The Pros and Cons of Buying a Condo, Townhouse and a House
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"Now, one thing I tell everyone is: Learn about real estate. Repeat after me: Real estate provides the highest returns, the greatest values and the least risk."
—Armstrong Williams, entrepreneur
"Buy land—they're not making it anymore."
—Mark Twain, writer
Buying a property is a smart, long-term strategy for building financial strength. Indeed, there are several ways in which homeownership offers a substantial return on your initial investment. For one thing, homeownership builds equity, allowing you to take out a home equity loan or line of credit against the money you've effectively "saved." For another thing, a property asset is associated with significant tax deductions. Finally, when you put down roots, you're a part of a close-knit community.
So, whether you're consulting with a real estate agent about buying a detached single-family house, a townhouse or a condominium, all three options will appreciate in value over time if you take car of your asset properly. Read on for the pros and cons of purchasing and owning your own real estate and what kind of insurance you'll need to protect your purchase.
How Much of a House Can You Afford?
If you buy a house for $300,000, you'll be expected to put down 20%, or $60,000. In addition to that hefty down payment, you'll have to pay all the closing costs, which usually range from 3% to 6% of the house's price; for example, if you purchase a $300,000 house, your closing costs would range from $9,000 to $18,000.
So, that's a big, up-front price tag. But what about your long-term budget? The 28/36 principle can give you an objective perspective on how much house you can afford. Basically, this time-tested rule-of-thumb says you should spend no more than 28% of your gross income on your total housing expenses and no more than 36% on your total debt. Of course, your total housing expenses include not only your monthly mortgage payment but also the cost of homeowners insurance, property taxes, home maintenance and HOA dues, if any.
When you figure out what your budget can reasonably afford, you'll be in a better position to decide whether you want a condo, a townhouse or a traditional single-family home. Buying a condo is often less expensive. Snow removal costs and gardening are also built into an HOA maintenance fees whereas you'll have to develop a green thumb or you'll have some added maintenance costs if you buy a house. For some people, like New York City residents, urban living often means buying a condo because single family homes are rare or have a completely unattainable price tag.
Either way, you'll save money on insuring a house, a condo or a townhouse if you compare homeowners insurance rates using SmartFinancial's financial tools. Don't let your lender lump your home insurance in with your mortgage payment. Do your due diligence and find a policy for the best price.
Aren't a Condo and a Townhouse the Same Thing?
In short, a townhouse is a building type, and a condo is a structure of financial ownership.
Typical townhouses are two- to four-story single-family homes that share walls with another single-family home. Also called a townhome, row house, terrace house or patio home, townhouses usually have a small front yard or backyard.
A condominium is a single building or condo buildings that contain multiple units, each of which is owned by a different person.
So, your condo could be a townhouse, but your townhouse doesn't have to be condo. The main point is, condo ownership is really joint ownership. For example, if you want to sell your condominium, you'll have to get approval from the condo's board.
If you own a condo, the exterior maintenance will be tracked, identified, planned and paid for by the condo's association fees. If you live in a townhouse or a stand-alone single-family home, all external maintenance fees must be paid by you, out of pocket.
A good investment that's attractive to retirees and first-time homebuyers, condos generally are much, much more hassle-free than a townhouse or a house. Not only don't condo owners have to worry about exterior maintenance, trash pickup and lawn care, they also enjoy swimming pools, fitness centers, extra amenities and, sometimes, a fully furnished condominium.
Homeowners Association (HOA) Fees
Whether you live in a complex of condo units or a townhome community, you will have to pay HOA fees. This monthly fee pays for the maintenance and improvement of common areas.
Condo owners only own the interior of their unit. The building's exterior, roof, lobby, elevators, landscaping, tennis court, swimming pool and other communal areas are the property of the homeowners association, which also takes care of services such as trash removal and pest control.
Townhouse owners own their unit's interior and exterior, including the roof, lawn and driveway, but not the common spaces. Once again, these common areas are the property of the HOA.
While condos tend to have lower HOA fees and homeowners insurance rates, non-condo townhouses tend to have higher HOA fees and homeowners insurance rates. That's because condo owners only own the interior of their condos.
A Condo: Pros
Price. A condominium is a unit owned by an individual in a building or community of buildings. Condos are usually the most affordable home-buying option for Americans. In 2019, the median price for condos and single-family homes was $270,000. You may think that this means there are no price differences between the two options, but that's not the case. For one thing, you're getting far more condo for $250,000 than you are a house in the same neighborhood (if you can find a house for $250,000 in that neighborhood). With that said, condos appreciation rates are slower to grow in value than homes and townhouses.
Maintenance. You only have to maintain the interior of a unit. You basically own everything walls in. The landscaping, the painting of the structure, cleaning the pool, raking leaves and shoveling snow -- all of this is covered with a homeowners association (HOA) fee. HOA fees vary widely, often based on how many common amenities the property offers and also based on location. You'll find that even less desirable condos in a very good neighborhood will still have high HOA fees.
Amenities. Whereas you're looking at spending thousands of dollars more for a house with a swimming pool, many condos have community pools. You often have a gym, tennis courts, dog runs, jogging tracks and more. Your HOA fees go towards maintenance of these amenities so you don't have to push your sleeves up to keep your home in good shape.
Proximity. If being close to dining and entertainment is important to you, condos are often situated near downtown areas and cultural venues. When you buy a home, you're usually farther away from shopping centers, for good or bad. Chances are that your commute would be shorter than in a home that would most likely be farther away. If you're a social person and one who likes to be surrounded by other people at all times, a condo is a great choice. A condo unit may sometimes even closely resemble a single-family home but is usually surrounded by other units. There is a greater level of closeness with neighbors in condos.
Insuring a condo. Most insurers who offer home insurance also offer condo insurance. To compare condo insurance rates, enter your zip code here.
If you buy a condo, you aren't able to customize the exterior of your home or have a proper garden on the land, which is a communal property that is solely maintained by the HOA. You have little privacy in a condominium, which has close quarters and shared spaces. Usually, you share at least two walls with neighbors unless you have an end unit. Condos do not appreciate in value as quickly as townhouses and single-family houses. Condos are not as easy to sell as houses.
Typically, a condo association's master insurance does not cover anything beyond an individual unit's exterior walls. When you purchase an individual To insure your unit, personal property and general liability, you'll have to buy an individual homeowners insurance policy. Most condo policies will cover losses associated with the following:
Interior walls, floors and ceilings
Personal property, including theft
Damage from fire, lightning, windstorms and smoke
Damage from accidental water leaks
Damage from vandalism
Medical bills of an injured house guest
Nationwide, the average cost of condo insurance is about $500 a year.
A Note to Condo Owners
Before you purchase individual condo insurance, or HO-6 coverage, you should review what your condo association's insurance does and does not cover. In other words, you don't have to insure what is already protected by your condo association's group policy.
Privacy. Townhouses are rows of houses that are attached by one wall (brownstones, for example). They are more private than condos but not as much as houses. Townhouse ownership is more like the ownership of a detached single-family house than it is a condo. As with a condo, you will have an HOA fee, or joint ownership of communal spaces. But ownership rights differ from one townhouse to another. In most townhomes, you may even be able to own land in the form of a driveway, a front yard or backyard, unlike in a condo. However, there are also common areas in townhome communities.
Affordability. Like a condo, a townhouse is usually more affordable than a detached, single-family home. Townhouse HOA costs also tend to be lower than condo HOA costs, but you are responsible for more of the upkeep of the property. Townhouses usually appreciate in value faster than a condo but not as much as a detached house.
Size. While condos come in various sizes, townhouses are often larger. In fact, townhouses can be very large and usually feature multiple stories.
Even though townhouses usually appreciate in value more than condos, they do not appreciate as fast as a detached house. Further, you privacy is limited because you share a wall with an adjacent townhouse. Finally, you
Most people get confused about what kind of insurance to buy for a townhouse. Do you buy condo insurance or homeowners insurance for a townhouse? Well, it depends on whether you belong to a condo association. If you do, you'll need condo insurance. If you don't, you'll likely be shopping for a homeowner's policy. In short, "townhouse insurance" doesn't exist.
If your townhouse is in a planned community that falls under HOA regulations, make sure you know exactly what type of coverage is required and what the HOA's group policy covers and does not cover. Your homeowners insurance should fill in the gaps.
No law requires you to purchase home insurance for your townhouse, whether or not it's a condo. However, your mortgage lender may require it to protect the bank's investment as well as your own. To find out what homeowners insurance typically covers, scroll down.
Single-Family Home Pros
Land. One of the main reasons people love the idea of having a home is because they currently lack a backyard or front yard or both! Yards are where the fun happens, whether you build a swimming pool or grow a garden. It's where the dogs can run around to stay fit and it's where kids can play safely. Even if you don't use all the space you own, people like to have privacy. The more padding of space you have, the more isolated you and your loved ones will feel. Also, if there is quite a bit of land, you may be able to one day sell extra land for someone to build a house if you need the money.
Freedom. Since you are not under any HOA rules, you have more freedom to what you want, whenever you want. With a condo, you don't own the exterior, so you cannot paint it or do much with any of the exterior elements. Additions can be added to detached homes. You can also add additions if your family outgrows the home you bought. Also, you can live with whomever you want, whereas with an HOA, you may have to get tenants approved, even if they are family members. You may also face some restrictions if you try to run a home business in an apartment or condo. You can almost always do it out of a house.
Easier to sell. Because owning a home has more benefits, homes are more desirable and easier to sell. Detached houses tend to be more liquid than condos and townhouses, whether the housing market is good or bad. It also appreciates in value much quicker than condos and townhomes.
Single-Family Home Cons
If you buy a house, you are responsible for the interior, the exterior, plumbing, electricity, any outdoor space and everything else. You will have to take care of all the interior systems yourself—no homeowner's association will be swooping in to give you a hand. Homes are usually more expensive to buy than condos and townhouses. Generally speaking, homes have much higher utility bills because they are much larger than condos and townhomes.
Single-Family Home Insurance
Homeowners insurance—which covers detached single-family houses as well as townhouses—usually includes four types of coverage:
This product covers the main structure your home; that is, it does not cover a shed, detached garage or guest house. Further, the rate for dwelling coverage goes up faster than the other three types.
Personal Belongings Coverage
This type of insurance, also called contents coverage, includes any possessions in your home, shed and garage as well as any items outside your home if they're damaged or destroyed in a listed peril.
Temporary Living Expenses Coverage
If you can't live in your home after a covered event, coverage for temporary living expenses will pay for food and your lodging.
This product covers the medical bills if a visitor to your home (or townhouse) gets injured on your property.
Other Types of Homeowners Insurance
Depending on where they live and the condition of their house, many homeowners are not satisfied with the standard package of dwelling, personal property, temporary living expenses and liability coverage. Here are some other insurance products you might consider buying:
Other Structure Coverage
You are often covered for these structures in the event of a storm that takes down multiple structures on your property: fences, decks and built-in appliances like furnaces and water heaters.
Sump Pump Overflow Coverage
An optional coverage, Sump Pump Overflow coverage can take care of costly repairs due to water damage caused by a backed-up drain or an overflowing sump.
Credit Theft Protection and Monitoring
Many insurers will now add this protection to a standard policy. You'll be alerted when credit accounts are opened in your name, when an account is changed, a credit card institution pulls an inquiry on your credit and more.
If home systems, smart-home devices or appliances break down, this coverage will cover some costs.
If there is a flood and your home and/or belongings are damaged or destroyed, you are not covered by a standard home insurance policy. Flood insurance is always sold separately.
Earthquakes can do extensive damage, even when they are mild. Damages caused by an earthquake are only covered by earthquake insurance, which is sold separately from a standard homeowners insurance policy.
To compare home insurance rates enter your zip code here.