Apartment or Condominium: Which is the Better Investment During a Recession?

I spent much of my life in the real estate business. As a child, I roamed home sites and watched one parent scout land for future homes and apartments. For over 30 years, I saw the ups and downs of the housing markets. I listened as that parent often noted, "Remember, buying a home or condo is not always better than renting. Sometimes you save money by renting." That same parent urged me to rent an apartment when I graduated college instead of buying that "really cute" condo I wanted.

This didn't make sense to me for a long time. I felt (as I believe many people feel) that investing money in a home or condo was a wise investment, helping to build equity and preserve wealth. Why would anyone want to throw away perfectly good money on rent every month, especially when rental money didn't buy you a stake in that apartment but went to the landlord?

I no longer feel that way but have come to believe that renting an apartment may be the better choice for some people. At the same time, buying a condominium may be a better investment for others. Read on and I'll explain why.

But first, know that I'm starting with this bottom line premise: people are different and so are their financial situations. Starting with that assumption, as well as the fact that home prices vary from one region of the country to another, it becomes easier to decide whether renting an apartment or buying a home is a better investment.

In order to understand why buying a condominium may not be a smart move, consider two new college graduates. One may have no debt, have a great job offer and the possibility of job stability. The other may have large amounts of student loan debt, a low level job and be in a field with frequent relocations or job transfers. The student who can afford to put money into a condo and not take on undue debt would be in a better position to buy one and (perhaps) build equity and even make money. The chance to build equity and own a condo home may be worth the risk that the place could lose value in the short term.

But what about the student with significant debt? Taking on a condominium could be a major financial stress and if he or she got a job transfer, the condo might not even sell at a profit. Results can differ from one area of the country to the other but I hope these two scenarios show how different situations can result in equally diverse financial risks.

Bottom line: start with your specific situation, debt level, lifestyle and local housing market. As I write this, the housing market in my area of the country, the Midwest, is pretty bad. There are exceptions, of course, but homes in my neighborhood are remaining on the market longer and selling for greatly reduced prices (when they sell). The same is true for condominiums. It is not a given that a condo bought today would sell for a profit a year from now. Even in the best housing markets, it can take 5-7 years when buying condos in certain Midwest states, like Indiana. It can take that long for a condo to be more profitable than renting an apartment for the same length of time.

Use the right tools to decide whether buying a condominium or renting an apartment is the better investment

Although there are a lot of them out there, I happen to find this calculator, located at the NY Times business website here to be particularly useful. While not perfect, it gives a starting point for comparing a rental with a condominium. The main advantage of this calculator is that you can compare a home's price, down payment, mortgage interest and other costs to the rental price of an apartment. The calculator will then tell you how many years you'd need to remain in a condo or home for it to be a better investment than renting an apartment.

If you put in the dollars in the appropriate spaces, the answers may surprise you. Of course, you also need to put in average home appreciation figures and those can be tricky to gauge, especially in today's very rocky housing market.

Bottom line: online calculators reveal that it can take years of living in a home or condominium for it to be more profitable than renting, especially in today's housing market.

Surprised? I certainly was. Like so many, I saw home ownership, even condo ownership, as part of the American dream. However, I also see many homes which are renting for far less than some far less luxurious apartments. In those instances, it might be wise to rent, save the difference and wait for the right house to come along unless.....

You've been saving your money for awhile and you really want a place of your own. Then isn't it best to buy a condo? You really want to own a home or condo! So isn't investing in a condo the right choice? Besides, that condo comes with a really great swimming pool and clubhouse and people who even mow the grass regularly.

Ah, but there is the catch - a home and a condo are not the same. They way seem like they are but there are significant differences. One difference? Many condominium owners are responsible for the maintenance of their home's interiors but pay monthly fees for someone to maintain the outside of their condos. There may be a board or condominium association. Fees can vary monthly, often adding a large amount to a hefty mortgage payment. Also, you can share common walls with neighbors, making the distinction between condo and apartment that much less obvious. If you don't agree with any free increases, you may have to like it or lump it. Some condominium associations even require specific types of window treatments or put other restrictions on condo "owners".

Bottom line: a condominium is not the same as a home and investing in one brings additional financial obligations and potential risks that might not be there for those renting apartments. Investing in a condominium is not always the wisest financial move, especially now.

Remember, if you hate an apartment or get a job transfer, you can often move - even if you have to pay a penalty. Hate a condo? It is up to you (usually) to find a new tenant or buyer and many condominiums have restrictions about sales. Monthly maintenance fees can go up dramatically within a year. I know this because just before an aunt moved from her condominium to a nursing home, huge fees were assessed for a new roof as well as increased maintenance - all within a short time period! This made it that much harder to sell the condo since potential buyers - understandably - didn't want to pay the extra costs. She sold at a loss.

Finally, don't discount the emotional factors. This is the trickiest part about deciding to invest in a condominium or rent an apartment. Why? Because you - and only you - really know which choice will make you happy. Having lived for awhile in a condo with a friend, I was grateful that I didn't own it. I was happy to move. The walls were paper thin and it felt like an apartment. I actually had a hard time believing my friend was buying it. Also, the free maintenance consisted of a rather inept maintenance crew who didn't exactly make sure the grounds were kept free of snow. This meant many cars got stuck as they tried to get out of the parking spaces in the morning. This wasn't exactly a dream situation.

But I've also seen some lovely condominiums, particularly ones catering to senior citizens. They not only had gorgeous pools, waterfront views and spacious clubhouses but free transportation to and from local malls. Security guards manned the main entrance to the condominiums. Many of the owners had lived there for 10 or more years and had built up equity and a sense of security in knowing that they owned their own place. They loved being condominium owners. The emotional factor was far more important than any actual profit they might make because they never really planned to sell their condos. For them, it was a great investment and they weren't in a position to lose much money - or care if they did.

Bottom line - even if a particular housing option isn't a great investment, it may be a great emotional investment. Some people want the freedom of being renters and able to take off after a short while in a place. Others would prefer to stay in one location, enjoy the pride of ownership and sense of security in knowing a place is theirs.