The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: chicagomeg on December 10, 2012, 10:15:33 AM
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Can I get some wisdom from my favorite group of wise folks?
Here's the scenario:
-HHI: $100kish
-Debts: Student loans, $6k at 8.49% (to be paid off in January), $29k @ 5.5% (estimated pay off date August 2013), no interest accruing until April as I'm on IBR right now based on my wages in 2011 when I was still a student for 1/2 the year
-Emergency fund of $13.5k, not adding to it right now
-Paying $3200/month towards debt
-Necessary living expenses are within $100/month of being covered entirely by my salary (1/3 of total HHI)
-Getting married 5/18/13 :)
-Both contributing to our 401k's to get employer match; will increase to max after student loans are fully paid off next year.
-Monthly rent is $960/month for 2 bedroom in a condo building
In our building, a 1 bedroom has come up for sale for $44,900. Taxes are $1900/year, Condo dues of $183, 15 year payment at 2.75% would be $244/month with 20% down. Total, not including insurance, of $585/month
We're planning to stay in our current city only 3-4 years. I don't expect this property to appreciate noticably in that time nor do I expect rent would increase substantially. Based on emails w/landlord, condo is professionally managed and seems to be managed well, he gets prompt responses to any maintenance requests. Neighbors are all great so far.
Normally, I would never consider taking on more debt when we still owe on my student loans at those interest rates. But what a steal! If we bought this condo, we could rebuild our e-fund in less than 2 years from the rent savings alone (Almost $400/month). $40k is what we were planning on saving up for a down payment and our target for that was Dec. 2015. We've also been toying w/the idea of a gut reno property somewhere, but I don't know if we're really going to be here long enough to finish a project like that. NY Times Rent v. Buy says breakeven is less than 1 year; after 3 years the average annual savings is $4,346. We didn't want a condo because of all the unknowns with neighbors, noise, management, etc., but there's none of that since we already live here.
Can I get your thoughts on buying this condo?
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Those numbers look like a pretty sound buy option to me. Just some real quick math to add everything up... Renting over 4 years = $46k, Buying over 4 years = $37k (ignoring maintenance and insurance) and a decent amount of that would be equity you would own in the end.
The only thing I might suggest would be, if you buy it and wipe out your emergency fund in the process, I would cut back on some of the debt repayment until it is built back up again.
You might also make sure you really do want to stay there at least a few years before jumping in. You guys are just getting married, who knows what else might change in your life that could result in you wanting to live elsewhere. Though - at your income level - a condo at that price wouldn't hold you down too much if you really needed to move so maybe it doesn't matter.
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Financially it sounds pretty good, main thing is whether you want to take on the extra hassle of owning property and dealing with it when you leave. If you are absolutely sure you will stay for 3-4 years, and are absolutely sure the apartment would work for that length of time, then I would probably go for it. I assume you could rent it pretty easily to cover the mortgage if necessary, and could pay a management company to take care of the details once you are out of town. If you absolutely weren't interested in maintaining it as a rental, they you may not want to tie yourself down to it knowing you will sell in a few years.
How many condos are available in the building right now? Is this the only one? Have any sold in the past couple years? What are rentals this size going for? Remember you are comparing apples to oranges, your current two bedroom with a one bedroom. Any other differences?
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Have you spoken with lenders about getting a loan for this property? Most lenders will not take on anything this small, and will charge higher rates and fees if they do. Also, what shape is this condo in? How much work would it need to make it livable? What would it rent for if one of you got a job offer somewhere else and you suddenly needed to move? What else is for sale and has sold in this and nearby complexes? Is it really a steal, or is there just not a lot of demand for 1 bedroom units in the area? Would you have to break a lease and pay a penalty to move?
In your shoes, I would need answers to these questions and others as part of my rent vs buy analysis.
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Financially it sounds pretty good, main thing is whether you want to take on the extra hassle of owning property and dealing with it when you leave. If you are absolutely sure you will stay for 3-4 years, and are absolutely sure the apartment would work for that length of time, then I would probably go for it. I assume you could rent it pretty easily to cover the mortgage if necessary, and could pay a management company to take care of the details once you are out of town. If you absolutely weren't interested in maintaining it as a rental, they you may not want to tie yourself down to it knowing you will sell in a few years.
How many condos are available in the building right now? Is this the only one? Have any sold in the past couple years? What are rentals this size going for? Remember you are comparing apples to oranges, your current two bedroom with a one bedroom. Any other differences?
To my knowledge, this is the only one available right now, although I think one of our neighboring ones might be vacant as well. Our landlord just bought ours over the summer for $55k in a short sale. The price/sq. foot is comparable to others in the neighborhood, although I probably wouldn't consider one in a different building due to all the things that could go wrong.
I'm not certain we'd be able to rent it, our landlord told us he had tons of trouble getting approval to buy & rent out our unit. Maybe I could just sell it to him in a few years though lol.
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Have you spoken with lenders about getting a loan for this property? Most lenders will not take on anything this small, and will charge higher rates and fees if they do. Also, what shape is this condo in? How much work would it need to make it livable? What would it rent for if one of you got a job offer somewhere else and you suddenly needed to move? What else is for sale and has sold in this and nearby complexes? Is it really a steal, or is there just not a lot of demand for 1 bedroom units in the area? Would you have to break a lease and pay a penalty to move?
In your shoes, I would need answers to these questions and others as part of my rent vs buy analysis.
I think the mortgage piece is a big unknown; I haven't looked into that yet. The condo is good shape; they were just renovated a couple years ago and from the photos it looks comparable to our current unit. I think it'd rent for around $750-800 on the conservative end. I don't know that it's a "steal" in a financial sense, it's a fair price, but the fact that I'd be able to buy it knowing what I'm walking into makes it more attractive to me.
We would have to break our lease; there's nothing written in our lease regarding a penalty but I'm sure there's a city ordinance that would specify the limitations. Likely we'd be responsible for the rent until the landlord was able to re-lease it, which I don't think would take more than a month or two. Even in year one the projected savings are something around $2000, so I think we'd still come out ahead.
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I would start to answer the questions about rental of the purchased unit, breaking lease on your current one, mortgage possibilities, etc. Find out from a realtor what similar units are selling for, and what else is available.
It might be a great deal, but I wouldn't do anything without a lot more information.
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We're definitely going to do a lot more research, I just wanted to make sure I wasn't being a complete idiot to consider it. :)
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I think it sounds like it is probably a very good idea. Some more questions to think about... Would you mind being in a smaller place? If you get pregnant in the next couple years would you be willing to stay in a 1 bedroom for a year or 2, or is there a way to convert it into a 1 bedroom plus a little nursery? Or is there no way that will happen? I would talk with a realtor about how well 1 bedrooms sell in your area. A 2 bedroom might be a lot easier to sell, or not.
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It's definitely too small to convert into 2 rooms, I can tell that from the pictures. We'd be fine in a 1 bedroom; that's what we had before. Our plan is to wait until we move back home closer to family before having kids, but I know it's not impossible. People have certainly had infants in a 1 bedroom before though, so I think we could make that aspect work. Definitely would need to assess how a 1 bedroom would sell vs. a 2 bedroom.