Towards the beginning of the pandemic, plenty of real estate experts wondered if an exodus from dense urban areas would lead to an abundance of empty condominiums. The appeal of condo living continues, however, with demand for condos driving prices upwards toward record levels. The average condominium price was up to $319,000 in February 2022, an increase of over 14% from the previous year, according to data provided by Redfin.

Condos are in demand partly because they have historically been a comparatively affordable option amid ever-increasing home prices and rising rates on the mortgage side. But how do we feel about next year, and the years after that? Are condos generally a good investment? Here are some things to consider:

Is a condo a good investment?

The answer depends on many factors, chief among them how you plan to use the condo. Do you intend to live in it or rent it out? Investing in a condo to generate passive rental income will generate more money than simply purchasing it as your home, but that means a higher interest rate and larger monthly payment. The direction that the market takes over the coming years can also impact the value of your investment over the long term.

Another important factor is that a condo in one housing market can look very different from a condo in another. From an investment standpoint, location can be key:

“If you look at a condo in Phoenix or New York City, they can be completely different,” says Nate Martinez, sales associate and owner of the Nate Martinez Team with RE/MAX Professionals in Arizona. “There are high-rise condos that can have very high HOA fees, and there are more traditional two-story buildings that can feel closer to an apartment.”

In addition to those monthly HOA fees, the HOA’s rules are worth considering, as they may limit what you can and can’t do with the property. It is not unusual for HOA’s to prohibit condo owners from renting out their units, for example:

“It’s important to understand the bylaws,” Martinez says. “Over the years, we have had a massive amount of properties go into the Airbnb and vacation rental space. Some communities allow it, and some do not.”

Crunching the numbers

If your goal is to rent out the condo to long-term tenants, it’s important to look at all of the factors that go into your payment to see if it is worth it. Let’s look at a condo with an asking price of $250,000. If you make a 20% down payment and have excellent credit, you would be looking at a mortgage rate around 7.00% right now, which would have a payment of around $1,330. Factor in the other expenses (all rough estimates):

• Homeowners’ insurance: $600 per year

• Property taxes:  $2,100 per year

• HOA fees: $2,400 per year

This would bring the full monthly payment to $1,755. This could affect your ability to even rent the property out to make money if comparable rents don’t go that high. It could still be a worthwhile investment if the condo appreciates in value before you sell it, even if you take a short-term loss.

Do condos appreciate in value?

Historically, single-family homes have appreciated in value more quickly than condos. However, a variety of market factors are currently helping to drive up the value of condos. A severe lack of inventory is ratcheting up competition and prices for condos as well as other types of housing. While condos have been selling for above asking price recently, they haven’t been demanding as much as single-family homes.

Investing in a condo as a primary residence

If you’re a first-time homebuyer, you might be thinking of a condo less as an investment and more as simply the most affordable path to homeownership. It’s true that condos are typically smaller than single-family houses, but with smaller asking prices to match. If you’re considering a condo for your first home, know that there are implications when it comes to HOA fees in relation to getting approved for a mortgage. These fees need to be factored into your qualifying payment.

Investing in a condo as a vacation home

If you’re lucky enough to be thinking about buying a vacation property, a condo can be a smart investment. Vacation should feel somewhat carefree, which makes the proposition of a condo—paying the HOA to handle the exterior maintenance, lawn duties, and other tasks—especially appealing. To make the equation work for a vacation home, though, you’ll need to think about how much time you’ll actually spend using the condo, as well as account for the overall costs of owning a vacation property. There are also significant differences when it comes to getting a mortgage and paying taxes on a vacation home versus a rental investment property. Considering all of these factors can help you make the most of your investment.

Investing in a condo as a rental property

If you’re an investor looking at buying a condo for passive income, it’s important to crunch the numbers in the following areas:

• Cash versus mortgage: Do the math of what you’ll pay and what you’ll earn. Can you afford to pay cash or do you need a loan? If you’re paying for mortgage interest, think about how much extra you’re paying each month and whether you can make that up by charging higher rent.

• HOA financials: You need to get the full financial picture from the HOA. Ask them if there are any upcoming special assessments. These can be one-time, but are often considerable. If the HOA determines that every unit needs to pay for new windows, for instance, an owner could be on the hook for $10,000. That’s a huge expense that takes away from rental income.

Bottom line

Whether you plan to buy a condo to leap into homeownership, rent out, or use as a second home, this type of property can be a relatively affordable and worthwhile investment. Before you begin your search, be sure to have clear goals in mind from the outset, and run the numbers. It can be especially helpful to work with a real estate agent who specializes in condos in the area you’re looking to buy or invest in.