Low prices and incredible mortgage interest rates may have you wondering if now is the time to buy a condo, but there are positives and negatives to consider before making the leap. Real estate is an asset that can grow over time, so as a condo owner you have an investment that renting an apartment doesn't give you. Paying a mortgage is like paying rent that you get to keep a percentage of every month. And someday, you hope to sell that investment for more than you purchased. But in today's market, will a condo be a good purchase for you?
Condo and House Prices
Compare prices of condos and single-family houses of similar square footage to get an idea of investment and value. In Chicago's desirable Lakeview neighborhood, a condo with 2,600 square feet was listed for $675,000 in January 2013, whereas a single-family house in the same area with 2,700 square feet was listed for a pricier $745,000. What may be even more important is that there are several condo choices in less expensive ranges, like the $400,000 range, making the possibility of home ownership more attractive for those who are comfortable with a smaller space.
Owning vs. Renting: Chicago
If you put 20 percent down on that Chicago $675,000 condo, your monthly mortgage, not including property taxes or homeowner association fees, would be approximately $2,277 a month. To rent a 2,000 square foot apartment in the same area of Chicago would cost $2,580 a month. That is less square footage for a higher price, and all of your rent money evaporates, whereas the percentage of your mortgage that goes against your investment you get to keep.
Owning vs. Renting: New York City
To reside in New York City you will be hard-pressed to find any living opportunity that is not an apartment. But in such a high-cost area, is it better to rent or buy? On the Upper East Side, a 3,000-square-foot apartment was available to rent in January 2013 for $25,000 a month. In that same neighborhood, a 2,200-square-foot apartment to own was listed in for $4.2 million. That might seem like an enormous difference, but if you put 20 percent down with a 3 percent interest rate on the $4.2 million condo, your monthly mortgage would be just over $14,000.
Owning vs/ Renting: Los Angeles
In 2012, a condo in Los Angeles averaged slightly more than $250,000. Homes in Los Angeles have a median price of $393,800. Apartments in Los Angeles average about $1,552 a month to rent. According to a "New York Times" Buy/Rent calculator, at those prices if you plan to own your condo for at least five years, then it is financially wiser to buy a condo than rent an apartment.
You can expect to save, on average, $1,331 a year if you own a condo for five years. Since a home costs significantly more, it isn't until your 22nd year in a home that you start to save money compared to that renting price.
The Downside of Buying a Condo
It is a buyer's market, which is dream come true if you are hunting for real estate, but can quickly become a nightmare if you need to sell while prices are still down. Unfortunately, condo prices show no signs of rising in several major metropolitan areas. In January 2012, Chicago, San Francisco and Los Angeles condo prices hit new crisis lows. Los Angeles has seen falling condo prices steadily for the past 18 months totaling a loss of 7.5 percent. New York shows very minor promise over that same period, with a rise of 0.3 percent. Both condos and single-family homes were hit hard during the economic recession, but condos lost more value than homes. Condos in Los Angeles depreciated by about 42.3 percent between July 2006 and 2012, while homes lost closer to 40.8 percent. In comparison to the continuing loss among condos, single-family homes have shown improvement across the United States from June 2011 to June 2012, rising 1.2 percent back to 2003 levels. (Reference 7)
The Difficulty of Investing
It can be more difficult to get a mortgage for a condo than a single-family home. Besides the fact that you will need excellent credit to be approved, your condo has to meet requirements as well. In 2009, the Federal Housing Administration declared it would only insure loans for condos that are at least 50 percent owner-occupied. For down payments of less than 25 percent, some lenders charge extra for a condo mortgage, up to 0.75 percent.
Advice for Purchasing a Condo
If you're going to purchase a condo, make sure 90 percent of the condos in the development are occupied, and that 97 percent of the owners are up-to-date with their fees. If you are looking at a new development, make sure at least 30 percent of the units are sold. If the building isn't new, make sure the roof and major mechanical systems have had maintenance in the last five to seven years. Ask a real estate agent how other condos are selling in the area. If prices are plummeting it may not be a good area in which to buy.
- Business Inquirer: Is Investing In a Condo Unit a Good Idea?
- New York Times: Is It Better to Buy Or Rent?
- CNN: Buy or Rent? 10 Major Cities
- Chicago Tribune: Condo vs House, Which One is For You?
- Oprah: Suze Orman: Should You Buy a Condo Instead of a House?
- CNN: Money: Home Prices Rebound
- Oprah: Suze Orman: 4 Signs You Should Rent Instead of Buy a Home
- Rent Jungle: Los Angeles Average Rent
Meredith Berg received her B.F.A. in directing from NYU's Tisch School of the Arts. Now living in Los Angeles, she works as a film and television writer, comic-book editor and director of plays and films. In addition, she loves tackling paleo recipes, workout routines and DIY projects.