Starter condo/home instead of renting?

[The_Bowme]

Hello all,

I'm a long time lurker, first time poster.  I'm thinking about making a financial move, and wanted to see if the forum had any advice for me.

Basically, I'm in Denver, CO and renting a studio for 700 a month including utilities. I feel silly throwing money at rent, when I could be building equity while providing myself hearth and home. I'm starting to look around the local real estate scene, and there are some decent condos, and some small homes and row houses available for $90,000 or below.

The issue I have is as follows. There is the possibility of my moving back to Michigan in 5 years or so. I can't say whether that will happen or not at this point. Because of that, I'm thinking of a 15 year mortgage to build up equity quickly. If I assume I'll be paying 3% in fees to buy the house, and 8% to sell it, I calculate that I'd be breaking even in terms of equity in about 2 years. After that, I would only be further ahead. If I did move, I would consider selling, or hiring property managers long distance.

Does this make good sense, or am I missing something? The mortgage rates are still pretty low, and I feel very positive about Denver's future population and economic growth, so I feel like I would be able to expect a lot of appreciation, but am not planning on it for this deal to make sense to me.

Thanks in advance for any comments!

[Hugh H]

Are you throwing in the down payment (as opposed to investing it in other ways)/maintenance in your calculations?

But I'm a supporter of this. If you move have someone else pay the mortgage. I'm a fan of building equity in real estate although a lot of people aren't. Condos are easy to maintain as well… but watch those condo fees.

[Another Reader]

For $90,000, what would you be able to buy?  Would this be in a desirable neighborhood?  Would the layout be desirable to the next buyer or renter? 

For example, a studio condo in a marginal neighborhood would not be my choice of a place to live or an investment.  A two bedroom, two bath condo that would appeal to a young, hip crowd in a desirable area near employment, shopping and entertainment would be more interesting.

[The_Bowme]

Hugh H, I was taking that the opportunity cost into account mentally, but not assigning an actual number to it in my calculation of the cost. That seems useful to me, so I'll do that.

Another Reader, I would be able to buy a studio or 1-bedroom condo in the hip, gentrified but old area of Denver, or a small townhouse or row house in a more marginal neighborhood. I don't see the point of looking for a 2-bedroom 2-bathroom potentially hip place though. The potential resale value and potential rents should be built into the purchase price of both cheap and expensive real estate, shouldn't thy? Obviously, bargains are good, but I don't see any reason why an expensive 2-bedroom is the more likely bargain than the less appealing studio.

Thanks for the responses!

[Another Reader]

More desirable properties tend to appreciate more, do better in market downturns, attract better tenants, and are easier to sell or rent.

[The_Bowme]

Another Reader: Thanks, I wasn't aware of that. Do you see those characteristics as a persuasive reason to avoid the sort of purchases you can get for 90,000 in an environment where the median home sells for 265,000? I don't want to let the perfect be the enemy of the good here, either.

[nawhite]

With condos, don't forget the cost of the HOA. We were recently looking and the purchase price at 90k looks like a great deal until you realize that there are $425/month in HOA fees. Makes it much more difficult to break even in 2 years and really cuts into your returns when you start renting.

[NumberCruncher]

Obligatory NY Times Buy vs Rent Calculator link: http://www.nytimes.com/interactive/business/buy-rent-calculator.html?_r=0

Takes closing costs, maintenance, increased utilities, etc into account (make sure to go into advanced settings for things like condo fees).

[Kazimieras]

Don't be afraid to rent, and never think you're throwing your money away, just be aware where it is going. Here are some great perks when renting:

• You have a very predictable cost
• You can break your lease and move, and are not tied to a specific location
• You don't lose like 3-5% of the cost of your home in fees, taxes, etc. since you don't have one to sell
• In general, renting costs less $s than buying (do the math on your particular situation). Save the difference and if you can get a better growth rate than the increase in housing prices, you're in better shape
• If something breaks, it isn't your pocketbook or problem

Buying is also awesome, but for different reasons. A lot of this doesn't come down to actual numbers, but more of a life preference. I enjoy being able to build a deck or doing home improvements, so all things being equal, owning makes more sense for me. I have a friend who just wants a box to live in, for her renting works. Houses (traditionally) follow inflation or income for value. The only way to truely get ahead in owning is buy in an area that is improving and sell when it has peaked (easier said than done).