My daughter is starting a university program that will take her four years to complete. Both of us want me to be in the same city while she’s there.
I can buy a condo for 100-125K cash; hoa + property taxes and HOI would be about $500-600/month, but local rents for the same sqft are about $1200-1500/month.
I’d lose the $350/mo interest I make in that CD, but I’d also lose the taxes I have to pay on that income, and I’d pay half in housing per month.
Basically I’d pay $60,000 in rent over 4 years but no maintenance. I’d pay roughly half that in property taxes/hoa/ins in that same period—and the property would increase in value.
What would you do? I hate hoa’s but I also hate throwing away rent.
Posted by moschocolate1
11 Comments
$125k in an index fund with an average return of 10% will get you nearly $60k in 4 years. Granted there is also a chance that there is a downward turn in the market but the same can happen to a condo.
>and the property would increase in value.
Cheap condos are the worst investment properties there are. And even HCOL most demand markets are not seeing much increases in value since interest rates doubled. I would expect the value to be flat, for 4 years. You’ll be lucky if it doesn’t lose value (tell us what city this is in and you might get a better prediction on the value).
You’re also going to pay 6% when you sell to the realtors. So you need 6% increase in value (probably unlikely IMO) just to break even when you sell. And you’ve thrown away the HOA dues as well during that time.
The biggest, worst case scenario is that during those years the HOA decides they didn’t save up enough money to replace the roof or fix some big structural issue, and they ask you for $40,000 in a special assessment. Look at the age of the building. Is the HOA saving up for a new roof, resurfacing the pool, painting the exterior, repaving the parking lot etc? When do they plan to make those repairs/maintenance? If any of that is scheduled to hit while you own it, and they haven’t budgeted correctly, you are going to have to fork over more money. And if they haven’t planned for those things, that’s a bigger risk, unless (say) the roof is new and they’ve spend a lot of money maintaining and keeping up the building over the last 5-10 years.
I’d rent. You’re not throwing money away you’re buying freedom and opting out of the risks of owning.
If you do decide to buy make sure you look VERY CLOSELY at the reserves, ask for the last reserve study and analyze the budget. HOA dues are not set in stone and they aren’t the max you may pay. The rent is the max you will pay for the period of your lease.
You can and should look up the local market data for the city you’d be in. Here’s Boston, MA, as an example. This is probably the most recession-proof real estate market in the country. Yet, condos dropped in value last year.
https://www.redfin.com/city/1826/MA/Boston/housing-market
Denver, CO, another “good” real estate market, condos have dropped in value. And a substantial drop, 8.8%.
https://www.redfin.com/city/5155/CO/Denver/housing-market
San Diego, another pretty recession proof market, condos down 5.3% last year.
https://www.redfin.com/city/16904/CA/San-Diego/housing-market
I’d let my kid strike off on their own, even if they don’t want to.
I would reconsider moving there at all. Would you be living together or would your daughter be in a dorm?
It would make sense if you buy a small condo and live there for the first year while she’s in the dorm, then she moves in for the next 3 years.
I don’t think you should live together. Let her be her own adult.
OP – there are multiple considerations when buying real estate. The financial/investment angle is important but also personal plans and goals.
Without knowing your overall financial picture or which market this is in, we don’t know what’s best for you. You can’t count on appreciation in 4 years with a condo so would you be open to keeping it as a rental?
That said I like the idea. She’s lucky to have you.
> I’d pay roughly half that in property taxes/hoa/ins in that same period—and the property would increase in value.
Could increase in value, could.
>What would you do? I hate hoa’s but I also hate throwing away rent.
Why do you hate HOA’s? Is it the cost sharing of community space and mantinance, or the rules? Because any apartment style living in a University town has the potential to require additional policing of the rules. And the mantinance and cost sharing aspect is an important part of your due diligence and impacts if your investment increases in value or you are hit with hefty special assessments.
I would probably go ahead and purchase as university towns do tend to hold their value. If this a renter heavy condo development it may be unwarrantable and may not be as easy to sell in 4 years depending on the investor market, but it would also cash flow as a rental investment for you at a greater return then your CD.
$125k condo near a university, must be like Arkansas.
Sounds cheap enough it could be a good deal versus renting for 4 years. Put it in a spreadsheet to compare and be conservative.
Real-estate works best as a long-term, leveraged, investment in properties that generate income.
* *Long-term* because markets fluctuate and there are high transaction costs. You want to sell when you want to sell, usually after many years, not when you have to sell (e.g. in exactly four years.) And it will cost *at least* 5% of the value to buy/sell.
* *Leveraged* because you can use someone else’s money for capital appreciation and deduct the interest.
* *Income* because there are tax advantages, like depreciation and interest cost deduction, that are only available if someone is paying you rent.
Your situation doesn’t really fit the profile. You might get lucky and see significant appreciation in four years, but that’s not a great bet. Like the other poster said, you are probably just better off investing the cash in something more liquid and paying the rent.
I get why this feels like an easy buy. I’d just be a bit careful with the 4-year timeline. That’s pretty short, so the deal really depends on what happens when you sell.
I’d probably re-run the numbers assuming no appreciation and include buying + selling costs, just to see if the deal still works.
If it still works without upside, buying makes sense. If not, it’s tighter than it looks.
Have you looked at it that way yet?
Don’t move. Allow your child to go to school and become an independent adult. It’s normal and healthy.
I would let my daughter learn to fly on her own…