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March 18, 2021

Buying a condo vs. renting: Which is better for you?

Erik J. MartinThe Mortgage Reports Contributor

March 18, 2021 - 8 min read

Should I buy a condo or rent?

Buying a condo can be a great move for first-time home buyers. Prices are often lower than standalone homes, and condos can be more convenient in terms of location and maintenance.

But when it comes to buying a condo vs. renting, how do you make the right choice?

There are pros and cons to both options, depending on your personal finances and what stage you’re at in life. Here’s how to make the right decision.

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Buying a condo vs. renting: An overview

Buying a condo vs. renting is a tough decision in much of the country.

First-time home buyers might worry about the down payment and upfront fees that come with buying a home. But with rents rising steeply in many areas, owning a condo could be more affordable than renting in the long run.

So how do you know what’s right for you at this stage in your life?

Generally, buying is better than renting when you meet four criteria:

You have a stable income and employment
You can afford the down payment and closing costs
You want to stay in the same location for at least three years
You aren’t expecting a major life event that would require you to move, upsize, or downsize your home. These events include marriage, divorce, having a child, or job relocation

If your job or life circumstances are likely to change in the next few years, renting likely makes more sense. You have the flexibility to move without selling and you don’t have to worry about ‘losing’ your down payment (since you didn’t make one).

But if you’re ready to buy and you like the perks that a condominium can offer — like a lower purchase price and easier maintenance — then buying a condo could be a great choice.

Pros of buying a condo

Owning a condo offers some distinct advantages that renting doesn’t:

Rents continue to rise across the country. Buying a condo with a fixed-rate loan freezes the majority of your housing costs
Owning a condo helps you build wealth through home equity
Homeowners may be able to take advantage of tax breaks that renters don’t get

Homeownership is one of the biggest ways individuals and families build wealth.

Home prices are steadily rising across much of the country. As a condo owner, you’re sitting on an asset that’s growing in value each year. When you sell, you’ll likely make more than you spent.

In addition, paying your mortgage helps you build equity while paying rent does not.

“Buying establishes ownership and builds credit. Each mortgage payment you make reduces your debt,” explains Michael Hills with Atlas Real Estate Group. By contrast, “Each rental payment lines the pockets of your landlord.”

There are also perks of buying a condo over a traditional detached home.

“If you don’t need a huge place, a condo may be right for you,” says Bruce Ailion, real estate attorney and Realtor.

Condos are “often half the size of an average detached home. That makes them easier to furnish, clean, and manage,” he explains.

And condo owners don’t have to worry about expensive structural repairs or building upkeep. The homeowners association (HOA) takes care of exterior maintenance costs. (Although you’ll pay monthly HOA dues for this convenience.)

Some condo buildings also provide perks like a fitness room, swimming pool, and assigned parking. A condo can offer extra security, too.

“Like rentals, many are located near city centers,” says Joshua Harris, clinical assistant professor of real estate at NYU’s Schack Institute of Real Estate. This can make commuting to work easier and cheaper.

Many first-time buyers prefer the convenience and affordability that come with condo ownership over house ownership.

Cons of buying a condo

There are significant costs associated with buying and selling a home, whether it’s a condominium or a standalone house.

When you purchase a condo, you’ll need a down payment of at least 3.5% (the minimum for an FHA loan). If you want the best interest rates and lowest monthly payments, you’ll need to put 25% down on a conventional loan.

Condo buyers also have to pay closing costs, which can be 3 percent or more of the loan amount. And homeowners have additional monthly costs like property taxes and insurance to consider.

When you rent, your only upfront cost is the security deposit, equal to around one month’s rent payment. This can make renting more approachable for those without large savings accounts.

Monthly rent may also be cheaper than monthly mortgage payments — although average rent and mortgage are neck-and-neck in some housing markets.

Buyers should also consider that selling a home involves paying a commission fee of 5 to 7 percent.

When you add up the cost to buy and the cost to sell, “The property will have had to appreciate about 10 percent for you to break even,” explains Ailion.

That’s why buying a condo is only recommended if you plan to live in it for at least 3-5 years. Otherwise, you could actually lose money when you sell.

Also on the ‘cons’ side is some unpredictability around future housing expenses. HOA dues tend to creep up each year, often much more than expected when the building needs significant repairs.

You’re at the mercy of the HOA. While you might buy a condo to say ‘goodbye’ to ever-rising rents, you may be stepping into a situation where housing costs go up by $25-$100 per year or more thanks to HOA dues.

Are you qualified to buy a condo?

Don’t let these downsides scare you off if you’re ready to buy. You’d have to consider the same things with any type of home purchase.

Even the upfront cost of buying a condo shouldn’t be a deal-breaker.

If you don’t have a lot in savings, there are down payment and closing cost assistance programs that can help with the upfront fees. These programs are often available to condo buyers as long as they meet credit score and income requirements.

What’s more, condos are often cheaper than houses in the same area.

According to the National Association of Realtors, the median condo sale price in 2020 was around $266,000, while the median single-family home went for over $300,000. And the difference will be even bigger in some housing markets.

If you’re leaning toward buying a condo vs. renting, the condo could be your best and most affordable starter home.

Verify your eligibility to buy a condo (Jun 15th, 2022)

Pros and cons of renting

The downsides of renting are probably clear:

You won’t see any returns on money paid to your landlord
You don’t own any share in the home’s equity
There’s typically less flexibility to make changes or upgrades to the property

However, renting shouldn’t be seen as a waste of money. If you’re at a point in your life where buying doesn’t make financial sense, then renting is absolutely the best option.

One of the biggest benefits of renting is that apartment living offers more flexibility.

“Many workers today will need to switch cities to take new jobs. Being forced to sell a home is time-consuming,” explains Harris.

Ailion agrees. “Say in a year or two that the location or property no longer suits your needs. You can move at the end of the lease without penalty,” he says.

“And renters don’t face the risk of being forced to sell in a down market or quickly due to personal circumstances,” Harris notes.

Also, renting is easier than home buying.

That’s because getting approved for a mortgage loan can be tricky depending on your credit score and debts. Plus, the entire process, including closing, can take a long time.

Getting approved for a lease can be simpler and faster. And you don’t have to worry about saving up for the down payment and closing costs when you rent.

Plus, renting doesn’t put you in debt. When you buy a condo, you’re typically taking out a sizeable mortgage loan that you’ll pay back with interest over 15-30 years.

If you ever take a financial hit (for instance, from a divorce or job loss), not being able to afford your mortgage could put your new home and your credit at risk.

Rental agreements, on the other hand, are a lot less risky and easier to get out of.

That’s why it’s so important to be in a financially stable position before you buy a home. When you’re ready, it can be a great decision and a sound investment. But if you’re not ready, buying a condo instead of renting could be a bad financial move.

What to expect when buying a condo

The pros of buying a condo may outweigh the cons for you. But it’s important to know what to expect before taking the plunge.

First, be aware that you have to pay regular HOA dues. This monthly fee covers maintenance of the building and common areas as well as amenities. HOA fees can vary a lot, but expect to pay at least $100-$200 per month to the homeowners association.

Second, your HOA may have strict rules against things like pets, excessive overnight guests, and loud parties.

“When buying into a condo, you’re essentially entering a realm of majority rules. A good HOA can be a blessing, but a bad one can be hell,” says Ailion.

Third, consider the condo’s location carefully.

“What’s within walking distance? How long is the commute to work? Is there nearby public transportation?” asks Hills.

Fourth, prepare to do your homework.

“The biggest risk of buying a condo is having a financially insolvent HOA. Condos require more due diligence in this regard,” Harris says. “Learning the history of the building’s management and past assessments can be useful.”

For this reason, your mortgage lender probably won’t finance a condo that does not meet strict guidelines.

Not all condos are approved for VA, FHA, USDA, or conventional financing. So if you’re interested in a condo, check with these agencies (they all have look-up pages) or ask the condo property management provider or HOA.

You can learn more about buying a condo via a conventional or government-backed mortgage here.

Buying a condo vs. renting: What are today’s mortgage rates?

Mortgage interest rates are still at historic lows while rents keep rising.

If you’re ready to buy, now is a great time to lock in affordable financing on a condo.

In a few years, you could be paying much less month-to-month than you would on rent. And the sooner you buy a home, the sooner you start building equity.

Check your eligibility for today’s lowest condo rates to see what you can afford.