Difference between apartment and condo? Here's what you need to know

If you're in the market for a new home, it's important to understand the many differences between apartments and condos. It’s not enough to compare condos with houses before making an investment, you should also be aware of the pros and cons of renting an apartment.

The major difference between a condo and an apartment is the ownership arrangement that's in place, with people able to purchase an individual condo but only able to lease an apartment. This key difference can have a number of implications for your budget and lifestyle, so let's take a detailed look at all the considerations you need to make.

Basic legal ownership differences - apartment vs condo

Rather than a type of building or location, a condominium is defined by a specific ownership arrangement. When you purchase a condo, you are taking ownership of the interior unit along with shared access to the common areas and assets of the community. While you don't own the building exterior, the swimming pool, or the surrounding land, you do have the right to use these spaces and amenities in exchange for monthly condo fees. In contrast, it's impossible to purchase an individual apartment, which are only available to rent alongside other apartments in the same building.

While you can purchase an entire apartment building and lease individual units to the rental market, this is expensive and not an option for most people. Individual condos are owned by a single entity and managed by a collective association. Individual apartments are rented by a single entity and owned by a single individual or corporation. When you buy a condo, you pay monthly condo fees to the Homeowners Association (HOA) or Condo Board. When you rent an apartment, you pay monthly rent to a management company.

Initial costs - condo vs apartment

The choice to buy a condo or rent an apartment will depend greatly on where you want to live and how much immediate capital you have available. While lots of people would love to purchase a condo, going down this path is simply not an option if you don't have access to a deposit. Down payment amounts can vary considerably depending on many factors, including your location, your credit scores, and whether or not you qualify for a Government home loan.

In the United States, a standard deposit amount is 20 percent, with as little as 3.5 to 10 percent often available for FHA loans and other non-conventional mortgages. The situation is similar but not identical in Canada, with a 15 to 25 percent deposit fairly standard for a condo purchase and much smaller amounts also possible depending on your first-home buyer status and credit history.

When you're renting an apartment, there are no initial costs apart from a rental bond, which is typically one or two months rent in advance. Renting an apartment is much more accessible for low-income earners, however, either on a full-time basis or while saving for a mortgage deposit.

Ongoing costs - condo vs apartment

Like many things in life, the decision you make between a condo or an apartment will probably come down to cost. While there are also key lifestyle differences to address, all ongoing monthly costs need to be analyzed from the outset. Contrary to popular belief, this is exactly the same when you buy a detached property. Whether it's fixing the roof, employing a gardener, or just carrying out regular building maintenance, detached homes require attention, time, and more money than most people think.

It's not enough to budget for your monthly mortgage payments, you also need to account for building maintenance and create a large contingency fund so that you're covered if something goes wrong. In fact, the demanding nature of detached dwellings is one of the key reasons why so many people are attracted to condos.

Defined by individual apartment ownership and the payment of monthly fees, in many ways, condos combine the best parts of being a property owner with the best parts of being a tenant. While you still enjoy the financial freedom, security, and equity growth potential of property ownership, condo owners also benefit from reduced property maintenance in the same way as people who rent apartments. While monthly condo fees put some people off, others are delighted by the ease of budgeting and lack of work required to live in a condo unit.

If you're deciding to buy a condo, however, renting an apartment should also be considered. While you lose the ability to build equity and can't access many of the securities associated with property ownership, there are undeniable freedom and lifestyle benefits associated with renting a home. While condo owners need to budget for mortgage payments along with condo fees, leasing an apartment demands regular rental payments and nothing else. You don't have to mow the lawn like a house owner, and you don't have to deal with a condo board either. While rent can seem like "dead money", it makes it easier for you to move around and take advantage of travel and employment opportunities.

What is the price-to-rent ratio?

In order to make a decision, you need to analyze the price-to-rent ratio in your location. This figure, which is the ratio of home prices to annualized rent, is used as an important benchmark for anyone who's estimating whether it's cheaper to rent or own a property. Trulia produces a price-to-rent ratio called the "Trulia Rent vs. Buy Index", and it’s easy to do the calculations yourself if you have access to the right information.

You can make your own price-to-rent ratio by dividing the condo cost or average list price by the average annual rent. While an average list or selling price will give you a good indication of an entire area at any given time, an individual condo price will obviously be more accurate. When you have a figure, it's important to compare it to Trulia's established thresholds. A price-to-rent ratio of 1 to 15 means that buying is considered much better than renting, with 16 to 20 slightly better than renting, and 21 or more indicating that it's better to rent than buy.

Limits of the price-to-rent ratio

While the price-to-rent ratio is an important tool, it's not enough in isolation. Along with the purchase price of the condo in question, you also need to account for interest rates, condo fees, property taxes, insurance, closing costs, and tax benefits if applicable. Each case is different and each person needs to make their own calculations based on the information at hand. Even in locations where it's more expensive to rent, it's important to take equity into account. Regardless of how small their rental payments happen to be, tenants are unable to build equity by selling their property in the future.

Costs and considerations in the United States

The choice between a condo purchase or an apartment rental will depend greatly on where you live. The actual costs of a mortgage vary considerably between locations, as do monthly condo fees and rental costs. While each person needs to make their own decision based on their personal budget and lifestyle needs, the price-to-rent ratio and other data can help you make the right decision. It's important to consider both up-front and ongoing costs and adapt your budget according to changing market conditions.

Historic price-to-rent ratios in the US

The nationwide price-to-rent ratio has changed dramatically in the US over the years, rising to as much as 24.5 in 2007 before the global financial crisis and now sitting at 19.21. Before the housing bubble and GFC, the ratio was around 15, which is why so many people were buying property and so many lenders were prepared to relax their mortgage rules. While it might not seem as attractive buying property now as it was then, it’s much safer now in many regards and is still considered the best option in most locations.

Prices and rents across the US

As you might expect, the price-to-rent ratio varies considerably between locations in the United States. According to figures from SmartAsset based on U.S. Census data, San Francisco in California currently has the highest ratio at a massive 45.88; followed by Honolulu, Hawaii at 40.11; Oakland, California at 38.5; Los Angeles, California at 28.02; and New York at 35.65.

On the other end of the spectrum, Detroit, Michigan currently has the lowest ratio at just 6.27; followed by Cleveland, Ohio at 10.52; Buffalo, New York at 10.71; Pittsburgh, Pennsylvania at 12; and Memphis, Tennessee at 12.26.

Costs and considerations in Canada

The situation in Canada is also highly variable based on the location of the condo or apartment in question. While Canada is no longer an obvious sellers' market, buyers still face a number of hurdles and renting can be challenging in heated locations.

According to data from the Canadian Real Estate Association 40 percent of the 4.4 million Canadians who have a landlord spend over 30 percent of their pre-tax income on their rent. While mortgage payments are even higher in some cities, tenants have less security and are unable to build equity.

To offer an example, the average asking price for a three-bedroom home in the Greater Toronto Area (GTA) is around $744,000, with an average monthly mortgage payment of $2,969 if you can save enough for a 20 percent deposit.

While this number will be lower for condos, you'll still end up spending way more than $3000 a month when you account for condo fees, property taxes, insurance, and utilities. In comparison, a comparable property is around $2,450 a month to rent in the GTA, providing savings of between $500 and $1000 each and every month.

Whether or not renting is a good decision depends greatly on how much prices rise in the future. If equity over time is greater than the difference between renting and buying, you will come out on top as a property owner. With most Canadian real estate markets rising over time based on historical data, property owners will generally be at an advantage.

This is not always the case, however, with flat and falling markets likely to benefit renters more than buyers. Rent vs buy calculators can help you to make the right decision for your situation, with lifestyle considerations relating to amenities and maintenance also needing to be addressed.

Price-to-rent ratio in Canada

The price-to-rent ratio in Canada has been rising over the last few years, from under parity in the first quarter of 2015 at 98.5 percent to 124.9 percent during the third quarter of 2018. According to the Organisation for Economic Co-operation and Development (OECD), the price-to-rent ratio has risen sharply in recent years compared to long-term data.

The average ratio is now 23.08 in city centers and 19.1 outside of the city limits, with huge price discrepancies between locations.

Surrey is the least affordable place to buy with a ratio of 32.26 in the city center, followed by Burnaby with 29.77, Kingston at 27.77, Vancouver at 27.59, and Windsor at 25.85. On the other end of the market, the most affordable markets to buy are Kamloops at 10.67, St Catharines at 11.66, Nanaimo at 12.72, Oshawa at 13.0, and London at 13.05.

As you might expect, however, equity does not play a consideration in these calculations, with the real cost of renting property also expressed as the opportunity costs lost when property prices rise over time. In order to make a real comparison, you need to account for all of the costs associated with housing along with forecast growth rates over time.  

Amenities - costs and accessibility

Access to amenities is one of the main reasons why so many people choose to purchase a condominium. While few people can afford their own gym, tennis court, or swimming pool, all of these things are easily accessible when you live in a condo building.

Along with the lower purchase price and the opportunity to live in a central location, increased access to amenities is a major draw-card of the condo lifestyle. Modern condos include a wide range of amenities, with business rooms, entertainment areas, and tech centers continuing to attract a young and professional demographic.

In contrast, leased apartment buildings may or may not offer amenities, with many cheaper apartments completely void of critical infrastructure. On the more expensive end of the market, however, amenities are increasingly being added to buildings as a way to attract prospective tenants.

If an apartment building wants to compete on issues other than price, it can attract renters by adding things like childcare centers, community rooms, and business centers. Different buildings will focus on different types of amenities, with popular categories including pet amenities, transportation amenities, laundry amenities, kitchen amenities, unit amenities, tech amenities, and recreation amenities.

Apartment buildings and complexes vary widely across North America based on their amenity structure, with buildings in Brooklyn or Toronto very different to those in Florida or San Francisco.

It's important to compare buildings which cater to your age group and income demographic, with apartment buildings often catering to specific target markets based on their location. For example, Florida apartment buildings often include amenities for retirees, and trendy inner-city neighborhoods often include amenities to attract young families.

Rules and regulations in a condo

If you decide to buy a condo, you need to be aware of the rules and regulations that you'll be subjected to. While this will not be a problem for most people, certain people and certain condo associations are simply not a good mix.

Always do your homework before diving into the deep end and compare multiple condo communities to see if you're a good fit. While you do have certain rights as a condo owner, you don't want to test these rights against the might of a condo board.

In the United States, condo rules and regulations are spelled out in the Declaration of Covenants, Conditions & Restrictions (CC&R). Depending on the jurisdiction in question, there may also be certain bylaws, legal guidelines, and other rules and regulations that you'll be subjected to as a condo owner.

In Canada, The Condominium Act is the master blueprint for how an organization is run, with the master deed designed to define certain terms and conditions within the act. Whether it's pet ownership, voting rights, or parking spaces, everything is defined by governing documents controlled by the Condo Board.

The Condo Board are responsible for the management and administration of these rules and regulations. While individual condo owners are responsible for everything within their four walls, and all services which affect them exclusively, everything else is run by the board. While this can seem restrictive in some situations, it's also a great way to free yourself from the responsibilities of maintenance and management associated with property ownership.

Common rules and regulations may apply for pet ownership, sub-leasing, alterations to the building exterior, noise levels, parking spaces, apartment renovations, and the use of amenities. While condo owners typically have the right to renovate the interior of their unit, balconies and external spaces can be contentious.

Certain restrictions can affect your lifestyle, including noise level restrictions, guest restrictions, and whether or not you're allowed to hang your washing on the balcony. Before buying a condo, it's important to talk to the board, meet your potential neighbors, and make sure the building or community is a good fit for your current and future needs.

Rules and restrictions in an apartment

If you decide to rent an apartment, you will also be subject to certain rules and regulations. While many of the restrictions will be the same as condos, this time you're accountable to a management company rather than a condo board.

Similar rules will apply, however, including noise restrictions, pet restrictions, rules regarding the use of amenities, and possible guest restrictions. Before moving into an apartment, you can research the rules and regulations, compare buildings, and talk to your potential neighbors to see whether or not the rules are enforced.

While most apartment tenants are used to living under certain rules, it's important to realize that they can change substantially between buildings and locations. Regardless of where you want to live, you will be expected to look after the apartment and leave it in a similar condition to how you found it.

There are various ways to enforce this, with most tenants expected to sign a document that defines the condition of the apartment and hand over a bond to cover for any potential damages.

Maintenance - condo vs apartment

The condo lifestyle is attractive for many reasons, including the relatively low cost of purchase, the accessibility of amenities, and the opportunity to live in a central location. Along with these well-known benefits, many people are also attracted to condos because of the low-maintenance lifestyle that they provide.

Monthly condo fees and called maintenance fees for a very good reason, with most of the money you pay going towards the regular maintenance of common areas and assets. While you still have to look after your own unit, most of the large expenses associated with the building exterior are covered.

This has a number of benefits, not just in terms of saving you money but also making it easier for you to manage your maintenance responsibilities. While condo fees can seem like an additional and unwanted expense, you can actually save yourself a lot of time and money by going down this route, not to mention avoiding a lot of stress along the way.

When you rent an apartment, your primary responsibility is to keep the unit clean, tidy, and in good condition. In many ways, buying a condo is similar to renting an apartment in terms of your maintenance responsibilities, except you're able to build equity and take advantage of the security that comes with home ownership.

Community life - condo vs apartment

The community aspect of modern condos is a major draw-card for many people, with many buildings and complexes designed to cater to the needs of a specific demographic. Whether you're looking for a retirement condo or a building that caters to young professionals, condos allow you to upgrade your quality of life and make new friends along the way.

From the provision of amenities and social nights through to the design of communal spaces, condos are increasingly concerned with community interaction and social support.

In contrast, most apartment buildings do not emphasize community engagement, with a range of ages and social groups catered for under a single roof. While there are a number of exceptions to this rule, exclusive rental communities with amenities and community support systems are rare and can be expensive. If you want to live among like-minded people and enjoy access to a range of social and sporting amenities, buying a condo is a great choice.

Making the right choice

Making the choice between buying a condo and renting an apartment can be challenging. There are pros and cons associated with each decision, with each person needing to do their own homework and make their own choice based on criteria that's important to them.

While renting an apartment is often cheaper and more accessible to younger people, many of the savings you make don't make sense when analyzed on a long-term basis. If you're in a healthy financial position and are able to raise a deposit, buying a condo can be a great choice.

While paying condo fees and abiding by the rules and regulations of the condo board can prove challenging at time, the economic and lifestyle benefits of condo ownership should not be underestimated. Not only will you have a reliable way to build equity and secure the financial future of yourself and your family, you'll also have an opportunity to upgrade your quality of life by taking advantage of the amenities and community support systems that define the modern condo lifestyle.