Is a Condo or Single-Family Home better as a vacation rental?
Whether a Condo or Single-Family Home is a better investment is largely a personal preference. When considering one over the other it’s important to ask how the property will be used. For example, if you plan to use the rental for personal use – you should pick an investment that meets your personal needs. If the home is purely an investment, here are some things to consider and guide your decision.
Investing in real estate is a great way to diversify a portfolio. The wealthiest Americans hold a large amount of their wealth in real estate. There are many different niches of the real estate industry, each offering strengths, and weaknesses. One niche that is proving very lucrative is the short-term vacation rental sector. The increase in popularity results from the rise of sites like Airbnb and VRBO.
When starting in real estate investing, regardless of the niche, most people turn to single-family residential properties as they often require a lower amount of capital to get started. When deciding to purchase a residential rental property, the two most common options are single-family residences and condos. There are benefits and drawbacks to both as short-term rentals. In knowing what each offers and requires, you can make an informed decision before committing to a significant investment.
Condos and Single Family Homes
A condominium, or condo for short, is a private residence within a multi-unit property. Condos can be in large buildings (like apartments), semi-detached, sharing walls (townhouses), or even fully detached. They typically share common areas such as yards, pools, recreation halls, laundry, garages, and more. The shared amenities can be a draw for travelers – especially pools and other common areas.
A single-family home is a traditional house with its own yard, separated from neighboring properties. Single-family homes as a vacation rental often draw families and those seeking more privacy and a “locals” experience.
Location, location, location.
The location of the property plays a significant role in whether a condo or single-family home will make a better investment. If the property is in an area that is a favorite vacation spot, like near the beach or mountain resorts, rents and occupancy rates are likely to be higher.
Condos located in urban locales are usually situated close to the downtown areas, business districts, and/or universities. Their proximity to attractions often makes them more ideal for those looking to be close to work, conferences, or entertainment venues.
A single-family home located in urban areas or near popular vacation spots will typically be pricier or significantly older. They will command higher rents to obtain similar profits to that of a condo, which could limit your pool of tenants.
In populated and/or popular locales, the condo usually provides higher profit margins for the owner as they are less expensive while yielding similar rent prices.
Condos will have homeowners associations (HOAs), while neighborhoods with single-family homes may or may not. If traditional neighborhoods have an HOA, their regulations are usually less stringent than those operating in condo complexes. The associations can be both beneficial and burdensome, depending on the situation, however. It’s important to note that HOA dues can impact profits and may change over time to meet the needs of the neighborhood or complex.
HOAs impart strict rules that keep the building looking good, prohibiting things like signage or furniture in front of the homes, abandoned vehicles on the property, tacky decorations/paint, etc… These rules assist in making the property look great but can be troublesome if the tenant disobeys them or if the regulations imparted gare viewed as unreasonable.
With a vacation rental, it is challenging to enforce the rules on short-term guests who are using the property as a part of their vacation and may throw caution to the wind. Ultimately, the homeowner is responsible for the behavior of the occupants of the rental, which can cause difficulties when dealing with overbearing HOAs. If complaints are common, the owner could face additional fees or fines imposed by the HOA.
Conversely, the watchful HOA will ensure the home is not being abused or used for illegal activity.
As every homeowner knows, every property requires maintenance. However, a single-family home will require a bit more upkeep. Things like mowing the lawn, tending to the plants, running the sprinklers, and pool care (if applicable) will need to be addressed. These tasks can be offset with the rent but is an expense none the less.
Condos can be low maintenance by comparison. The landscaping, pool, parking, exterior are all taken care of by the association and included in the HOA fees.
With a condo, the structure is insured through the association, allowing for a low cost ($100 per year) policy to cover liability and the assets inside the home. The liability insurance is a must-have for a vacation rental and will protect not only the asset but you. Insuring a traditional house of similar price and square footage will cost exponentially more than the condo.
A major drawback for the condo owners are the fees. These association fees can start low and increase as the property ages.
Special assessments may also come up for capital improvements like new roofing, major pool repairs, or parking lot resurfacing. Members of the HOA will vote on assessments and fee increases, but the owner-occupants directly benefiting from the improvements will be more apt to approve the increases than investment owners who will only see a reduction in profits without the enjoyment of the new luxury or convenience.
Many owners would rather avoid paying association fees and spend the money making improvements to their property at their discretion or using the money to pay down their mortgage’s principal.
Many of the conveniences may make the condo more attractive to short-term renters and give them the feel of being in a hotel with recreation areas, pools, or a gym. When shopping condos, weigh the value of the amenities as they translate to rent prices and contrast them with the association dues. Not all aspects of the property will be attractive to short term tenants or your bottom line.
When comparing the costs of high association dues, it may make more financial sense to purchase a single-family home with a pool or offer other amenities to make the home more attractive to travelers.
In the end, the decision on the type of property purchase is contingent on the resources of the buyer. If you are buying a property in a location that is some distance from your own residence, the low maintenance aspect of a condo and knowing the watchful eye of the HOA is protecting your investment may make your decision a bit easier. However, if you prefer a home where improvements to both the interior and exterior can be made, without anyone’s approval, adding value and marketability to your investment, then a single-family home may be the way to go.
As you look to increase your wealth and invest in your financial future, you are making a wise decision in considering real estate as that avenue. When you’re ready to begin managing your property, PMBO is here to help. Earn more, work less, and worry never with our vacation rental management software.