Real estate investor Graham Stephan recently made waves by advising against one particular type of property investment: condominiums. While condos might seem like an affordable entry point into real estate ownership, Stephan argues they’re fundamentally flawed investments compared to single-family homes. His analysis comes at a time when mortgage rates remain elevated, making careful investment selection more crucial than ever. For prospective buyers, understanding why condos typically underperform can help avoid costly mistakes in today’s challenging market. The current environment demands smarter investment strategies, and Stephan’s warnings provide valuable insight into where not to put your money when building long-term wealth through real estate.
Stephan’s primary argument against condos centers on land ownership—or rather, the lack thereof. When you purchase a single-family home, you acquire both the structure and the land it sits on, which historically appreciates in value. Condo owners, however, only own their individual unit while sharing ownership of common areas and land with other residents. This fundamental difference creates a significant valuation gap over time, as land scarcity tends to drive appreciation more reliably than building structures alone. In markets where land values are rising rapidly, condo owners miss out on the most substantial portion of property appreciation, making their investment returns comparatively weaker.
Another critical factor Stephan highlights is the ongoing financial burden of homeowners’ association (HOA) fees. These mandatory monthly payments cover maintenance of common areas, amenities, and building insurance, but they never disappear—even after you’ve paid off your mortgage. Unlike fixed-rate mortgage payments that remain constant over time, HOA fees typically increase annually due to inflation and rising maintenance costs. Some condo developments feature HOA fees that exceed typical mortgage payments, creating a permanent carrying cost that eats into potential returns. This ongoing expense structure makes condos particularly vulnerable to economic downturns, as fee increases can quickly turn a cash-flow positive property into a money-losing investment.
The comparison between condo and single-family home performance reveals a stark contrast. Historical data shows that single-family homes typically appreciate faster and maintain value better during market downturns. While condos might show strong returns in exceptional circumstances—such as buying in a rapidly gentrifying urban area—Stephan compares these scenarios to winning lottery tickets rather than reliable investment strategies. The consistency of single-family home appreciation makes them a more predictable wealth-building tool, especially for investors seeking long-term stability. In today’s volatile market, this reliability becomes even more valuable as investors look for safer harbors for their capital.
Stephan extends his analysis beyond property types to question the entire premise of buying versus renting in the current market. Using Las Vegas as an example, he calculates that home prices would need to drop 35-40% to make monthly mortgage payments comparable to current rental rates. This analysis reflects the dramatic impact of rising mortgage rates on housing affordability. With 30-year fixed rates hovering around 7%, the math simply doesn’t favor purchasing in many markets. This creates a unusual situation where renting becomes the financially prudent choice for many would-be buyers, challenging conventional wisdom about always preferring ownership.
The current market dynamics represent a significant shift from the environment that made real estate investing so attractive just a few years ago. During the pandemic, historically low mortgage rates below 3% created unprecedented buying opportunities, making almost any real estate purchase profitable. Today’s higher rate environment requires much more selective investing. Properties that might have worked as investments in 2020-2021 could become financial burdens under current conditions. This paradigm shift demands that investors recalibrate their expectations and strategies to align with the new reality of expensive financing and compressed returns.
For those considering condo investments despite the warnings, several practical considerations can help mitigate risks. First, carefully review the HOA’s financial health and reserve funds—underfunded associations can lead to special assessments that devastate returns. Second, consider condos in buildings with fewer amenities to keep HOA fees manageable. Third, look for properties where you can add value through renovations or improvements that differentiate your unit from others in the building. Finally, calculate your total carrying costs including mortgage, taxes, insurance, and HOA fees to ensure positive cash flow even if appreciation is limited.
The rental versus buying analysis deserves deeper examination in today’s market. While Stephan advocates for renting in many situations, this strategy comes with its own considerations. Renters benefit from flexibility and avoiding maintenance costs, but they miss out on equity building and potential appreciation. The decision ultimately depends on local market conditions, personal financial situation, and long-term goals. In high-cost markets with expensive financing, renting and investing the difference might actually generate better returns than owning, especially if invested in diversified portfolios rather than concentrating wealth in a single property.
Market timing plays a crucial role in Stephan’s current cautious approach. He’s waiting for prices to adjust downward before making his next move, reflecting a strategic patience that many investors would benefit from emulating. Historical patterns suggest that real estate markets do eventually correct after periods of rapid price appreciation, especially when accompanied by rising interest rates. However, timing these corrections perfectly is nearly impossible. A more practical approach involves continuously monitoring local market conditions, having financing pre-approval ready, and being prepared to act quickly when genuine opportunities emerge rather than trying to predict market bottoms.
For investors determined to enter the market despite current challenges, several strategies can improve outcomes. Consider targeting properties that need cosmetic improvements rather than structural repairs, as these often sell below market value. Explore assumable mortgages, particularly FHA and VA loans, which might allow you to take over a seller’s lower interest rate. Look into seller financing options that might offer better terms than traditional lenders. Additionally, consider partnering with other investors to pool resources and share risks, particularly for larger single-family investments that might be otherwise unaffordable individually.
The broader economic context suggests that patience may indeed be the wisest strategy currently. With the Federal Reserve maintaining higher interest rates to combat inflation, mortgage rates are unlikely to drop significantly in the near term. This continued pressure on financing costs should eventually translate into more reasonable home prices, creating better buying opportunities. Meanwhile, keeping investment capital liquid allows investors to capitalize on these opportunities when they emerge. Those who rushed into purchases during the peak may find themselves facing negative equity if prices correct substantially, underscoring the importance of strategic timing.
Actionable advice for today’s market includes: thoroughly analyze total ownership costs before any purchase, including taxes, insurance, and potential HOA fees; maintain emergency funds equivalent to 3-6 months of housing expenses to weather market fluctuations; consider starting with REITs or real estate crowdfunding platforms to gain exposure without large capital commitments; focus on markets with strong job growth and demographic trends rather than chasing past performance; and most importantly, consult with financial advisors who understand both real estate and broader investment strategies to ensure your decisions align with your overall financial goals.
