OK to buy a condo when the monthly payment is less than the cheapest rent?

[strongboy2005]

So I have been looking into renting a "cheap" apartment where I'll be living for the next 4 years with my wife while going to medical school and have found out that the cheapest apartments in the area, the absolute rock-bottom for a 1-bedroom apt is about $700.

However, there seems to be a pretty big disconnect between rent and housing prices. Usually, rent is quite a bit cheaper than mortgage, but I have now found that prices have come down so much that the rents have not kept up.

There are some decent condos available in the area from $80k-$120k, which means a monthly mortgage payment of $414-$621. At the lower end, there is a significant difference in price for the same setup (1 bedroom), while the upper end, while still cheaper than renting, gets you a lot more bang for the buck (2-3 bedrooms).

So what I wonder is, given this current market and the first-time homebuyers rebates, is it wise to buy a condo instead of renting? Also, will my student loan money allocated for housing be counted by potential lenders as "income"? (Because, if not, this is all a moot point. Although, could this be remedied by a cosigner?)

I am really looking at this less philosophically (I don't really care whether I rent or buy) but more financially. I would like to pick the cheaper option.

---

Members don't see this ad.

 

[arrhythmia7]

In an ideal real estate market like the early 2000's, with double digit annual appreciation, it takes 2.5 years to break even. Don't forget that your going to have to pay things like closing costs, escrow, loan origination/servicing fees and broker fees (usually when you sell). Once you have the place there are montly assessments/dues, repair costs, upgrades, and a whole bunch of other hidden costs you might not realize now. Finally, on a property that cheap, IF the deal does go well, your appreciation and tax breaks are going to be so small (10-20k?) that you may as well keep your money in the market and buy something you really like when you have more dough.

 

[Habeed]

I read that the tax credit is 10%. So for an 80k condo, you would get the full $8000 tax credit. Would that cover the transaction costs of buying a condo?

Personally, I don't see why you couldn't buy a cheap condo. The reason rents are higher than buying at the moment is because when you rent, you're paying someone else's mortgage made when the market was higher.

 

[strongboy2005]

In an ideal real estate market like the early 2000's, with double digit annual appreciation, it takes 2.5 years to break even.

I plugged all the info into an online calculator (http://mortgages.interest.com/content/calculators/rentvsbuy.asp). It says I can break even in 2.5 years without "double digit" growth. To me, a 2.5 year break-even point proves that it's a better idea to just buy, since I will be guaranteed to live there for 4 years.

Not only that, but I believe the market will have recovered significantly 4 years from now. I don't think it's too far-fetched to think I could pocket $50,000 profit in the next few years when the market bounces (but even if it doesn't, the monthly payment over 4 years will still be less than renting).

Talked to my parents today about it and they said they would cosign. My fiancee has $25,000 that we could use for a down payment. With a 10% tax rebate on an $80,000 condo, it seems like a no brainer.

Don't forget that your going to have to pay things like closing costs, escrow, loan origination/servicing fees and broker fees (usually when you sell). Once you have the place there are montly assessments/dues, repair costs, upgrades, and a whole bunch of other hidden costs you might not realize now. Finally, on a property that cheap, IF the deal does go well, your appreciation and tax breaks are going to be so small (10-20k?) that you may as well keep your money in the market and buy something you really like when you have more dough.

All the closing costs and fees should easily be covered by our savings. Monthly dues, even if we assume they add up to $100, still put the monthly payment below $700 a month (the rent on the cheapest 1-bedroom apt). Shouldn't be as many hidden costs in a condo as there would be for a house, but again, the monthly savings should make up for that even if the condo never appreciates in value (though I think it will).

Another thing to consider: inflation. Mortgage payments take a hit from inflation. $500 per month now is not the same as $500 per month in 20 years. However, rent is subject to change, and goes up with inflation.

 

[nontrdgsbuiucmd]

post above had a good point.

suggest that you request confirmation as to the wording of the condo association regarding 1) monthly assessment/fees and 2) special assessment.

A special assessment would include things like a new roof, if sufficient monthly member $$ has not been put aside by the condo association from the monthly condo fees received from each owner. A friend (and every other owner in the building) was hit with a special assessment fee of over 10K per condo when major renovations were done in their condo complex.

As an owner of 2 homes over 10+ yrs, I want to point out also the issue of limited flexibility with buying -- if there's a smoker next door or a person you realize you really don't care for, but can hear daily through the walls, that's how it'll be for years. This may be a reason to check out sound issues, there are architectural specs that would objectively reference the level of soundproofing -- better construction = better soundproofing.

Financially? Who knows. Seriously, who thought Las Vegas or FL or CA would tank in the past year? You're taking more risk with buying -- probably it'll be fine, but things could get much better or much worse. If you buy, you're assuming that risk.

I like owning because you can change things, or install your preferred color carpet, or upgrade the kitchen appliances, and feel that you're making things better in YOUR home rather than helping a landlord. But it's truly impossible to say with certainty that you're "better" renting, or "better" owning; it just depends what's most important to you.

 

[dragonfly99]

strongboy,
in your situation (with a spouse, and having money to put down) buying may not be a bad idea. Yes, you will get the 8k tax credit. You have 20% down and someone willing to cosign your loan, so you are going to be able to get a better deal (i.e. no mortgage insurance, and a better interest rate) than mos graduating med students.

You seem to be seriously underestimating the condo fees. I have been looking at condos in the price range you describe,and all of them had condo fees in the range of 230-345 dollars/month. I have never seen one with condo fees as low as $100/month, though some townhouses have <$200/month fees. I also agree with the above post about the assessments. Also, you need to find out what is included in the HOA fees...usually it includes insurance for the roof/structure, but NOT for anything inside the condo, so you'll still have to pay for homeowner's insurance of some kind. Also, check which utilities, etc. are included - usually the garbage pickup and water are included, but not the electricity, I think. Also, keep in mind that whenever you leave, you'll need to sell the condo and if you can't sell it right away, will still be stuck paying the payments; also the real estate agent will take a commission when you sell the thing.

You don't know whether you will gain or lose money by buying, but with the 8k tax credit I'd be tempted to go for it in your situation, particularly if your spouse is willing to deal with some of the extra hassles, etc. that can come from being an owner -you won't be around much as an intern to be able to do it.

 

[Tours2]

Financially? Who knows. Seriously, who thought Las Vegas or FL or CA would tank in the past year? You're taking more risk with buying -- probably it'll be fine, but things could get much better or much worse. If you buy, you're assuming that risk.

Really? A lot of people did--particularly anyone from areas where real estate still follows any traditional sense of financial responsibility and logic. I remember chatting with my roommate back in 2004 when I lived in Orange County and warning him to be careful, as this was all going to topple like a house of cards.

Prices in California, in particular, are still over-inflated. When the ALT-A and Option ARM loans begin resetting later this year and begin peaking in 2010 and 2011, the markets there will finally make the corrections they need. Right now prices are only hanging on because the banks are holding onto foreclosed homes instead of filling the markets with the homes that should be on them.

I'd consider a real estate purchase in California right now to be a very dangerous investment. Go read some more about the second waves of mortgage crisis that awaits before you go out there and purchase in that state. There are over a trillion dollars in foul loans made to unworthy home "owners" still to come down the pipes. A vast majority of these people are going to lose their homes--not that they ever owned any equity in them to start with.

 

[The White Coat Investor]

It ain't just about principle and interest. The owner must also pay taxes, insurance, homeowner fees, full utilities, repairs etc.

When "running the numbers" make very conservative assumptions, such as that it will take you 6 months to sell your place. So add in the cost of an extra 6 mortgage payments. You might get lucky like me and only pay 3 extra months...

 

[Habeed]

So he should factor in transaction fees to buy the place, condo association fees, money for internal repairs, opportunity cost of tying up the money for the down payment, the $8000 tax credit and the mortgage interest tax credit, and 6 months of payments while selling the place. Further, he should assume that the value of the place remains constant with increases only for inflation.

Be interesting to hear if the place is still a bargain with all those things calculated in. I think he should pull the trigger only if the place is still at least $100/month cheaper than rent, after adding up all the costs and dividing by the total months he'll live in the place.

 

[nontrdgsbuiucmd]

Really? A lot of people did--particularly anyone from areas where real estate still follows any traditional sense of financial responsibility and logic. I remember chatting with my roommate back in 2004 when I lived in Orange County and warning him to be careful, as this was all going to topple like a house of cards.

Prices in California, in particular, are still over-inflated. When the ALT-A and Option ARM loans begin resetting later this year and begin peaking in 2010 and 2011, the markets there will finally make the corrections they need. Right now prices are only hanging on because the banks are holding onto foreclosed homes instead of filling the markets with the homes that should be on them.

I'd consider a real estate purchase in California right now to be a very dangerous investment. Go read some more about the second waves of mortgage crisis that awaits before you go out there and purchase in that state. There are over a trillion dollars in foul loans made to unworthy home "owners" still to come down the pipes. A vast majority of these people are going to lose their homes--not that they ever owned any equity in them to start with.

20/20 hindsight my friend..I gained this vision too, but only after losing most of the 2,500 retirement funds dropped into a tech stock index fund in the late 1990's. (remember when everything was going up, and companies were priced based on "eyeballs" and "clicks" and if you didn't adhere to the new economy, you didn't "get it"?)

There's an old stock broker trick -- call 80 people, telling 1/2 a certain stock will go up, and the other 1/2 that it'll go down. Wait until the stock price changes, then call back the 40 that you'd given correct advice to -- tell 1/2 that a different stock will go up, another 1/2 that it'll go down. Call back the 20 that you gave correct advice to. Repeat, and on that next call you've been correct on calling the stock market change 3x in a row! you're gold!

The great news is that you can benefit from this current knowledge! Buy put options (which will let you sell at a prespecified price) on a residential bond fund, and as the market realizes that you're correct, you will make a KILLING, as you'll get the spread between the market price and the option. There was one fund that did this when the mortgage market crashed, and it returned some crazy high gain for the year.

 

[Upgrayedd]

I didn't read all of the posts, so I apologize if I am repeating, but just three things:

1) It looks like this deal might make sense for you financially
2) Home owner fees can start low and then increase later if the condos end up not selling (since the building maintenance somehow has to be paid...) Check the contract for this...
3) This is the BIGGEST point: except for areas with a very well defined condo resale market (i.e. Manhattan) the price you pay for a condo does not necessarily represent "the market". How many condo's have been bought/sold per year in a certain area? Is there a huge influx of new condo buildings in your area? Just for reference, condo's in SD dropped 45-50% while houses in a similar area dropped 25-30%, mainly because the condo's were overvalued in the first place.

 

[deleted116380]

Financially? Who knows. Seriously, who thought Las Vegas or FL or CA would tank in the past year? You're taking more risk with buying -- probably it'll be fine, but things could get much better or much worse. If you buy, you're assuming that risk.

Uh...me? But what do I know...I'm just an economist. 😉

I remember my mother selling her house back in '05 at the peak and I couldn't believe the price it sold for. Just looking at it you wouldn't be able to come up with $430k worth of land or building materials. The massive amounts of construction projects in FL (and LV) were obviously never going to be filled...just too much supply. I had a few buddies in NorCal and Central FL that were loan officers and telling me how much they were making getting into the subprime area. I couldn't believe how much they would approve people for. They all looked short-term and talked about their boss' CL55 AMG, M5s, etc. Disgusting how they were handling business.

Anyway...condos can get pricey. Figure how much it will cost after closing costs, property tax, insurance, and especially condo fees. I would never buy a condo because I don't like shared walls and condo fees. When a condo building doesn't have much occupancy (new units unsold) and/or owners stop paying their fees, the association raises the rates on the rest to cover the costs. If they still can't meet costs, they start cutting away at services like pool maintenance, lawn care, gated entry will be left open (gates require a lot of service for some reason), etc.

For what it's worth, don't expect the prices to "significantly" rebound in the next four years. What we've had is a correction and prices should still come down a bit in some markets (like Cali). Don't ever plan/expect for the best situation. The DOW will not be shooting up to 14k anytime soon and home prices will not be 50% higher in a few years.