In-Depth Look at Buying a Condo vs Renting an Apartment

Are you looking for a new home? Do you know whether you want to rent or buy? Are you familiar with the benefits of each option?

The choice between buying a condo or renting an apartment can be complex and stressful. There’s many financial and lifestyle considerations that need to be addressed.

Let’s take a look at the pros and cons of each approach so that you can make the right decision for you and your family.

What Is a Condo?

These are defined by a specific ownership arrangement rather than a type of dwelling. When you buy a condo, you take ownership of the individual unit along with the right to use the common areas.

You do not outright own the exterior of the building, the community amenities, or the surrounding land. You share the ownership with other owners.

Condo living also comes with maintenance fees, which are payable each month to the Homeowners Association (HOA). These fees go towards paying the amenities and maintenance of the property.

Condo owners have to make mortgage payments. However, this helps them build equity over the years. Condo owners also have the option to generate passive income by renting their condo when they move out.

What Is an Apartment?

An apartment is a self-contained housing unit that makes up part of a larger building or housing complex.

Unlike condos, you can’t own an individual apartment. These units are defined by conventional rental agreements between an owner and tenant.

You can purchase an entire apartment complex, but not an individual apartment (those can be expensive).

Apartment living can seem cheaper than buying a condo. There’s fewer expenses and no maintenance fees. Unfortunately, renters don’t build equity and can’t generate rental income in the future.

Let’s take a look at the costs associated with property ownership and renting, including both the initial and ongoing expenses.

Initial Costs – Owning vs Renting

The choice to buy a condo or rent an apartment depends on how much capital you have available. Buying any kind of property requires a substantial down payment:

In the US: 20% for conventional loans and between 3.5-10% for non-conventional loans.
In Canada, the minimum down payment is 5%. But with the new mortgages rules, more than 5% is ideal.

If you don’t have this kind of money available, you can borrow from friends and family or knuckle down and start saving.

You also have to bear in mind condo closing costs which can be in the several thousands of dollars.

On the other hand, when you’re renting an apartment, there are no initial costs apart from a rental bond. These are typically the equivalent of one or two months rent.

For this reason alone, renting an apartment is much more accessible for most people. Renters can also use this lifestyle as a means to save for a mortgage deposit.

Ongoing Costs – Owning vs Renting

In order to compare the ongoing costs associated with property ownership and renting, you need to understand exactly what you’re paying for.

While it can seem tough saving for a deposit, there are financial advantages to owning a condo vs renting one. It all depends on the market you buy in and the amenities your building offers.

That’s why it’s important you understand the major monthly expenses of owning a condo.

Owning – Condo fees – Along with mortgage payments, condo fees represent the biggest expense of the condo lifestyle. Fees are paid monthly to the HOA. These cover building maintenance and other expenses such as insurance, parking, and a contingency fund. You never get this money back so condo fee payments do not go towards increasing your equity.

Owning – Property taxes – When you own property, you are responsible for property taxes. If you’re thinking about going down this route, it’s important to check tax rates and rules in your local jurisdiction before buying a condo.

Owning – Property insurance – Owning a condo comes with a number of additional expenses, including property or condo insurance. Compared to renters, property insurance for a condo comes out to be about the same price as rental insurance.

Renting – Monthly Rent Payments – This is the one and only cost associated with renting an apartment. Unlike a condo, rent payments don’t go towards paying off your own asset. However, it’s predictable and in most cities there are limits to how much it can increase every year.

Buying a Condo vs Renting Ratio

With all these expenses, you’re probably wondering when renting gets better than buying.

Truth is, the benefits of buying a condo versus renting depend greatly on where you want to live. While some locations are more affordable to rent, others are much cheaper to buy.

In order to make this decision, you need to analyze the price-to-rent ratio in your location. Let’s take a look at this ratio and see how you can use it to your advantage.

What Is the Price-To-Rent Ratio?

The price-to-rent ratio is the ratio of average home prices divided by average rents in your location. The calculation is simple: divide the average condo price in your area by the average annual rent.

calculate if buying a condo is good for you

Once you have that figure, you can use it to compare to established thresholds:

1-10: a purchase is much better than a rental
10-15: buying is somewhat better than renting but factors like renovations can skew towards renting
16- 20: buying is only slightly better than renting
21+: renting is better than buying

While this ratio is useful, it’s important to note that buying property allows you to build equity over time.

Benefits of Renting an Apartment

While renting is not ideal for everyone, there are some advantages associated with not being a homeowner.

Renting is easier to move locations and accept new work opportunities. When you own, you have to consider that to move you need to go through the process of selling your condo. This makes renting appealing to some millennials who depend on mobility for work.
Renting can be less stressful than owning a condo, with all major renovations and repairs the responsibility of the landlord.
Renting may be more affordable in certain real estate markets. This varies by city, and more often than not, by individual neighborhood. You need to check each property and location separately.
When you rent an apartment, you are not responsible for condo fees.

Benefits of Buying a Condo

Buying a condo is a great way to secure your financial future and safeguard your living arrangements for years to come. The benefits compared to renting are numerous:

Financial benefits

Condos are more affordable than other forms of housing. This puts them within reach of first-time home buyers.
Condo ownership allows you to build equity and take advantage of property market growth.
Condos allow you to generate rental income by becoming a landlord yourself when you decide to move out.
Pre-construction condos can be an even better option. They involve lower condo fees and access to new amenities. They are also more affordable than condos in established neighborhoods.

Lifestyle benefits

Owning a condo enables you to live in a central location close to downtown amenities and work centers.
The condo lifestyle gives you access to swimming pools, gyms, saunas, lounges. These are assets you may not be able to afford yourself.
The condo lifestyle is often associated with increased socialization and a sense of community spirit.

How Much Can You Afford?

Have you decided to buy a condo? Congratulations, you have made a great choice. But before diving into the deep end, it’s important to take a step back and work out how much you can afford as a first time home buyer.

Note – Mortgage lenders use some well-known qualification ratios to determine mortgage limits. These rules can help you set a budget so that you can avoid getting in over your head. After all, the last thing you want is to be ‘house-broke’.

Here are a few guidelines you should keep in mind when setting a budget:

Monthly mortgage payments should not exceed 28 percent of your gross monthly income.
Total housing payments (property taxes, insurance etc) should not exceed 32 percent of your gross monthly income.
All total debt payments (housing payments, credit cards etc) should not exceed 40 percent of your gross monthly income.

Wrapping This Up

While buying a condo isn’t for everyone, it’s a versatile and affordable form of housing.

Rather than wasting money on rent or waiting for years to afford a detached home, a condo purchase can fill the gap between the best of both worlds. When you buy a condo, you are securing your long-term financial future.