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Why you should consider a condo as your first home

By Zak Stoiber

April 2018

When it comes to deciding whether to rent an apartment or buy a home, condos are like the middle child: often forgotten, despite their many sterling qualities. (Am I a middle child? How'd you guess?)

Why buying a condo as your first home could make sense 

I never considered buying a condo in my 20s, but it was the first move for my friend Adam after he graduated from college and left the parental nest. Why? “It’s pretty straightforward, actually,” Adam explained. “I was a 23-year-old kid who had a short- to mid-term commitment to a general area. I didn’t have any grand plans to move to a new city in the next 5 years. I also knew I didn’t want to throw gobs of money at a landlord for rent. I did the math and realized by purchasing a condo I’d have about the same monthly expenses as renting while also building equity, giving me an investment that will grow as I live there. Then, if and when I decide to move, I’ll have some added flexibility with the extra cash I get from selling.”

If, like Adam, you’re wondering if buying or renting makes more sense for you, try the math with our calculator.

Adam viewed buying his 2-bedroom condo in Germantown, Wisconsin, as a stepping-stone to his future — except this stepping-stone also grew money. “I’ve gained about 15-20% on my listing. I didn’t go in expecting any appreciation, since the value of condos tends to stay flat. But the market went up, and now I have this nice bonus. The only bonus I would have at the end of renting would be my security deposit. Maybe.”

So is a condo a house, an apartment, or something in between?

The short answer is: You buy a condo like you would any other home, so it's yours to own. That means you can do what you want with it – to an extent. Adam explains: “Condo associations have their own set of bylaws and rules, so mileage may vary. My condo association has a rule that a certain percentage of units be occupied by owners, not tenants. They want people invested. But as long as I’m living there too, I’m free to rent my extra room out to anyone.” However, if Adam decides to move and rent out his whole condo, he’ll only be able to do so if the condo association agrees.

There are also other trade-offs to owning a condo. You’re free to paint your kitchen electric pink, but you have less control over your outdoor space. Adam explains it this way: “If it's inside the walls, it's my responsibility. If it's on the outside, it's generally the condo association’s responsibility.” That means that if you live in a place that tends to snow, like Adam does, having snow removal and provided services is a big benefit compared to buying a home. But if your dishwasher dies, there’s no landlord to take care of it: You own the condo, you deal with it.

How do the expenses stack up?

In addition to a mortgage payment, Adam pays a monthly fee to the condo association to cover building maintenance costs, shared services (like snow removal) and contingencies. If he had purchased a single-family home, his maintenance expenses would probably be comparable over time, if less predictable.

For Adam, the decision to purchase a condo instead of renting has worked out even better than he planned. “When I look at the cost of renting a comparable apartment, I’m paying just a touch more to own per month, and I’m also building equity. Not to mention I've rented out a room, which makes the actual monthly expenses even cheaper,” he said.

How much of a down payment do you need to buy a condo?

Buying a condo as your first home means getting a mortgage loan, and a mortgage means paying a down payment. Living with his parents for a while helped Adam save for a down payment, but it wasn't a huge hurdle. He chose to buy a condo in a smaller city to bring down the cost of ownership, as well. “I bought a $100,000 condo with a 5% down payment – an amount that’s similar to a car down payment,” he said. 

Adam followed advice he received from friends and family not to stretch his liquidity to cover a 20% down payment. Instead, he financed with private mortgage insurance (PMI). “In order to get into the condo sooner rather than later, I put down 5% instead of the full 20% down payment,” he explained. “I'd rather have a pile of cash to rely on for emergencies and other expenses, and just pay the negligible PMI each month.” After 5 years in his condo, Adam is close to cancelling his mortgage insurance. 

What's next for Adam?

“My decision to buy a condo has paid off for me,” Adam said. Whether he chooses to stay in his condo or sell it and use the equity he’s built to move up to a bigger place, he’s happy he decided to become a condo-owner early in his 20s rather than renting.   

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Zak

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Zak Stoiber is a digital marketing program specialist at MGIC who enjoys reading books, some of which do not contain pictures. He recently became a homeowner mostly to house his board game collection.
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