-term rental key stats:
- Hosts earn avg $924/month in extra income
- 72% occupancy rate on Airbnb (higher in urban + vacation areas)
- Works best in markets with high tourism/traveler demand
- Income covers approx. 79% of typical mortgage payment
Long-term rental key stats:
- 8-12% gross annual return on investment in rents
- Steady occupancy with multi-year leases
- Involves tenant vetting and management
- Provides stable monthly income to cover expenses
- Lower overhead than short-term model
Renting out your condo provides a flexible way to offset housing costs or profit while keeping ownership.
Maintenance duties differ drastically between owning and renting. Here’s the breakdown:
Condo owners handle:
- Interior repairs – plumbing, electric, HVAC, appliances
- Interior improvements – renovations, remodeling projects
- Reporting issues to HOA promptly
- Exterior maintenance – roof, siding, paint, landscaping
- Shared systems – elevators, lobby, gym, pool
- Parking areas and sidewalks
- Minor routine maintenance – changing light bulbs, unclogging drains, etc
- Reporting bigger issues promptly to landlord
- Major systems repairs – plumbing, electrical, HVAC
- Appliances, roof, and structural issues
- Turnover maintenance between tenants – paint, carpet cleaning
Condo owners must budget for surprise repairs and invest time into maintenance oversight. But renters can leave most duties to the landlord.
Key Factors to Consider
Deciding between buying a condo and renting depends primarily on your:
- Financial situation
- Life plans and goals
- Family needs
- Stage of life
Think hard about your current needs and future desires. Try to balance pragmatism and practicality now with your long-term vision.
If you’re just starting out and need flexibility, renting likely makes the most sense. But if you’re putting down roots and can swing a down payment, buying a condo can be a sound financial move.
Carefully weigh the pros and cons and talk to experienced professionals. Make sure to factor in all the costs. And don’t forget to account for your lifestyle preferences.
With the right research and planning, you can make a smart decision between buying a condo or renting.