I’ve been successfully managing both types of rental properties for clients and have often asked myself, which type of rental property is better?
Here is my opinion on the subject after years of experience and study.
For the new investor looking to get into rental real estate investment Condos cost a lot less, being available for a third to half the cost of an available rental property. This low entry cost makes Condos very attractive. Price wise Condos seem to favor Single Family Homes (SFH).
Condos are smaller, both by overall area, and by the number of rooms that they contain. The typical rental condo has 2 Bedrooms with 1-2 Bathrooms while the traditional home starts at 3 Bedrooms and contain at least 2 Bathrooms. As a consequence Single Family Homes rent for much more than condos. A modest 3 Bed 2 Bath SFH will typically rent for 50% more than a traditional 2 Bed 2 Bath Condo while only costing double the cost in purchase price. Condos still looking better?
The biggest monthly cost of a rental investment property are Condo & HOA fees. Condo Fees typically cost 35-45% of your monthly rent. HOA fees for SFH’s are 1/10th of the cost of Condo Fees. These fees are the biggest equalizer between Condos & SFH’s. Once you start factoring these fees in the comparison, most Condos & SFH’s are yielding the same Return on Investment (ROI).
So it doesn’t matter which type of rental you buy?
Lets take a look at repairs for a moment. How much does it cost to replace a thermostat in a Condo? And how much more does it cost to replace the thermostat in an SFH? The cost is the same.
Repairs are typically broken down into two cost types, fixed costs, and variable costs, which are based on the size of the residence. Most repairs have a fixed cost or the costs are mostly fixed. This means that typical repairs cost more for condo than the SFH, because there is less revenue to pay for it. (Let me break this out in an example. A Condo renting for $800 needs a $200 repair which is 25% of the total rent. A Single Family Home renting for $1,200 with an identical repair cost of $200 is only 16% of the monthly rent).
It’s close, but in the long run, SFH’s are better investment rental properties than Condos because the overall profit to expense ratio is lower for Single Family Homes than it is for Condos.
I recently had the opportunity to compare a SFH to an identically priced Condo. (Both were selling for $200,000 in the Orlando FL area during the Spring of 2015). With this “apples” to “apples” approach, the comparison became even more apparent and the SFH generated far more net income than the comparable condo.
This is not to totally disparage Condos as rental investment properties. If the right Condo deal presents itself and you have the ready capital to realize that opportunity, I’m not saying you should skip on it. However, in the long run, your goal should be to focus on acquiring SFH’s.
Before you purchase any investment property, check with local real estate agents and other professionals (Orlando Property Managers know the Orlando rental market very well) to get the best information on whether this is a good investment opportunity.
– Jon Gedge is a local Orlando Property Manager who provides pre-purchase evaluation of rental investment properties in the Orlando Florida market and the surrounding Central Florida area as well as Full Service Property Management services after the sale.
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