Purchasing a home will be the largest, most rewarding investment you will ever make. The decisions you make when purchasing a property, like location, price range, and the style of your home, are fun. With the different types of properties you can purchase, it can be difficult to understand which is a better investment. Understanding the pros and cons of each property will help you determine the best option for you. Narrowing down your criteria will save you time and stress during your searching process.
Detached
Detached homes are without a doubt the most desirable purchase for buyers. Although they usually come with a higher price tag, they offer more privacy and land. A yard is definitely an advantage, especially for kids and family parties. Another benefit is being able to add-on an extra bedroom or bathroom depending on the zoning setbacks.
The maintenance cost of a detached home can be expensive, depending on factors such as the amount of landscaping, the age of roof, water usage, and stucco/paint. It’s important to ask yourself if you are willing to maintain the home and have enough money saved if something were to happen in the future.
From an investor’s point of view, detached homes have the most advantages based on the ownership of the land, having fewer limitations on what you can do in terms of renovation. The option to add-on an extra bedroom or bathroom is huge. If the property is located in a great area, you have the option to lease out a portion of the house. An example of that would be an attached studio.
Twin-home
The only advantage to really purchasing a twin home over a detached home is that they cost less. You will be sharing a wall with your neighbor and most likely be paying an HOA fee. Sharing a wall can lead to noise transfer, so be prepared. However, twin-homes have larger lots than condos, so if that is something you need, expect to pay for the maintenance as well as an HOA fee.
The issue lies on their resale value, which is less than a detached home, meaning the appreciation falls behind at a slower rate. However, this type of home still appreciates at a better rate than condos. You should calculate the HOA fee to determine if you are still able to afford the higher cost of a home compared to condos. The difference in price can be around $100,000-$150,000 depending on location.
Condo & Townhome
It’s important to understand the ownership of condos before moving forward. Not only are you purchasing the unit, but a share in the common area as well (parking, community pool, playground, landscaping, lobby, etc). Because you own part of the common area, it’s your responsibility for the maintenance and upkeep of these areas. Which is the reason you would pay a high monthly HOA fee.
With the many advantages of purchasing a condo, the biggest one being low maintenance, as there is no land. Condos are great for renting out if you do not plan to live there yourself. Especially when located near great schools and the beach. Condos are easy for buyers who want a simple investment with the many amenities that most detached homes do not offer. These amenities include a gym, pool, hot tub, steam room, tennis court, basketball court, etc. Just remember you will be paying for these amenities per month if you use them or not.
The disadvantages of purchasing a condo is the close proximity to your neighbors, lack of any outdoor area, strict rules and regulations, privacy and most importantly, HOA fees. The fees alone can cut into your spending limitations by $100,000.
The overall investment
Your #1 goal is to make this a good investment, so by deciding on purchasing a detached home, twin-home or condo, it’s best to start by calculating all the numbers. Detached homes typically have low HOA fees, if any, compared to condos and townhomes. This allows you to not only be able to maximize your budget by allocating the fees you would have spent on HOA to the purchase price but allows you more spending options. You have to also consider the possible assessments that come along with condos and twin-homes, so make sure to look out for this.
A good way to see the different rates of appreciation is by looking at historical performance in a particular zip code. You can do this by breaking down the cost per square foot for both condos and detached homes for the last three years. This will indicate which of the two in a certain area will possibly give you a faster growth.
EXAMPLE:
| Year | Detached Sqft | Townhome Sqft | Condos Sqft |
|---|---|---|---|
| 2016 | $623 | $545 | $462 |
| 2015 | $562 | $505 | $433 |
| 2014 | $515 | $475 | $405 |
Appreciation Potential
Since condos are much easier to maintain with low maintenance cost (landscaping, roof, termite, trash…), this allows you to sit back hoping the condo will appreciate over the years for you to later sell for substantial gains. Detached and twin homes can be expensive to maintain the cost of maintenance, but has a faster rate of appreciation.
When you add in the HOA dues and possible assessments, it can be very costly. This can have a negative effect on the financial gain you will get from appreciation by not being able to use all funds towards receiving a higher loan. Detached homes typically appreciate faster than condos on the basis of demand and condo/twin-homes HOA fees being so expensive. Most buyers would rather invest their money into making home improvements, not a $400 HOA. Not to mention buyers are able to use that $400 per month on being able to qualify for a larger home. You can do this rough calculation by imagining a $100,000 loan results in an estimated $500 increase in your mortgage payment. Leverage yourself by using the bank’s money to purchase a good investment.
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