Why Condos Make Great Starter Homes

That stereotypical American dream is a single-family detached home with a front yard and a white picket fence. But with the market as competitive as it is right now, those kinds of homes are relatively hard to find. If you're just starting out and looking to get your feet wet as a homeowner, a condo can actually be a great option as a starter home. Let's talk about how a condo could put you on the path to home ownership. When you're looking at housing listings, you might see lots of things that say they're condos, and they might not look like how you think a condo looks. But that's because there is no one way that a condo looks. Depending on where you live, condos might look like all kinds of different buildings. If you live in a city or an urban center, apartment buildings, multi-story buildings, those could be condos. If you live more out in the suburbs, you might see sprawling developments, smaller homes that are side-by-side and are connected. They look like townhouses, but those could actually be condos. And sometimes you'll even find older buildings, historic hotels, factories, that kind of thing, and those have been redeveloped and they're condos, too. So what really defines something as a condo is actually what you own as the individual property owner. So when you own a single-family detached home, you own the house itself, you own the property around it, the whole shebang is yours, right? With a condo, you own the interior of your unit and what's inside it. Obviously, you own your own stuff. The difference between a condo and a townhome is kind of finicky and technical. Difference is just that with a townhome, you own the land under your unit. With a condo, you don't. So that's the only real difference, is that from a townhouse, you own from the ground up. From a condo, with a condo, you own sort of from the floor up. Let's talk numbers. There are more than 85 million detached single-family homes in the U.S. It's by far the most common kind of housing, compared to roughly 9 million condo units. It makes sense then that in 2021, 82% of homes sold were detached single-family homes, but only about 4% were condos. Proportionally, when you look at those numbers, it implies there's less competition for condos, but like all things real estate, it comes down to location. You can find condos in surprisingly rural parts of the country, but they are most concentrated in cities and prime vacation spots. The states with the highest concentrations of homeowners associations, so developments that include condos, are Florida, California, Texas, Illinois, North Carolina, and New York. Well, buying a condo does mean getting involved with an HOA. Getting involved with an HOA doesn't necessarily mean you bought a condo. You can find HOAs with all different kinds of home types, including detached single-family homes. A lot of new construction developments in the U.S. are going to come with HOAs. The biggest difference between a condo HOA and other HOAs comes when you're looking at a condo versus a co-op, and that's something that you're most likely to find in cities. So a cooperative is when the building is owned by all of the individual unit owners together. So every single person is a shareholder. Every single person is very hands-on. The HOA runs all aspects of the co-op. On the other hand, with condos, someone else actually owns the development. You own your unit. Your neighbor owns their unit. But the entire thing is owned by a company, an investor, a group of investors, or something like that. The HOA will manage some day-to-day aspects of the condo, maybe some of the property management, but they're not at all as involved as the HOA on a co-op. While we're a little bit on the negative side of things, let's talk about some of the downsides of buying a condo. A big one is that as part of the homeowners association, you will pay HOA fees. So this is extra money that will be part of your housing payment on top of your mortgage, insurance, and all that other good stuff every month. That said, when you're looking at an HOA fee and trying to consider how it would fit into your budget, pay attention to what's included because some of the costs you might have if you owned your own separate house anyway. These can be things like shared utilities or maintenance, trash pickup, stuff like that. Additionally, if the condo development or complex has amenities like a pool or a gym, if it's stuff that you would actually use and you're really excited about, that's probably worth paying for each month, right? The other thing that's important to know when you're looking at your overall budget is that on top of and separate from the monthly fees, you can wind up with a special assessment from the HOA. That's something that happens when the entire complex needs a really big thing done to it. And that could mean some kind of major renovation, for example, say all of the units need new roofs, or if you're in a high-rise building, maybe there's elevator repair, something like that. So it's a thing that's necessary, but that is going to cost a bunch of extra money. And that's something that you can totally ask about when you're home shopping. You can even potentially ask to see the minutes of HOA meetings to see if it looks like there's anything scary that might be coming down the pike, or if not scary, at least expensive. Another thing to consider with condos and with HOAs is that you have a bit less autonomy than you would have in a home. Well, with a condo, you do own the interior, that's all yours. The HOA can sometimes make rules about what you can do even inside your unit. That can include things like whether you can rent the unit and for how long, and also what kind of pet you can have. Again, with a condo, since you don't own the outdoor space at all, you don't have control over the exterior. If you want to paint your front door, if you want to have a garden, condo living probably isn't for you. Another downside with a condo versus a detached home is lack of privacy. That's not to say that there aren't detached homes that are close together, but attached means you're sharing walls, so you are going to be closer to your neighbors with a condo. If your neighbors in the condo are long-term, that's one thing, but if it's a rental that changes hands frequently or is turning over every weekend, that could potentially be a concern with safety or noise. The last thing to consider as a downside of getting a condo is that it can be a little bit harder to get a loan for one. While getting a mortgage for a condo is mostly the same as getting one for a house, there are a few extra steps because your lender is going to want to look at not just your finances, but also the condo complexes and the HOAs. So they're going to want to know things like, is the HOA operating with a budget deficit or a budget surplus? Are there any big projects coming up? Which, again, because of special assessments, you're going to want to know that too. What percent of the units are vacant? What percent are owner-occupied? All that kind of stuff. It basically just means that things might take a little bit longer because there's going to be a bit more paperwork that you or your agent are going to have to find and give to your lender. So we've talked a lot about the downsides of buying a condo, but there are plenty of upsides to buying a condo. For one, think about the upsides of your HOA payments. That's helping you pay for all kinds of shared amenities that you might not otherwise have. Think stuff like a shared roof deck or covered parking. And perhaps, at least for me, the biggest one of all, your maintenance for the most part is covered. You don't have to mow the lawn, you don't have to deal with landscaping, snow removal, that is all taken care of thanks to your HOA fees. Not to mention that if something small goes wrong in your condo, you've got someone that you can call and they will come and deal with it. So unlike when you're a homeowner and you're just sort of thrown in the deep end and have to figure everything out, with a condo, it eases you in because you're building equity, you've got a place that's your own, but you don't have to quite deal with all of those responsibilities just yet. Another thing that's worth considering, you're likely to pay less for homeowners insurance because you're insuring a lot less. You really only need to worry about your stuff as opposed to having all kinds of insurance that will cover the entire structure. That said, you want to be sure that your policy is able to handle any gaps that might exist in the HOA's coverage. Another one, and this is really big given how much home prices have gone up, is that condos tend to simply cost less. In February, 2022, the median cost for a single family detached home was $363,800. That same month, the median cost for a condo was $305,400. That is a difference of almost 60,000 bucks. So that's less money up front, that's a lower down payment, and that's a lower monthly mortgage payment. Another upside to consider, your first home could become your first investment property. If you turn it into a rental, you're still gaining equity, you still own that condo, and someone's paying rent money and covering that mortgage. So that's a pretty cool money move that you can make if you decide to make a condo your first home. If you're interested in becoming a homeowner, don't discount condos. Even though it's not that single family home with a white picket fence, you'd still be building equity, and you don't have to do a lot of the maintenance yourself, which is pretty awesome. There are upsides and downsides to buying a condo, but the bottom line is that for some homebuyers, they can make ideal starter homes. I'm Kate Wood, and I'm a writer on the homes and mortgages team at NerdWallet. If you're considering buying a condo or any type of home, head to our website for all kinds of resources, including mortgage calculators and the latest interest rates. And if you learned something in this video, hit like and don't forget to subscribe.