Many first-time homebuyers often debate whether they should buy a condo or townhome now, or wait a few years so that they can buy their ideal home in their preferred location. Others contemplate the options of buying a condo or townhouse in their desired location versus buying a single-family home in a less desirable location.
The properly considered decision is the result of a strategic game plan to capitalize on the rising market, and often this plan should be to buy a condo now in the city with the highest projected appreciation. While most first-time homebuyers are more conservative with their purchases, they should be thinking about the end game five to seven years down the road. Keep in mind that as rent increases, ownership is a much better alternative to paying rent because you can build up equity and get tax benefits. Low mortgage interest rates also incentivize buyers to get into the market now. The real estate market has many driving trends that tend to follow a seasonal cycle that buyers should factor into their game plan. This can be seen throughout the slow winter season, which leads to a great opportunity for buyers, and the busy spring season, which is a perfect time for sellers to list their homes.
An additional benefit to homeowners that may be unknown to many first-time homebuyers is that, if they go to sell and they have lived in their home for a minimum of two years out of the past five, they will get a capital gains exemption upon the sale of their home. The exemption is up to $250,000 in profit if one is single, and up to $500,000 if one is married. It is important to note that the property must be a seller’s primary residence. This tax break does not apply to a house or any other property that is held solely for investment purposes. When homeowners decide to sell after a few years, they can use that extra savings to invest into their actual dream house.
Even if a buyer today decides not to sell their condo later, they can keep it as an investment property, as they also make great rentals with very low maintenance. Then, when they decide to sell their investment condo sometime down the road, they can utilize a 1031 exchange to defer capital gain taxes.
If one compares the appreciation of a condo in Palo Alto over the last three years to that of a single-family home in Santa Clara with similar values, the Palo Alto condo still has an overall higher average appreciation. A Palo Alto condo or townhouse appreciated on average about 17 percent over the past three years as compared to a Sunnyvale single-family home which appreciated on average about 15 percent over the same amount of time, and this is on top of the intangible benefits of ownership, like security and the pride of homeownership. A second comparison between a condo in Mountain View to a single-family home in Santa Clara yields very similar results. Over the past three years, a condo in Mountain View had an average of about 17 percent appreciation and a single-family home in Santa Clara had an average appreciation of about 14 percent. Certainly not all single-family homes will necessarily have more appreciation when compared to a condo or townhouse, but these statistics prove an observable trend.
Ultimately, it comes down to the city and the location of the home being the biggest driving factors. Both Palo Alto and Mountain View condo locations offer better schools, more new construction and development, proximity transportation, and high walkability to shops and restaurants. A similarly valued single-family home in either Sunnyvale or Santa Clara may not offer the same convenience, benefits, or appreciation. Whether you are looking to buy your very first home or to downsize, make sure that you have a well thought-out game plan ready so that you can work with a local, knowledgeable agent to help execute your plan.