Author Topic: Buy a condo or continue to rent?  (Read 14963 times)

icefr

  • Bristles
  • ***
  • Posts: 325
Buy a condo or continue to rent?
« on: April 22, 2012, 01:28:33 AM »
I am seriously starting to debate buying a condo.

My financial situation

I am a 23 year old single female. I grossed about $100k in 2010 and $115k in 2011. My base salary alone is now over $100k and I'm expecting my total gross for 2012 to be around $132-138k including RSUs.

I've built up a pretty good nest egg at this point ($ = USD):
* 4k CAD in cash savings
* $4k in my checking account
* $24k in cash reserves
* $64k in cash savings for a down payment, plus 4k CAD intended for a down payment that I'll move south soon
* $4k in cash savings for a new car (I'm making a car payment to myself)
* 8k CAD in RRSPs (all in 5 year GICs, so no worries about non-resident trading restrictions)
* $5k in a money market account at Vanguard
* 28k in my 401(k)
* 10k in my Roth IRA

I'm pretty confident that my income for this year won't allow me to put very much into a Roth IRA directly, which is what the $5k in the money market account at Vanguard was meant for. I'm keeping that in cash right now instead of invested in case that will help me with a down payment. So in summary:
* 8k USD/CAD in checking accounts
* 24k USD in cash reserves (savings)
* 77k available for a down payment, closing and moving costs (64k USD + 4k CAD + 4k USD + 5k USD - I'm ignoring exchange rates since the dollars are so close)
* 46k USD/CAD in investments (RRSPs, 401(k), Roth IRA) that I will leave alone

I am maxing out my 401(k) and getting the maximum employer match. Those two add up to less than 20% of my gross income, which I decided was my magic retirement investing number, so I'm putting another $200 into my taxable Vanguard account each month. After that and expenses, about $1,600 is direct deposited to my down payment savings account. That means I'm saving about 45% of my net pay each month. I invest 20% of my gross RSU vests and save the rest.

Buy vs rent

Rent in my area is pretty expensive. I paid about $1,400 for two years and now I'm paying $1,800 (yes, that's how much rent for a comparable apartment went up year-over-year.) Normal rent increases seem to be around 5-30%, but considering that I'm in a one bedroom apartment, I see rent plateauing around $2,100 or so in a few years. It's also possible that rent could go down as the market cycles in a few years, but that seems somewhat unlikely to me.

You might say that paying $1,800 to rent a one bedroom apartment is anti-mustachian, but I really value my personal space and I walk pretty much everywhere since I live in the city, so I never fill up my gas tank more than once per month on average.

When I started thinking about buying, my first thought was houses, but I've realized that I really don't want to deal with yardwork, roof problems, etc. I also realized when I looked at townhouses that as a single woman, I wasn't comfortable buying a place that anyone can just walk up to the door pretty easily. I've decided that I want to buy a two bedroom/two bathroom condo, ideally with two bedrooms of comparable size so that I could rent out the other bedroom if I so chose and allowing for some flexibility in the case of marriage and/or children.

I would say that 2 bedroom condos in the areas I would be interested in run between $275k and $500k. I've used the NYT Buy or Rent calculator to death and really since I have no magic ball to know how rent and property values will change over the next decade, it could take anywhere from 3-12 years for buying to make sense, barring condo prices dropping significantly further than they already have.

Some days I wonder if it makes sense to buy a condo when there are so many variables at this point in my life - will I get married? will I want to have children? will I want to stay in my current city for awhile?

I don't see myself wanting to live in a house in the next five years. The catch on all of this planning is how long I will stay in the States for. Right now, I see myself staying here until I reach FI since moving back to Canada would mean a huge pay cut. I'm not opposed to staying here, but I could also quite happily move back to Canada in 10 years.


Given my situation, do you think that I'm crazy to buy a condo?

astadt

  • 5 O'Clock Shadow
  • *
  • Posts: 68
Re: Buy a condo or continue to rent?
« Reply #1 on: April 22, 2012, 05:12:20 AM »
I dont think its a crazy idea at all. Especially now, with interest rates so low. Heres a couple more points to consider... Maintenance- You'll have to figure this out once you purchase a condo. I'd say its not a huge deal. Homeowners Insurance- This will be a lot more than renters insurance... Condo fees and all of that...

But youve got a high income and plenty of $$ saved up for a down payment. I'd say shoot for a place on the lower side of the price range and go for it...if you want to be very mustachian, get a roommate. If not, I wont judge. Go with a 15 year mortgage to lock up the lowest rates and to get cracking on your equity.

Last point...Good luck!

herisff

  • Stubble
  • **
  • Posts: 111
  • Location: Olympic peninsula, WA
Re: Buy a condo or continue to rent?
« Reply #2 on: April 22, 2012, 07:27:22 AM »
I suggest that you also take a hard look at the condo association, and scrutinize the rules and regulations that govern the building. What are you allowed and not allowed to do? My sister lived in one where she couldn't even change the doorbell on the door. How large is the association. Who runs it - a management company or is it owner run? It can make a difference. Some boards are more easy going than others; some can be downright draconian. Choose your association and unit carefully.

As a side note, I tend to prefer townhouses to condos, since then there would be people only to the sides of you, not sides above and below. I value auditory privacy quite highly. I hate it when people pound the floor above me!

Also, are you sure that you will be staying where you currently live? If you don't plan on being there for the foreseeable future, then continue renting. If you do, then go for it. Good luck.

icefr

  • Bristles
  • ***
  • Posts: 325
Re: Buy a condo or continue to rent?
« Reply #3 on: April 22, 2012, 10:29:14 AM »
Thanks for the input guys. I've done a LOT of math, but what worries me still is the fact that prices could drop another 50%. That seems less likely to me with the influx of high incomes in the area and how much property values have already dropped in the last few years, but you never really know I guess.

Maintenance - I've talked to people who own condos and their maintenance costs seem to be around replacing the appliances, the carpet, refinishing cupboards, painting walls, etc. and special assessments from the condo association. I did some math and it seemed like if the appliances are pretty new, I don't need to set aside much more than $100/month for that.

Homeowner's insurance - If you own a condo, it isn't all that much more than renter's insurance. My insurance company quoted a yearly increase of about $40 to switch, but owning a condo would lower my car insurance by about $100, so it would actually lower my overall insurance cost.

15 year mortgage - this scares me a bit since in one of the situations I've thrown at it, the mortgage payment jumps from $1,333 for a 30 year fixed at 4% to $1,962 for a 15 year fixed at 3.25%. My current proposed budget with a condo (and a 30 year fixed) mortgage cuts my cash flow buffer from $1600 to $1250 and taking on a 15 year mortgage would cut that down even further to about $600. Maybe that's not such a bad idea since you do sure get your equity faster that way. My concern with that as well is that if I want to rent the condo out later, it's not going to cash flow with a 15 year fixed mortgage, but it should with a 30 year fixed mortgage.

Condo association - I believe that I get those documents AFTER putting in an offer and I can back out of the offer and get my earnest money back if I don't agree with them. Would you prefer one run by a management company or by owners? Some of the buildings I've looked at are quite large (hundreds of units) and some are quite small (only a handful of units). Would you recommend that I personally try to talk to people on the board?

Townhouses - I looked at some townhouses. I found that I didn't really like the boxed-in feeling of the middle units. The corner units weren't as bad, with the more windows, but a lot of the ones I saw were pretty narrow. Around here, townhouses are actually just attached houses and you still have yards and building maintenance to deal with yourself, no HOA dues. If they had a HOA instead of shared maintenance agreements, I would have considered them, but I feel like single-floor condo layouts are much more spacious and inviting.

City - My current plan is to initiate the green card process and stay with my employer through it and then maybe look for another company since I would have been with my current employer for quite awhile at that point. The green card process alone pretty much puts me at the break-even point for buying a condo. Plus, I absolutely love my current city and don't really see a reason to leave.

Jimbo

  • Stubble
  • **
  • Posts: 104
  • Location: Montreal, Qc
Re: Buy a condo or continue to rent?
« Reply #4 on: April 22, 2012, 05:14:57 PM »
I'd go with the condo, and take a 30 year mortgage but increase payments... this makes it better inf you move out and want to rent, and yet makes it easy to get equity.

Just curious - Where do you have to be, and what do you have to do, to be a 23 year old who almost grossed 350k already in their life ?


icefr

  • Bristles
  • ***
  • Posts: 325
Re: Buy a condo or continue to rent?
« Reply #5 on: April 22, 2012, 07:12:50 PM »
I'd go with the condo, and take a 30 year mortgage but increase payments... this makes it better inf you move out and want to rent, and yet makes it easy to get equity.

Agreed. I think what I'll end up doing is taking a 30 year fixed, but making the 15 year payments, directing my monthly cash flow buffer and bonuses to the savings buckets I borrowed from until those are re-paid and then investing the difference, with bonuses after that going 50/50 to mortgage pre-payment and investments.

Just curious - Where do you have to be, and what do you have to do, to be a 23 year old who almost grossed 350k already in their life ?

Graduating a bit early from university with multiple internships under my belt, growing my career well and getting good raises, with parents who paid for my undergrad in full (though it was in Canada and only cost them 60k including living expenses) and working in a highly competitive industry (software) in a city where employers are competing for you. If you throw in my minimum wage jobs and internships, I'll have grossed just over 400k by the end of this calendar year.

Some of it was luck in that I chose this field and that I graduated at a time where it wasn't so bad to find a job when you had work experience. Some of it was networking based on my internships. Some of it was hard work. Some of it was choosing industry over grad school.

Jimbo

  • Stubble
  • **
  • Posts: 104
  • Location: Montreal, Qc
Re: Buy a condo or continue to rent?
« Reply #6 on: April 22, 2012, 08:49:02 PM »
Good work!

Make sure you get a mortgage which allows easy prepayments options and no penalty. ING springs to mind for this.

Also, don't be afraid to sell and not rent out if you move across the continent. Sometimes, it's easier...

Seems like you have it pretty good, you figured this out quicker than me.

icefr

  • Bristles
  • ***
  • Posts: 325
Re: Buy a condo or continue to rent?
« Reply #7 on: April 22, 2012, 09:37:41 PM »
Thanks Jimbo! I'm actually really looking forward to putting down some roots and owning the place I live in.

My credit union has decent mortgage rates with great pre-payment policies. It looks like I could save about .25% on the rate by going with a mortgage broker referral instead.

I would definitely sell if I moved back to Canada - no sense dealing with the hassle of being a landlord from another country. Not sure what I would do if I moved to another city within the States, but I don't see that happening until I at least have a green card, which is a few years out at this point and I could almost have a mortgage paid off with my current salary by that point!

gooki

  • Handlebar Stache
  • *****
  • Posts: 2362
  • Location: NZ
Re: Buy a condo or continue to rent?
« Reply #8 on: April 22, 2012, 10:41:44 PM »
Agreed. I think what I'll end up doing is taking a 30 year fixed, but making the 15 year payments, directing my monthly cash flow buffer and bonuses to the savings buckets I borrowed from until those are re-paid and then investing the difference, with bonuses after that going 50/50 to mortgage pre-payment and investments.

Why do you want to pay an extra 0.75% interest on what will be a fairly large mortgage, that you won't take you 30 years to repay, let alone 15 years?

And I wouldn't be worrying about your savings buckets. If you're not investing the extra money in something generating more that 5% interest, then I'd be putting it all on the mortgage. With your income you can get it paid of in a flash - 5-7 years should be easily achievable. And the freedom this will give you will be priceless - trust me.

Mr Money Moustache has a few blog posts covering this. Here's a good one to start reading, I'll see if I can dig up some more:
http://www.mrmoneymustache.com/2011/05/16/mmm-reader-case-study-the-man-who-didnt-realize-he-was-already-rich/
http://www.mrmoneymustache.com/2011/05/24/mmm-challenge-get-yourself-a-lower-mortgage-rate/

Also read this one on tidying up your accounts, so you can make the most of your money:
http://www.mrmoneymustache.com/2011/05/04/instant-wealth-boost-by-tidying-up-your-bank-accounts/
« Last Edit: April 22, 2012, 10:46:30 PM by gooki »

icefr

  • Bristles
  • ***
  • Posts: 325
Re: Buy a condo or continue to rent?
« Reply #9 on: April 22, 2012, 11:56:11 PM »
Why do you want to pay an extra 0.75% interest on what will be a fairly large mortgage, that you won't take you 30 years to repay, let alone 15 years?

And I wouldn't be worrying about your savings buckets. If you're not investing the extra money in something generating more that 5% interest, then I'd be putting it all on the mortgage. With your income you can get it paid of in a flash - 5-7 years should be easily achievable. And the freedom this will give you will be priceless - trust me.

Mr Money Moustache has a few blog posts covering this. Here's a good one to start reading, I'll see if I can dig up some more:
http://www.mrmoneymustache.com/2011/05/16/mmm-reader-case-study-the-man-who-didnt-realize-he-was-already-rich/
http://www.mrmoneymustache.com/2011/05/24/mmm-challenge-get-yourself-a-lower-mortgage-rate/

Also read this one on tidying up your accounts, so you can make the most of your money:
http://www.mrmoneymustache.com/2011/05/04/instant-wealth-boost-by-tidying-up-your-bank-accounts/

That's a very good point. Are you suggesting that other than maxing out my 401(k), I should throw everything at the mortgage?

I guess the car savings bucket could be thrown out since I shouldn't need to buy a new car until after I've paid off the mortgage.

I just did some math and you are totally right. I could pay off a $275,000 15-year fixed mortgage at 3.375% in 5 years and 4 months at my current income and spending level, assuming no raises. If I throw in $200 net raises each year, that brings the mortgage pay-off down to 4 years and 11 months. Throwing in some other expected bonuses, 4 years and 5 months. If I stop contributing to my 401(k) for the duration of the mortgage, I could pay it off in 3 years and 5 months. I could also take whatever income taxes I save from the mortgage interest and property taxes credit and throw that at the mortgage for the 2-3 years where that would allow me to itemize. That is some pretty darned awesome math, if I ever did see some. But with a 30 year fixed mortgage at 4%, it would take only an extra month to pay off the mortgage.

With no mortgage right now, I would have about $3,000 of free cash flow each month, after maxing out my 401(k), plus bonuses. I would estimate that at at least $66k in free cash flow per year while working. That could generate a pretty awesome stash very quickly.

I see how this could be an enthralling game. Maybe my challenge when I take out a mortgage should be to pay it off in under 4 years! :)

icefr

  • Bristles
  • ***
  • Posts: 325
Re: Buy a condo or continue to rent?
« Reply #10 on: April 23, 2012, 12:15:07 AM »
Hmmm if I can pay it off in under 5 years, does it then make sense to take out a 5/1 ARM instead of a 15 year fixed mortgage, to lower the rate down to 2.75%?

(I could probably find lower rates than my credit union with a mortgage broker, but I'm just using rates from the same lender for comparison purposes. According to Zillow, it looks like I could get the rate on a 5/1 ARM down to 2.375%.)

That cuts the total interest paid down to under $15,000! Holy cow!

gooki

  • Handlebar Stache
  • *****
  • Posts: 2362
  • Location: NZ
Re: Buy a condo or continue to rent?
« Reply #11 on: April 23, 2012, 01:46:51 AM »
If dropping down to 5/1 will reduce your interest rate a further 0.5% then yes I'd recomend it. I believe this is the loan structure Mr Money Moustache used in the past, and I used the equivilant version in my country to be paid off in 5.5 years.

As I live/work in another country I can't advise on 401k contributions, but any retirement savings that have an enployeer match I woul keep up, and anything that allows for tax free contributions I would weigh your options up carefully. I expect other forum members will be able to advise how best to deal with this while maximizing debt repayment.

But yes I do highly recomend throwing everything you've got at the mortgage. As you figured out you'll be debt free in just a few years, which leaves a lot of time to build the rest of you wealth.

astadt

  • 5 O'Clock Shadow
  • *
  • Posts: 68
Re: Buy a condo or continue to rent?
« Reply #12 on: April 23, 2012, 01:55:03 AM »
Icefr,

Youre in great shape and better than 99.9% of home buyers because of your situation and planning. That being said, look into any ARMs and apply it to your situation, just know that in a couple of years rates WILL BE HIGHER, so if your time frame gets elongated for any reason you may end up paying more.

An argument against throwing all your money at the mortgage (what a great and unique situation youre in) is to what extent you will end up neglecting your other assets. What I would do is look ahead ten years and figure out the amount you want your equity in your house to be in proportion to your other investments. Folks that throw all their money at their mortgages end up with lopsided asset allocations for a long time afterwards. Put some thought into that before you try to pay it off as quickly as possible.

And remember go 401k to the match first, then max your Roth than a mix between taxable and 401k for early retirement shooters.

moneymohawk

  • 5 O'Clock Shadow
  • *
  • Posts: 17
  • Location: Boston
Re: Buy a condo or continue to rent?
« Reply #13 on: April 23, 2012, 07:43:45 AM »
Two thoughts...

1.) Have you thought about looking at smaller condos?  Based on prices here in Boston, even going down to a two bed, ONE bath should save you a lot of money.  But one bedrooms are dramatically lower still. It doesn't sound like you're currently engaged or planning on having children soon. Are you sure you want to go big now and spend more on housing every year until you finally need it?

2.) Every situation is different, but my fiancee and I are buying a condo and chose a 30-year, despite having a similar pay-off timeframe to you. While the interest rate discount of a 15-year would have been great if we planned on paying over the full term, when I did the math, the savings at our accelerated pace would have amounted to a few thousand dollars. We choose the flexibility of a lower minimum monthly payment instead.

Sounds like you're in a great position!  Especially at 23.  Good luck!
« Last Edit: April 23, 2012, 07:46:31 AM by moneymohawk »

icefr

  • Bristles
  • ***
  • Posts: 325
Re: Buy a condo or continue to rent?
« Reply #14 on: April 23, 2012, 09:21:11 AM »
Youre in great shape and better than 99.9% of home buyers because of your situation and planning. That being said, look into any ARMs and apply it to your situation, just know that in a couple of years rates WILL BE HIGHER, so if your time frame gets elongated for any reason you may end up paying more.


Agreed. With a ridiculously quick pay-off plan, the mortgage rate actually doesn't seem to make a huge difference. The 30 year fixed at 4% takes one more month to pay off the mortgage than a 15 year fixed at 3.375%, which takes one more month than the 5/1 ARM at 2.75%. At that difference, it could make more sense to go with the 15 year fixed for a mix of safety and interest rate rather than the 5/1 ARM.

And remember go 401k to the match first, then max your Roth than a mix between taxable and 401k for early retirement shooters.

My income is already too high for direct Roth IRA contributions and I'm not sure of how exactly of how great an idea doing backdoor contributions would be if/when I move back to Canada, so I've been going with maxing out my 401(k) and putting extra into taxable to make sure I'm investing 20% of my gross income.

An argument against throwing all your money at the mortgage (what a great and unique situation youre in) is to what extent you will end up neglecting your other assets. What I would do is look ahead ten years and figure out the amount you want your equity in your house to be in proportion to your other investments. Folks that throw all their money at their mortgages end up with lopsided asset allocations for a long time afterwards. Put some thought into that before you try to pay it off as quickly as possible.

Perhaps I should stick with that 20% of gross income for investing number while paying off the mortgage to keep the asset allocation down because my projections for the end of 2016 are (assuming I max out the 401(k), but everything else goes to the mortgage):
* 7% checking/cash
* 68% condo value
* 2% Roth IRA
* 23% 401(k)

I could probably still pay off the mortgage in 5-6 years with investing 20% of my gross income, which would result in the condo being less concentrated in my assets, but even that wouldn't dilute the condo that much since I estimate that putting the condo at 58% of my assets. It would take about 3 years after pay-off to get the condo down to 45% of my assets.

icefr

  • Bristles
  • ***
  • Posts: 325
Re: Buy a condo or continue to rent?
« Reply #15 on: April 23, 2012, 09:26:06 AM »
1.) Have you thought about looking at smaller condos?  Based on prices here in Boston, even going down to a two bed, ONE bath should save you a lot of money.  But one bedrooms are dramatically lower still. It doesn't sound like you're currently engaged or planning on having children soon. Are you sure you want to go big now and spend more on housing every year until you finally need it?

One bedrooms aren't dramatically lower in the areas that I'm looking at. Square footage wise, two bedroom places aren't much bigger than one bedrooms. Utilities aren't that expensive here either. I want the space to use one bedroom as an office/spare bedroom. My parents visit a lot, as do friends. I hate the tiny space of my current one bedroom and since I can afford it, I would far, far prefer a second bedroom. I've also noticed that two bed ONE bath places stay on the market longer than two bed TWO bath places, so it seems like the second bathroom would improve the ability to resell and it's not like I need to clean a second bathroom if I never use it.

2.) Every situation is different, but my fiancee and I are buying a condo and chose a 30-year, despite having a similar pay-off timeframe to you. While the interest rate discount of a 15-year would have been great if we planned on paying over the full term, when I did the math, the savings at our accelerated pace would have amounted to a few thousand dollars. We choose the flexibility of a lower minimum monthly payment instead.

Yup, I did the math and saw that there isn't much difference in the payoff schedules/cost with a 30 year fixed, a 15 year fixed or a 5/1 ARM. I have some food for thought on that at this point.

Sounds like you're in a great position!  Especially at 23.  Good luck!

Thanks!!!

AJ

  • Pencil Stache
  • ****
  • Posts: 906
  • Age: 35
  • Location: Oregon
Re: Buy a condo or continue to rent?
« Reply #16 on: April 23, 2012, 09:52:20 AM »
I'd like to just throw out one more thing for you to consider. At 23, your life may be changing a lot in the next few years (if you think you'll want to get married and/or have kids). If I were in your position, I would be looking to buy with an eye toward potentially converting the place into a rental. That will give you some flexibility if your SO also owns his/her own home.

gooki

  • Handlebar Stache
  • *****
  • Posts: 2362
  • Location: NZ
Re: Buy a condo or continue to rent?
« Reply #17 on: April 23, 2012, 03:20:22 PM »
My calculations show there's about a $10,000 saving to be had between the highest interest rate 4% vs the lowest 2.35% assuming $300,000 mortgage and 4 year repayment plan.

Now you might not view that as much, but $10,000 is a fair bit of loose change for doing nothing differently (all scenarios assumed the same repayment length).

If you are considering a longer therm then I'd be even more aggressive about getting a lower rate.

As for what size home you are wanting to buy - I think your going down the right track (although a single bathroom would easily be sufficient). In a down real estate market I would buy the best home available (note best, not most expensive), that you can easily afford. When the market rebounds you'll be in for the largest capital gains. Just make sure you're buying at a price that reflects the down market, always offer less than the asking price (10 to 20% below advertised) and most importantly take your time.


smedleyb

  • Guest
Re: Buy a condo or continue to rent?
« Reply #18 on: April 23, 2012, 08:26:24 PM »
Ice,

Clearly you're ready/capable of purchasing a condo.  I think you know that.  You're young, smart, and quite the badass, if I may say so myself.  Most people your age are clueless and insufferable fools when it comes to personal finance. 

As far as "should you buy?", here's my take:  stay young and liquid for now.  Work on building your career, establishing new relationships, seeking companionship, etc.   Home ownership is a financial and mental commitment which I don't think you need to rush into at this point.  Build up that savings.  In two years you'll be approaching 250K liquid net worth; maybe revisit the home ownership premise then when you won't need to tie up the majority of your accessible cash in equity. 

But if you do pursue ownership, buy quality at a good price and seriously consider a roommate in the beginning, as well as ditching your auto altogether.  Heck, you walk everywhere as it is already, right?  That's one less expense/headache can't hurt. 

Best of luck!

icefr

  • Bristles
  • ***
  • Posts: 325
Re: Buy a condo or continue to rent?
« Reply #19 on: April 23, 2012, 11:06:04 PM »
If I were in your position, I would be looking to buy with an eye toward potentially converting the place into a rental. That will give you some flexibility if your SO also owns his/her own home.

That's definitely something I'm looking at. I feel like both bedrooms being a good size and having two bathrooms on a two bedroom unit would make it easier to rent out, as well as being in a good location. I've also been checking out Craigslist to see how much apartments are renting for in the area and comparing that to a 30 year fixed mortgage payment + HOA dues + (property taxes / 12). I am also the sort to keep a place in good condition, which helps for renting out.

My calculations show there's about a $10,000 saving to be had between the highest interest rate 4% vs the lowest 2.35% assuming $300,000 mortgage and 4 year repayment plan.  Now you might not view that as much, but $10,000 is a fair bit of loose change for doing nothing differently (all scenarios assumed the same repayment length). If you are considering a longer therm then I'd be even more aggressive about getting a lower rate.

Very good point, thank you. I think that I will decide on a specific loan and lender after picking a property since the mortgage size affects the overall cost as well.

Do you have any advice for how to pay for renovations? If I want to renovate the kitchen, that is best to do before moving in, which means that I would either need the cash available for that upfront or a way to roll that into the mortgage somehow. Bathroom renovations, especially when you have two, can easily be done later, as the cash allows.

As for what size home you are wanting to buy - I think your going down the right track (although a single bathroom would easily be sufficient). In a down real estate market I would buy the best home available (note best, not most expensive), that you can easily afford. [...] and most importantly take your time.

I'm seeing what you mean by best, not most expensive. There are so many distinct properties on the market. I've been watching the market and am getting better at understanding how much is an appropriate price for a particular unit and area. I'm happy enough with my current rental apartment that I'm content to stay here until I find the right place to buy and the longer I wait, the more cash that I will have on hand :)

Clearly you're ready/capable of purchasing a condo.  I think you know that.  You're young, smart, and quite the badass, if I may say so myself.  Most people your age are clueless and insufferable fools when it comes to personal finance. 

Thank you :) I really wish I could find more people my age who care about these things. That could also explain why I seem to fare much better on dates with guys several years older than me...

As far as "should you buy?", here's my take:  stay young and liquid for now.  Work on building your career, establishing new relationships, seeking companionship, etc.   Home ownership is a financial and mental commitment which I don't think you need to rush into at this point.  Build up that savings.  In two years you'll be approaching 250K liquid net worth; maybe revisit the home ownership premise then when you won't need to tie up the majority of your accessible cash in equity. 

But if you do pursue ownership, buy quality at a good price and seriously consider a roommate in the beginning, as well as ditching your auto altogether.  Heck, you walk everywhere as it is already, right?  That's one less expense/headache can't hurt.

For the vast majority of places that I want to go, public transit is awkward, so I walk if it's under 2.5 miles and I drive if it's further or requires a highway. I also drive to visit friends in nearby cities and have averaged about 400 miles per month. Since the car is already paid for, monthly costs of running at this point are under $200 and if I was using a car share program for the times I do need a car, I would average about $300/month in transportation costs, so I'd rather keep the car.

I would consider a roommate if I knew any women who weren't already living with significant others. Ah, the joys of working in tech :)

I'm not in a particular hurry, so if I don't find the right place, I'll just keep renting, saving, and looking.

gooki

  • Handlebar Stache
  • *****
  • Posts: 2362
  • Location: NZ
Re: Buy a condo or continue to rent?
« Reply #20 on: April 24, 2012, 02:09:14 AM »
Do you have any advice for how to pay for renovations? If I want to renovate the kitchen, that is best to do before moving in, which means that I would either need the cash available for that upfront or a way to roll that into the mortgage somehow. Bathroom renovations, especially when you have two, can easily be done later, as the cash allows.

In my situation we waited 2 years and then recovated the bathroom, and then in an other 2 years we re did the kitchen, dining and flooring, and a year latter we added a deck. Paid cash each time at the expense of putting that lump sum down on our mortgage.

However when we purchased we were borrowing the maximum we felt confortable with, interet rates were high (7.45% for 5 years was a good deal). So waiting was the only sensible option.

In your case I would weigh it up like this.
- Am I buying at the top of my price range? If so wait until you're well ahead of your repayments and save up the cash.
- Am I buying towards the bottom of my price range? Save up the extra cash.

Why I don't recommend rolling it into the mortgage? I'd always recomend living in a place at least 6 months before commiting to renovating (unless your buying an absolute dive that needs work to be liveable). And well you'll have no prolem saving up the cash.


gooki

  • Handlebar Stache
  • *****
  • Posts: 2362
  • Location: NZ
Re: Buy a condo or continue to rent?
« Reply #21 on: April 24, 2012, 03:32:33 PM »
One last thing to add on the subject of renovations.

I  wouldnt renovate just for the sake of it. I'd be rennovating to add value. I our case we purchased below the average market price with the expectations that rennovations would bring the house value to be above market average. I.e. taking the home from a first home buyers home, and making it appeal to second home buyers.

AJ

  • Pencil Stache
  • ****
  • Posts: 906
  • Age: 35
  • Location: Oregon
Re: Buy a condo or continue to rent?
« Reply #22 on: April 24, 2012, 05:33:16 PM »
I'd always recomend living in a place at least 6 months before commiting to renovating (unless your buying an absolute dive that needs work to be liveable).

This. When we bought our first house we had a bad case of new-home-owner-itis, and we started a myriad of projects - everything we'd always wanted to do as a renter but never could. When we bought our next place, we vowed not to make the same mistake and committed to making no changes for the first year. Its good to get the feel of a place before making major changes. Waiting 6 months is good advice I wish we had followed the first time.

icefr

  • Bristles
  • ***
  • Posts: 325
Re: Buy a condo or continue to rent?
« Reply #23 on: April 24, 2012, 11:06:28 PM »
I  wouldnt renovate just for the sake of it. I'd be rennovating to add value. I our case we purchased below the average market price with the expectations that rennovations would bring the house value to be above market average. I.e. taking the home from a first home buyers home, and making it appeal to second home buyers.

I understand the concept of renovating to add value, but what do you mean by "taking the home from a first home buyers home, and making it appeal to second home buyers"?

gooki

  • Handlebar Stache
  • *****
  • Posts: 2362
  • Location: NZ
Re: Buy a condo or continue to rent?
« Reply #24 on: April 25, 2012, 04:05:26 AM »
Generally speaking.

First home buyers are (people who are purchasing a home for the first time):
- Singles or couples without children
- Willing to live in a house that needs some work
- Have very little capital
- Happy to be no longer throwing money away in rent

Second home buyers (people who are purchasing their second home, also in the process of selling their first home.)
- Have or are about to start families
- Require more rooms
- Care about what schools are in the local vacinity
- Dont have time for major renovations before they move in
- Have a higher expectation of quality
- Have a prefrence for outdoor space
- Have a higher income and significantly more capital

So by buying something that on the surface is ideal for a first home buyer, but through improvements can be made to appeal to second home buyers you can greatly increase your capital gain as you are now appealing to more wealth buyers.

This is why I liked your idea of a two bedroom place over a single bedroom. If you were to buy, renovate and then sell a single bedroom place, it will only ever appeal to single people and low budget couples (but can make good rentals as these people make up a large portion of the rental market).

A two bedroom place however will appeal to wealthier singles, couples, couples starting a family, established single child families, as well as retired couples. Some of these people will be second home (or greater) buyers. They have a lot more money to spend on a home vs the first home buyer, so your potential for increased capital gains through thoughtfull renovations.

And the last thing don't overpay for renovations. Always get three quotes, always check their referrences.
« Last Edit: April 25, 2012, 04:10:36 AM by gooki »

herisff

  • Stubble
  • **
  • Posts: 111
  • Location: Olympic peninsula, WA
Re: Buy a condo or continue to rent?
« Reply #25 on: April 25, 2012, 07:23:16 AM »
Condo association - I believe that I get those documents AFTER putting in an offer and I can back out of the offer and get my earnest money back if I don't agree with them. Would you prefer one run by a management company or by owners? Some of the buildings I've looked at are quite large (hundreds of units) and some are quite small (only a handful of units). Would you recommend that I personally try to talk to people on the board?
Sorry I didn't catch this before: You may be able to look at the CC&Rs before an offer by going to the management office or by asking the Board president. If you want to have pets, look to see how pets are treated (weight limit, number limit, type-of-pet restriction, etc.). There may be a limit on how many persons can live in a place, or where things can go (grills, antennas, etc). If you can look at them without having to pay for them, then go for it (which may mean sitting there looking at them with a Board officer nearby).

As for size - it really depends on what you're seeing. However, the larger an association, the more (ahem) diverse the owners' opinions can be. I've seen large associations taken over by a small cadre, and the same with small ones. The best people to talk to are owners, if you can find one to talk to. A Board member would most likely give you the best possible view of what the place is like, which may be overly optimistic. If a condo is run by a management company, definitely talk to one or more owners to see if they like how the management company is running things.

Happy hunting!


gooki

  • Handlebar Stache
  • *****
  • Posts: 2362
  • Location: NZ
Re: Buy a condo or continue to rent?
« Reply #26 on: April 25, 2012, 04:23:58 PM »
And an MrMM article I had hoped to post earlier in the conversation but couldn't find the link:

http://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/

icefr

  • Bristles
  • ***
  • Posts: 325
Re: Buy a condo or continue to rent?
« Reply #27 on: April 25, 2012, 07:52:58 PM »
Thanks for the tips on renovations, gooki. I agree with you on the two bedroom. It's also more flexible for me with the variables ahead at this point and I like space.

I'll definitely try talking to the condo board before putting in an offer.

And an MrMM article I had hoped to post earlier in the conversation but couldn't find the link:

http://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/

That makes sense. As someone who can only legally be in the US for an extended period of time with a work visa, I feel like I need to self-insure for job loss than most Americans do, since if I can't find a job, I would need to move back to Canada and it may take awhile to sell the condo. I had actually planned on having 12 full months of expenses saved before buying a place, but I decided that that was overkill since if I really can't find work here, I would move back to Canada and it might be easier to find work there and just making mortgage payments in the States, it would be overkill to have 12 full months of expenses saved.

What are you suggesting that a line of credit against a house should be used for? Cash flowing car purchases with my income level and putting true emergencies on a line of credit instead of maintaining a lot of cash savings?

gooki

  • Handlebar Stache
  • *****
  • Posts: 2362
  • Location: NZ
Re: Buy a condo or continue to rent?
« Reply #28 on: April 25, 2012, 09:23:14 PM »
What are you suggesting that a line of credit against a house should be used for? Cash flowing car purchases with my income level and putting true emergencies on a line of credit instead of maintaining a lot of cash savings?

Yes using a line of credit instead of maintaining a large amount of cash savings.

If you are being aggressive in paying down the mortgage then you will want some backup funds because you can't cash out instantly, and this is where the line of credit can be useful (probably the lowest interest rate backup loan you can have). This can be used in lui of income protection insurance (you'll have to way up the costs/benefits of either option).

It's not something I've ever used as I purchased with my wife so the chance of worst case scenario (both of us loosing our jobs at the same time) was highly unlikely.

However if you lock in a very low interest rate I'd plan to progressively grow a modest cash backup. The key here is to be aggressive on the loan while the balance is high (with a line of credit as backup), and each month put a little aside for your cash backup. By the time your work permit expires you will have a modest cash balance available, while not having overpaid in interest.

If interest rates were much higher I'd forgo having any significant amount of cash backup.

This is also why having a  room mate can be helpful - gives you a bit of cash flow how, and keeps money coming in for what ever reason you income dries up.

The reason why I like being aggressive on debt is that in these worst case scenarios you're so far ahead of the required repayments that you can lower them almost instantly to an easily achievable level should the need arise.
« Last Edit: April 25, 2012, 09:25:23 PM by gooki »

icefr

  • Bristles
  • ***
  • Posts: 325
Re: Buy a condo or continue to rent?
« Reply #29 on: July 22, 2012, 04:50:12 PM »
An update on my condo debate:

I did end up buying a condo. The numbers all kind of just fell into place. The purchase price of the condo was in the price range I was looking at. It was a little higher than I wanted to ideally spend (low $300s), but it was lower than the most I was comfortable spending ($425k), and the HOA dues were in the low range from my research, which helped somewhat. I've since moved in and so far, I'm really glad I made this decision, as far as the living situation (it's a 2 bedroom > 1000 sqft apartment, whereas my last apartment was closer to 700 sqft).

At the time of closing, my finances were split up as follows:
* $8k in checking accounts (CAD+USD)
* $24k in cash reserves (easily accessible savings accounts)
* $77k set aside for a down payment in a savings account
* $55k between RRSPs, Roth IRA, 401(k), and a normal Vanguard account

I didn't pay any closing costs, thanks to the real estate broker I used and the seller. I put exactly 20% down, leaving some money left in the "down payment" account. I chose to do this so that I had some cash left over to help ease me through moving and then I threw what I felt I didn't need at the mortgage.

My mortgage is a 5/1 ARM at 3.00%. I have already made several pre-payments and I haven't even made my first "regular" payment yet. I should have 25% equity by the end of August. My plan is to throw all of my bonuses, plus what was "cash savings" from my paycheck at the mortgage and it should be gone in 3.5-5 years, while still maxing out my 401(k). Part of my reasoning for paying down the mortgage is that it seems to be a better tax shelter than investments in case I move back to Canada. By the time I have paid off the mortgage, I will be in my late 20s, so maybe I will have a better idea on whether or not I plan to move back to Canada in the near future.

My rent had I not bought the condo would have gone up another $150/month, so my monthly carrying cost on the condo is now about $150/month less than it would be to rent my smaller apartment.

I've debated getting a roommate. This place is big enough that even for someone who likes a lot of personal space, I think I could have a roommate. I want to spend a few months settling in though before I consider that option. I figure that I could charge about $850/month in rent for the second bedroom, all-inclusive, which would shave another 9 months or so off the mortgage. If I don't end up getting a roommate and a future significant other wants to move in to my place, this place would be a good size for two people and even a reasonable size for a toddler.

I did some shopping around for the mortgage, but in the end, I ended up going with the credit union that has my daily checking account and I'm so glad I did because all I have to do to make a principal only payment is to do a normal transfer from my checking/savings account! It being super easy to pre-pay I think will be a good motivating factor to help in paying it off quickly.

Thanks guys for all of the comments and advice! I probably would have never ended up with the 5/1 ARM without the points of gooki.

gooki

  • Handlebar Stache
  • *****
  • Posts: 2362
  • Location: NZ
Re: Buy a condo or continue to rent?
« Reply #30 on: July 22, 2012, 07:39:14 PM »
Nice to see you found a 2 bedroom space within your budget.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27549
  • Age: -999
  • Location: Traveling the World
Re: Buy a condo or continue to rent?
« Reply #31 on: July 22, 2012, 10:07:57 PM »
Congrats!  Hope it works out for you.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.