Hi everyone. I am asking this question on behalf of my father...
Background
- Father has been with a company around 30 years, they are closing down his office so he is forced to relocate from NY to MD (specific area is called Lusby near the Patuxent River). He is turning 58 later this year and does not want to retire for about another 7 years or so
- My grandpa also passed away last year and my father received a substantial amount from him so he also has new $ to invest
- There are 3 options my Dad is considering:
1) Buy a condo for around $200K cash
2) Rent an apartment (cheap one around $1200/mo) and invest $200K
3) Buy Condo with 20% down and invest the other $160K
My father will continue to own his home on Long Island throughout this period and commute back and forth every other weekend or so.
My View
I believe renting is the least desirable choice because at the end of this process he will have spent around $15-16K average per year for an apartment and have nothing to show for that when he leaves. I think he should buy the condo because it will give him some portfolio diversification as he currently has everything investment in an age-appropriate stock/bond allocation through a work 401(K). He has been pre-approved for a 4% mortgage.
My dad has no intention of keeping this property after he retires, he will sell it or leave it and buy a retirement home somewhere else and probably still keep his NY home. Given the information provide what advice could you offer? Are there any other factors that should be considered?
thanks in advance!
Mathematically, 1, 2, and 3, will have a similar (not exactly the same) effect on his NW on a 5+ yr horizon (assuming neither his property significantly appreciates/depreciates and the market doesn't have a huge run).
#1 - If he puts cash down, he'll have low payments for HOA/utilities/taxes, and the excess cash flow from income - expenses will be invested, right?
#2 - I'm not sure how the $1.2k rent compares to a mortgage interest+HOA+tax+insurance (the principal is just an asset exchange), but if the total of housing
expenses is under $900, it may be worthwhile to consider buying, especially over a 5+ yr time frame.
#3 - Since Dad plans on leaving once he retires, this is just going to be lost interest for the next few years
Compute total purchasing expenses + mortgage origination fees + mortgage interest + expected selling fees/commissions... if this total is considerably less than the rent he would have to pay, it may be worth considering a purchase.I don't know about that area specifically, so I can't really comment on how likely the property is to maintain value, or risk of depreciating, so you'll have to judge that. Do the calculation assuming he gets the exact same $200k in 5 years (zero appreciation).
There are a lot of details that go into it, but big picture:
- Is the property rentable if he can't sell to recoup his cost (even though he intends to)? If yes, and he can stay cash flow positive by renting, then this lowers the risk of buying. If no, then it increases the risk of buying.
- Considering his age, I doubt the majority of his investments are expected to return the stock returns, so buying with cash and avoiding 4% interest may be worthwhile