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Real estate investors on the hunt for the first investment property are faced with many decisions. Location, size, price, market opportunity, architecture, and even living style all come into play. If you're leaning towards a multifamily building, you will then have to choose whether you want an apartment vs. condo. The distinction between the two may not be noticeable for the tenant, but there are major differences for the investor buying to consider. This article will compare the two types of real estate so you can decide which is best for you.
What is the difference between an apartment and a condo?
While the physical building can appear nearly identical from the street, the two styles will have a big impact on the process of living in or renting the unit. An apartment is a building with five or more rental units all owned, managed, and operated by the same property owner. Each unit is rented from the landlord or from a third-party property manager who manages the building on behalf of the owner.
A condo, on the other hand, is a privately owned unit that is in a shared property development. The shared or communal areas of the property are maintained by a condo board and paid for through monthly homeowners association (HOA) fees. The HOA or condo board can designate if the condo can be rented or not, among establishing other rules and regulations. If rentals are allowed, the unit is rented to the tenant from the individual condo owner directly.
What are the features and amenities?
Both a condo complex and apartment complex almost always have shared amenities somewhere on site. The amenities will vary according to the individual property but could include pools, gyms, work spaces, and more. There's a perception that a condo building is going to be higher quality than an apartment building. However, there are rundown condos as well as fancy apartments, so don't assume that just because it is an apartment building the associated amenities will be of lower quality. These amenities may include parking, gyms, pools, laundry, dog parks, and lounges.
The interior amenities can be higher quality for a condominium due to the fact that the owner not only has the ability to make modifications but also the incentive to as well. If the unit owner does any remodeling, that will help them maintain or increase the value of the property. With an apartment, the landlord has the incentive to keep costs as low as possible to maximize their return on investment. You can expect more of a personalized feel with a condo than you will find in an apartment.
Pros and cons of apartment vs. condo
|Apartment||Costs for maintenance can be fixed out of gross rents. Can establish your own rules and regulations. No communal amenities unless provided by the landlord.||Higher up-front cost to purchase. Responsible for all maintenance and repairs, however big or small.|
|Condo||Only responsible for some repairs. Cheaper cost to purchase. Access to more communal amenities.||Association fees can eat into cash flow. Association fees can increase at any time. Must follow rules and regulations of association. May not be able to rent the unit (depends on the HOA).|
A key difference between a rental in a condo and an apartment is maintenance costs and monthly association fees. These fees are in addition to standard property taxes, property insurance, and upkeep or management fees for the rental property.
These fees help cover big repairs, such as repaving the parking lots, repairing the pool, or replacing the roof. They do not cover interior repairs to the unit; for example, if a sink won’t drain or the toilet gets clogged, the condo owner is responsible for making these repairs out of their own costs. Additional condo fees eat into a rental property's cash flow and usually increase over time to adjust for cost and inflation, making it hard to assess your fixed cash flow.
In an apartment, the owner of the building is responsible for all repairs, big or little, which means they can establish a set percentage of the gross rents that is allocated to future repairs. This means investors can establish a fixed cash flow, which naturally adjusts if and when rental rates are increased. Apartment owners are also able to establish their own rules and regulations rather than having to follow the rules of the community. This can allow more freedom to the landlord and the tenant, but it may also mean they cannot offer additional amenities unless they provide them to the tenants.
Purchasing cost is also a big factor for investors to consider. Condos are single units, making them often much more affordable to purchase. Apartments are more expensive but also provide multiple rental units with one purchase.
There is no simple answer as to whether an apartment versus condo is a better investment. There are pros and cons to both scenarios. Condos usually make more sense from an investment perspective if you've purchased the condo for your own part-time or full-time use at one point, and then you rent the unit when you've moved into another property or aren't using it. They are especially fitting for vacation rentals because they can offer luxury amenities and reduced maintenance responsibilities.
Apartments are often targeted merely for investment purposes, but there are ways for you to live in one unit and rent the others if desired. If you're undecided, talking with a real estate agent could be helpful. Overall, it's important to do your due diligence on the various investment options to see which is the better fit for your budget and ultimate goals.
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