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Condo vs. Single-Family Home: The Investor's Conundrum

This decision comes down to much more than aesthetics and the price of the property.

[Updated: Feb 04, 2021] Dec 30, 2019 by Lena Katz
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Residential investors need to evaluate potential properties differently than people would evaluate a primary residence -- and the question "condo or single-family home?" brings a whole different set of variables for investors. In addition to the down payment and restrictions, you'll need to consider the number of units you eventually want to own.

If you're considering buying a rental property in a resort area or up-and-coming urban center, you're in good company. According to iPropertyManagement, 45% percent of investment home purchases in 2019 were bought with the intent to rent. But as I've covered before, this type of real estate investment has many considerations, and the property type itself is a major one.

When people looking for a primary or even a secondary home consider, "condo or single-family home?" the answer usually boils down to price, aesthetics, and personal space. Condos offer less space, but the trade-off is that the grounds and common areas are professionally managed -- and the price is often slightly less than a home.

For investors shopping for a rental property, these considerations still exist, but several others are more important -- in fact, some will impact whether you can even get your desired property or use it for rentals. In this piece, I'll ask a series of questions, and your answers will determine what type of property is best for you.

The purchase

The first question with any real estate investment is, how do you plan on buying it?

How much do you intend to put down?

If it's less than 25%, be aware, condo associations need to meet Fannie Mae guidelines in order for conventional lenders to approve a loan on one with a 10% down payment. Non-warrantable condos (those not meeting the Fannie Mae guidelines) typically require a 25% down payment. Depending on what state you are looking to buy in, this can be a huge question mark. In Florida, where restrictions are stricter due to the abundance of condos and part-time residents, many condos are considered "non-warrantable" by Fannie Mae due to having low reserves or already having a high number of investor-owned units.

If you don't have 25% to put down, you can open a line of credit to supplement whatever down payment you do have -- but this is an additional financial commitment that some people aren't willing to make.

You may be asking, "What are my options if I want a conventional loan and can put down a larger down payment -- maybe 15% or 20% -- just not a full 25%?" The answer is, it depends just as much on the standing of the condo association as on you. If the condo can show that it has good reserves and a solid budget, then the lender can make an exception and give you -- an exceptionally qualified buyer with a decent down payment -- favorable loan terms without verifying Fannie Mae eligibility. But lenders will want to see that documentation upfront from the condo association.

If you want to stick with a 10% or lower down payment, a single-family home or a fee simple townhome may be the best option. (With a fee simple townhome, you own and are responsible for not only the interior but also certain parts of the exterior, such as any decks and the roof and exterior walls).

Are you paying cash or are you financing?

Federal Housing Administration (FHA) and Fannie Mae guidelines around condo financing can, once again, trip would-be investors up here, as the most favorable loan terms only go to Fannie Mae-eligible or FHA-certified condo associations. And a huge part of passing these certifications is that the entire condominium complex or development can have only 25% to 50% investor-owned/nonoccupant-owned units.

If financing, are you okay working with a nonconventional lender; i.e., a portfolio lender?

If a condo isn't warrantable, in most cases the would-be buyer needs to work with a nonconventional lender, and often at higher-interest mortgage rates than they would with a government-backed loan.

Is this to be your secondary home and a rental property, or purely an investment?

This is a little bit tricky for all but underwriters to understand, but if a home is classified as a vacation home, it is assessed more comparably to an owner-occupied home than an investment property. Single-family residences are considered superior in desirability to condos, and thus, more likely to be part-time homes instead of straightforward investments. In fact, some second homes/vacation homes can get owner-occupied classification -- and the better interest rates/lower down payments/lower insurance premiums that come with this classification.

Summary: While condos can seem like a more cost-effective investment -- and many of them appear purpose-designed for vacation rentals -- the regulations around lending make them a complicated buy, especially for someone new to the industry. For a cash buyer who is savvy to the ways of condo associations, it may be worthwhile to find a highly desirable condo unit that will allow nonoccupant owners. For everyone else, a single-family home or other fee simple property is often much easier.

The business plan

While you're working out the financing piece, there are other variables to consider around your intended usage for the property and whether it works within the parameters of a typical homeowners association.

Do you intend to rent the property out immediately?

If so, know that the HOA bylaws in every condo complex/development you're looking at will vary, and that many of them have restrictions, such as a year-long waiting period before renting.

Would you prefer to do seasonal/monthly rentals or more frequent/shorter-term?

Same note about HOA bylaws, with an even stronger caveat: The shorter-term the planned rentals, the more pushback you'll get from a typical association. In a typical condominium complex, quarterly rentals are considered incredibly lenient, and annual is the norm.

Are you planning to compete with hotels in the area?

If do manage to snag a rare condo that allows short-term rentals (STRs), you may wish to compete with the surrounding hotels. In this case, you most likely want to buy in a condo complex with hotel-like amenities, such as pool(s), a fitness center, and retailers on the bottom floor.

Is your ultimate goal to own several properties at a single complex or development?

One of the major eligibility factors for Fannie Mae is that a single entity/owner cannot own more than a small percentage of the units. For developments with 5 to 20 units, the guidelines currently permit a single entity to own two. For above 20 units, it's 20% of the total units. So if your ultimate goal is to own five units and hire a property manager to run them so you have passive income, you need to look at a development with at least 100 units, or your long-term goal may wind up being at odds with the HOA bylaws.

Summary: To determine which condominium development will fit into your plan, you need to look at much more than budget -- and you may need to review multiple HOA bylaws and restrictions to see which development will be a fit.

It's definitely a dream of many folks looking to get into the Airbnb rental market to have a unit in a well-maintained, touristic downtown center and rent it out short-term at a price that undercuts hotels. However, hotels are fighting this with everything they've got, and so are many cities. Compounding this, many condo complexes really don't want STRs in their building -- not just because of government bylaws but because they don't like the disruption. While a single-family residence can be more work to keep maintained and booked, it might wind up being a more stable long-term proposition.

The management plan

How you want to book out and manage your rental property will also play a role in deciding what type of property is right for you.

Are you looking for a rental property in the center of the destination or something more remote?

Condos are usually easier to find in areas of greater housing density, like the downtown center or tourism hot spots.

How much grounds and property maintenance are you comfortable with doing (versus how much do you prefer to be handled by an association)?

One of the great things about condo complexes is that the community management takes care of all groundskeeping and maintenance in the common areas. This saves an investor from needing to hire several regular services or retain a property manager to handle it.

How much security/oversight do you like?

Again, condominiums typically win in the security and personnel areas. Doormen, staff, housekeeping service, pool maintenance -- you'll get that from a condo building but will need to provide elements of it yourself if you invest in single-family residences.

If you're thinking "A gated community has all that too!" be aware that gated communities typically also have homeowners associations, and thus, bylaws that are unfriendly to investors.

Would you like the option of being in a rental pool managed by the property, or do you like to hire your own team?

Condo complexes that have leaned all the way into the STR model sometimes do have their own onsite vacation rental management so that owners can put their units into the pool and not think about it any further. You see this in ultra-luxury properties as well as mid-tier. If you ultimately plan to have multiple units in different cities and be as hands-off as possible, this might be a convenience.

Summary: The appeal of condominiums is that they offer the full package: good location, upkeep included, and onsite security. If you have a significant budget and want all those things, a condo might be worth the additional hassle.

Condo vs. single-family: What's best for you?

While it might seem the other way around, single-family homes are an easier investment from a financing and paperwork perspective. But, they take more labor and oversight. It truly is a conundrum.

The solution might be to buy the classification right in the middle: a townhome. Many of these are fee simple but look much the same as condos. Thus, they're a popular choice with investors.

Be aware, though, that just because a place doesn't need to go through Fannie Mae or the FHA, that doesn't mean it can't still have an HOA that's vigilant about oversight on investors looking to make money from their community. In fact, any community a vacationer would want to stay in probably has that kind of oversight. That's part of what makes them so desirable. Your challenge is finding the one with a balance that fits your needs.

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