Author Topic: Advice needed: Buy condo, invest in market, or pay off student loan.  (Read 4891 times)

Pylons13

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Hi all,

I'm in a situation where my landlord said he'd be willing to sell me the condo I'm renting at a considerable discount.  He's a genuinely super nice older guy who my friend got to give me below market rent for the past two years.  He recently (at my inquiry) said he'd be willing to sell the place to me and said to "do some research and come up with an offer, go ahead and low ball me, I won't be insulted and I'll probably take it".   He never had kids and is just sort of trying to help me out in a fatherly way.

But I need some advice, here's the current situation(amounts rounded):

-Student loan debt -20,000 (interest rate is 6.00%, after tax 4.74%)
-401k balance +20,000
-In brokerage (cash + blue chips) +20,000
-Current savings rate $2,000 per month
-Down payment + closing costs required -$20,000
-Monthly living expenses (including rent) $1,250

I think I can get the condo for between $84-$104 per square foot , which is below market.  Recent sales in my complex range from $89-$121 per square foot, and my unit has been remodeled/updated so i think it's on the higher end.  I'd be getting a 15-year mortgage @2.75% and my monthly payments would be slightly higher than I'm paying right now in rent (payments = mortgage+ property taxes + HOA dues).  It's in a great neighborhood and I see myself staying here for quite a few more years.  I could also rent it out cash flow positive if I ever moved.

(Note: I've calculated tax savings on the mortgage interest + property taxes, the tax benefits are negligible - about $50 per month, and will disappear in a few years as the balance is paid down and I am in a lower tax bracket because I'm semi-retired!)

I don't like the idea of taking out any more debt, but it seems like a really good opportunity.  I also want to keep a cash cushion of 6-12 months expenses.  What would you do?
« Last Edit: September 30, 2012, 06:42:06 PM by Pylons13 »

arebelspy

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Re: Advice needed: Buy condo, invest in market, or pay off student loan.
« Reply #1 on: September 30, 2012, 07:07:58 PM »
What is the market rent on it?

Have you used NYT's buy versus rent calculator?

Are there condo association fees, and if so, how much are they?  You wrote you'd have to put 20k down, what would the mortgaged amount be?
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Pylons13

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Re: Advice needed: Buy condo, invest in market, or pay off student loan.
« Reply #2 on: September 30, 2012, 07:13:46 PM »
Additional details:

948 square feet - so price for condo would be between $80,000 - $100,000.
15 years mortgage payment - $434
HOA - $250
Taxes $150
Total $834

My rent is $750, I estimate market rent to be $1,000 +/- $200.  It's hard to say for sure as the majority of the units are owned.  I've seen listings for $1,200, but they sat vacant for awhile at this price.



arebelspy

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Re: Advice needed: Buy condo, invest in market, or pay off student loan.
« Reply #3 on: September 30, 2012, 07:28:31 PM »
From a real estate investor's standpoint, that's not a great deal.  I wouldn't touch it.  So don't count on buying and renting it out later.

Let's compare it with owning though, assuming you'll live there long term.

Renting at 750 versus paying 834 plus all maintenance. Some will go to principal. Let's assume 66/mo. maintenance, so all in of 900. That's $150/mo. more than renting, but you get to own.

You put down 20k, pay 150/mo extra and after 15 years you own a condo worth 90k (nominally).  If instead you invested 20k and saved 150/mo. for the next 15 years at 5% real return, you'd have 82,367.  After buying and selling costs, the condo would come out about the same (~80k) as the stock portfolio.

If it's where you want to live and you have to own instead of rent, buying isn't terrible.  I'd probably stick with renting based on those numbers due to flexibility, more potential gains over the next 15 years in the market than a condo, and liquidity.

But a lot of times purchasing instead of renting is an emotional decision, so that may lean you towards buying.  Condos aren't often a place one wants to live long term (especially with a family, typically "graduating" to a house), so that may be something to consider as well. 
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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Pylons13

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Re: Advice needed: Buy condo, invest in market, or pay off student loan.
« Reply #4 on: September 30, 2012, 07:41:28 PM »
Good point thanks, what price would you think would make this a good purchase?  $60k?

I think you might be understating the significance of the fact that my rent and purchase price are 25% below market, and the fact that it would be cash flow positive at a 30 year mortgage?

I appreciate the point about the emotional component - I think that's a big reason why I'm throwing it out on this forum.

arebelspy

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Re: Advice needed: Buy condo, invest in market, or pay off student loan.
« Reply #5 on: September 30, 2012, 08:34:03 PM »
Yeah, that's not cash flow positive with that 250 HOA, unless the rent is at the top end of your estimate.  $400 is way too broad of a rent range though.  Check section 8, rentometer, zillow, and the MLS for rental comps.
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Pylons13

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Re: Advice needed: Buy condo, invest in market, or pay off student loan.
« Reply #6 on: September 30, 2012, 09:02:54 PM »
Rentomer median $1,113
Zillow rent estimate $1,060
Not sure about your section 8 or MLS, but honestly I've lived in the area for about 8 years now and I'm sure those are good estimates based on my own experience and inquiry of others in the area. 

So given all of these details, and assuming I were buying this strictly as a rental property, what would be a fair price in your opinion?

arebelspy

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Re: Advice needed: Buy condo, invest in market, or pay off student loan.
« Reply #7 on: September 30, 2012, 09:38:26 PM »
I likely wouldn't due to my preferences around condos (and specifically HOAs), but my MAO (max allowable offer) would be 46,500 if it has no repairs and is in perfect shape.

That's based on a 3.25% (owner occupied) rate, though it wouldn't actually likely be available for a loan amount that low.  It's assuming 1k rent.

That would provide my minimum of $100 cash flow and minimum of ~10% cash on cash return with 25% down (~11k).  It may do slightly better due to no capital repairs (HOA covers roof, etc., though you will eventually be paying for it through fees), but I wouldn't count on a lot better, I like to play conservative.

My actual offer would be in the range of 30k.  Like I said, I'd continue renting based on the math.  But buying isn't a terrible choice, it's just not great as an investment, in terms of business.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, 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.

Pylons13

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Re: Advice needed: Buy condo, invest in market, or pay off student loan.
« Reply #8 on: September 30, 2012, 09:53:04 PM »
May I ask why you're so against HOAs? 

arebelspy

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Re: Advice needed: Buy condo, invest in market, or pay off student loan.
« Reply #9 on: September 30, 2012, 09:57:29 PM »
Google HOA sucks or HOA complaints or keywords to those effects.

In a nutshell: you pay them to hassle you.

Pass.

I do own properties under the jurisdiction of three different HOAs, so it isn't a deal breaker, but I do try to avoid them when possible.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, 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.