Is it a Good Time to Invest in a Condo in Colorado?

Real estate investing has long been considered one of the most reliable ways to build wealth, but affordability is becoming a significant challenge. For those just starting out, especially in competitive markets like Denver, Colorado, the question arises: is it a good idea to buy a condo right now?

The Affordability Crunch in Denver

The median price of a home in the Denver area is approximately $550,000. With a 3.5% down payment, the monthly mortgage payment can easily reach $3,500. For many, this price point is out of reach, leading potential buyers to explore alternative options like condos. However, condos come with their own unique set of challenges.

The Challenges of Buying a Condo

1. Rising Insurance Costs Home insurance rates are climbing nationwide, but the impact is especially pronounced for condos. While homeowners are seeing insurance rates rise by 30%, some condo and townhome communities are experiencing increases as high as 200%. In extreme cases, insurance policies are not being renewed at all. This dramatic rise can lead to a sharp increase in HOA fees. For example, an initial HOA fee of $300 per month could easily jump to $575 or more, straining budgets and potentially triggering special assessments after you’ve closed on the property.
2. Impact on Property Values As HOA fees climb, fewer buyers can afford condos, leading to a decrease in demand. This can result in a significant drop in property values. I would not be surprised if condo owners were to see a $50,000 decrease in value shortly after purchase due to these financial pressures.  Colorado has rising costs due to inflation, and risks of major weather events such as fire and hail.  
3. Lifestyle Considerations For some, condos are a necessity or a lifestyle choice. Older adults who can’t manage home maintenance tasks like snow shoveling or those seeking amenities like pools or tennis courts may prefer condos. However, these lifestyle benefits come at a cost, which can impact the property’s long-term investment potential.

Condos vs. Houses as Investments

From an investment perspective, condos generally offer lower returns than single-family homes. When evaluating deals using a pro forma—a financial model used to assess investment potential—condos often show much lower capitalization rates (cap rates) than houses. For instance, while a house might have a 5% cap rate, a condo might only reach 2%.

Appreciation trends also tend to favor houses over condos. Drawing from personal experience, when my sister and I moved to Denver in the early 2000s, I purchased a home while she bought a condo. Over a decade, my property’s value doubled, while hers grew at a much slower pace. While every deal is unique, this highlights the importance of carefully evaluating potential investments.

Solutions for Aspiring Buyers

1. Renting or Getting Roommates Renting remains a viable option for those who can’t yet afford to buy. Alternatively, purchasing a home and renting out rooms can help offset mortgage costs, making homeownership more attainable.
2. Exploring Creative Financing Options Programs like FHA loans, which require lower down payments, can make homeownership more accessible. However, buyers should carefully evaluate their long-term financial implications as the payment with low money down is very high.  There are some options to get assumable mortgages, and buy like it is 2020, if you have the means to pay the difference between the loan value and current value.  It doesn't work with low money down.  
3. Investing in Single-Family Homes  While the upfront costs of a house may be higher, the long-term investment potential often outweighs that of condos. If you can, put more down and buy a house.  For those serious about building wealth through real estate, starting with a single-family home may be the better choice.

Final Thoughts

While condos can be a practical choice for some, especially those prioritizing lifestyle amenities or low-maintenance living, they often come with financial challenges that can impact both short-term affordability and long-term investment potential. If you’re considering real estate investing, it’s crucial to evaluate each deal on its own merits. As an experienced real estate investor and real estate agent, I’m happy to help you model potential deals and navigate this complex market. Whether you’re just starting out or looking to grow your portfolio, understanding the numbers and trends is key to making informed decisions.  Please call me at 303-514-8491, I would love to help you buy your next deal and be your real estate broker.