Is a Condo a Good Investment?

by Mark Hopkins on April 28, 2010

Ogden Condos

The Ogden Condos My Partner and I Looked At

Well, the short answer is no. Let me explain.

1) The Market for Condos is very Volatile
Richard Swerdlow, an authority on the condo market, observed that “When it comes to valuation [of a condo] they exhibit a lot of volatility, much more so than a single-family residence.” In the boom years preceding the current meltdown of the real estate market, it was not uncommon for condos in certain areas (using Miami Florida as the example) to appreciate as much as 100-220% over a five year span (After the Fall, Steve Bergsman, 110, 118). By the same token, condo prices have dropped as much as 80% in some areas and are predicted to continue to drop much more.

Miami Beach Condos

Miami Beach Condos

Another expert, Jack McCabe, argues that based on the statistics surrounding the condo market, we won’t have any kind of recovery in condos until some time into the 2010-2020 decade (After the Fall, Steve Bergsman, 115). Right now–June 27, 2010–the condo market has been vastly overbuilt by developers and speculators. This has led to the condo market being especially hit much more than single family residences during this economic downturn. But moving beyond the here and now, condos generally exhibit a lot of price volatility for other reasons, one being that supply can easily be expanded through condo conversions. Often a developer or investor will buy an apartment complex and convert the units to condos. Over a short period of time, the supply of condos in a given city could expand by several hundred.

Another factor that contributes to price volatility is that condo appreciation also seems to be based more on speculation than actual value. The 100-220% appreciation mentioned above occurred in Miami Florida and as such the valuation stemmed more from speculation surrounding the value of a vacation condo than on fundamentals like how much the the average salary compared to the cost of real estate. Speaking of fundamentals, dirt appreciates and dwellings depreciate. And people like dirt. They like to plant fruit trees and have a garden. A yard is just more desirable than a shared plot of grass. With a condo, you don’t own any of the dirt directly. It is all shared by the entire condo community. So, I would way rather own a house with some land than own a condo without land.

Many of the real estate professionals I have talked to generally concur that condo appreciation happens the most after single family residences have already experienced considerable appreciation. It is as if the appreciation and boom in the single family real estate market pulls up the condos with it. However, this observation is less applicable to condos in big cities like Manhattan and Chicago than urban condos or vacation/retirement condos. Condos in big cities exhibit more stability in their values and appreciation and this is probably so because there are not a lot of reasonably priced substitutes for a condo. The next step up–a house–typically costs well over $100,000 more to buy.

But what does this all mean for the average person? First, in the foreseeable future–perhaps next three to five years–condo prices will likely continue to decline. Second, condos values are generally volatile and thus can be much harder to sell unless in boom times or unless in a big city with very expensive alternatives to condo ownership.

2) You Have Less Control With a Condo
This goes without saying. If you all the sudden have to move and you want to rent out your condo, you can run into Home Owner Association (HOA) restrictions that prevent you from doing this. Of course whether you can rent your condo out depends on the rules of your HOA but even then, I would hate to have to deal with a HOA dictating to me what I can and can’t do with my property. You also have less control if the HOA is underfunded and they don’t have the money to fix your leaking roof or to repave the parking lot. These are things that are out of your control.

Speaking of HOA, the very idea of an HOA takes control from the individual and puts it in the hands of the majority. If that’s how you roll, no problem but its not for me. An article on MSN Money explains that even the newest and most expensive condos are “eventually turned over to resident-run condo associations, which often do a poor job of keeping up with maintenance and repairs.” Additionally, with a condo, you have to pay HOA fees which generally range anywhere from $50 to several hundred dollars and are paid in addition to the mortgage, insurance, and tax.

3) Close Neighbors Make Condos Less Desirable than Homes
Condos are more like a glorified apartment than a house, which means that instead of having a yard and space you have close neighbors. They can leave trash in the hall and they can play loud music at night. Also, if your neighbor has a fire, it could catch your condo on fire. A few years ago when I was just starting in real estate investing, I considered buying a condo in Ogden, Utah but my partner talked me out of it. About a year after, an article came out in the paper that announced that the entire condo complex had burnt down from a fire in one of the dwellings. One real estate expert that I follow, John Burley (he does rent to own, states bluntly that he would never buy a condo because condos are simply not that desirable.

So the bottom line is that condos are generally not a very good investment. I place condos more in the speculation category unless they are in big stable cities like Chicago and Manhattan. There are some benefits to a condo, like cool amenities such as communities that have a pool, not having to mow your own lawn or fix your roof, paying a little less in heating and air conditioning because you don’t have four walls exposed to the elements like a house does, etc. but getting back to fundamentals, the bottom line is that they are usually not very good investments. Another benefit of a condo is that everybody needs a place to live and if you can’t afford a house, it is usually better to own and pay a mortgage instead of paying rent. But if there is any way you can buy a home instead of a condo, do it! Your home will appreciate more, will sell more quickly and easily, and will not be subject to the volatilities associated with condos.

Author, Mark P. Hopkins is the owner of a Utah Rent to Own business. See listings of homes at Utah Rent to Own Homes.