For years, the rule of thumb has generally been that buying a home is a smarter financial decision versus renting, especially if you plan to own the property for more than five years. This has been the case because you can deduct mortgage payments and taxes from your income tax, and home price values tend to increase over time, as opposed to rent payments which accrue nothing in your portfolio. With a condominium, it’s no different.
However, the current real estate landscape has put a wrench in that thinking, and not all homebuying scenarios today make as much financial sense as renting.
[Read: The Rise of Built-for-Rent]
Here are a few points to consider if you’re buying a condo:
— Changes in mortgage and tax rates.
— Is five years enough to make a profit?
— Bargains are still out there.
— Fixer-uppers are a good investment.
— Is renting always a better option in the current market?
— Buying an investment condo.
— The long and short of it.
Changes in Mortgage and Tax Rates
The steep increase in mortgage rates is currently the single biggest factor making any home purchase less attractive. While it is true that you can deduct the interest on your mortgage for loans up to $750,000 per couple ($375,000 if you’re married and filing separately), the average home price — especially condos in a major city like New York — can be well above that amount.
In addition, the changes made by the IRS now only allow up to a $10,000 property tax deduction. This change has had a profound impact on the value of homeownership in locations with high property taxes.
However, if you purchase your condo with cash, you obviously will not be impacted by the increase in mortgage rates. The more you can put down at close, the better. Finding a condo in a town or city with lower property taxes will also make the deduction cap less of a hurdle.
Is Five Years Enough to Make a Profit?
Buying a condo that you plan to live in or rent out for more than five years was traditionally thought of as the best way to recoup your investment and sell for more than your purchase price. On the heels of the exceptionally inflated housing market of the past three years, this might no longer be the case. With housing prices at an all-time high in the past few years, the likelihood of selling for a significant profit in the next five to seven years has diminished.
This is especially the case in New York City, where some new buildings sold at a premium in recent years, featuring top-of-the-line amenities and cutting-edge technology and appliances. However, in five to 10 years, those properties will no longer be considered new, and there will be newer technology and appliances in newer buildings, so the chances of recouping your investment, if you paid a premium, are lower.
Bargains Are Still Out There
All indicators now show that the market has started to flatten and is slowly coming down to more realistic numbers. The massive migration out of cities during the coronavirus pandemic has eased, and home inventory has slowly increased in many markets.
As a result, home prices have started to come down, and bidding wars are more unusual. Much of the U.S. has shifted into a buyer’s market, with the exception of a few markets, based on realtor.com’s predictions for 2023. There are bargains to be had. Condos that need work are typically where you’ll find the best prices.
[READ: Should You Buy a House With Cash?]
Fixer-Uppers Are a Good Investment
There are great deals to be had on homes that are fixer-uppers. After the supply chain issues and labor shortages that plagued contractors during the pandemic, buyers now shy away from homes that need significant renovation.
Since there are fewer buyers that can stomach the time, effort and cost of a remodel, that is where you will find the best buys in the market. If this is the route you decide to take, it is important to be smart when selecting your materials. Top-of-the-line tile from Italy may still take months to get and have inflated prices, and products made in the U.S. might be more reasonably priced and easier to obtain.
Being thoughtful and flexible in your choices can make a renovation or upgrade project a great investment in the current market.
If you do decide to buy a condo that needs a complete renovation, the investment will ultimately pay off because of the exact reason that you got a great deal in the first place. Buyers and renters want a turnkey property; therefore, your home will more likely sell for a profit more quickly down the road. If you want to rent it out, that will be easier as well.
Is Renting Always a Better Option in the Current Market?
Since the cost of homeownership has certainly increased recently with the rise of mortgage rates and lower property tax deductions, along with lower expected resale values down the road, renting may seem like a smart financial decision in today’s climate. While this is often true, be aware that rents are also on the rise in nearly all major markets, whether you’re renting a condo from an individual, an apartment from a larger company or a single-family house.
Whether a condo is cheaper to own or rent also depends on where you live. A Jan. 12 article in The New York Times compared median monthly homeownership costs versus the median rent in cities across the U.S., using a 2021 Lending Tree study. In New York City, San Francisco, Los Angeles and San Jose, California, the cost of homeownership versus renting had the highest differential, benefitting renters. Cities including Memphis and Nashville in Tennessee, Tampa, Florida, and Las Vegas had the smallest difference in cost between owning and renting.
When you consider mortgage and property tax deductions, buying may be the wisest in many of the cities with the smallest differences.
One drawback to renting is that once your lease is up, your landlord can increase the rent at will. You will have little recourse, particularly if rents continue to rise in your area.
Buying an Investment Condo
When it comes to condo purchasing, buying an investment property that you plan to rent out, for a short-term or long-term rental, still makes good economic sense. If you earn any rental income on your condo, then the interest on your mortgage is considered a business expense and is not capped. Your property taxes are also considered a business expense and are therefore not subject to the $10,000 tax deduction cap.
Given the rising cost of renting in the most popular markets, the purchase of a condo in a popular vacation destination is a smart move, since you can charge a premium for a short-term rental. Be sure to check the local laws and condo association rules to ensure you are permitted to rent out your condo on a short-term basis — each city defines short-term differently. Some cities require you to be in the home when it is rented out, while others are more flexible.
[READ:The Most Undervalued Housing Markets in the U.S.]
The Long and Short of It
While it seems that renting an apartment rather than buying a condo may be the smarter financial decision in many cases in the current market, there are certainly pockets of the market that can be a great investment now, such as investment or vacation rental properties in popular destinations or homes that need significant work.
Additionally, being able to make a purchase with all cash can prove to work in your favor, especially with an investment property. We are shifting into a buyer’s market, and there are opportunities to buy a condo where you will see a financial upside.
Remember, not all decisions can boil down to a financially-motivated one. You are deciding where you want to live: Perhaps where you want to raise your children, work from home or commute, or become an active part of the community. Finding a condo where you want to put down roots and create memories need not be dictated by financial concerns alone. However, you just may want to rent temporarily in the area before you bite the bullet.
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Is a Condo a Good Investment? originally appeared on usnews.com
