How to Finance

Question

Early next year, I'd like to by a condo, probably in the $140,000 range.  I will move in and possibly do a light renovation.  I may stay there indefinitely, or I may move out at some point and make it a rental.  Condo might be REO or a short sale.

This is my financial situation (what I could apply toward the house):
-$10,000 Cash
-$40,000 401(k)
-$40,000 IRA

My circumstances:
-Finishing a Master's program.  
-Have job offer in hand (about $50,000 salary)
-Haven't owned a house for 3.5 years
-Currently Renting month-by-month

I have no idea how to proceed.  My ideal situation would be to to get a place under contract and move in now, then secure conventional financing when I start working in January.  Perhaps a lease option would work, but might it work in an REO or short-sale situation.  (I don't know a lot about lease options, REO, or short sales... only what I've read over the last few months)

How would you proceed? (Thanks for any thoughts you can offer)

Bill Gulley · Answer

Unless you're condo is in a senior living development, I'd suggest a single family home, something that won't fee you to death, something you could use as you liked, something that would appreciate in time, something that would be marketable...that people could finance easily.

When I saw "condo" that's all it took for me. You can find more opinions here as well. Good luck....

Aly W. · Answer

This year I've bought 2 condos in FL, cash. Good solid middle class neighborhood, condos in excellent condition.

First condo - paid $65K, it was rented 3 days after closing for $1100 p. month. HOA is $300 p. month and includes water/sewer, taxes $750 a year, insurance also $750 a year. Previous owner bought it 2 years ago for $175K.

Second condo, same area - paid $42K, has good tenants already in there paying $950. HOA also about $300, which includes water/sewer, taxes $750 a year, insurance also $750 a year.

I also own 2 SFRs. Tenants pay water/sewer, but if they don't, I get stuck with the bill, as happened last year after an eviction.

I agree that HOA fees can get out of hand, but so can repairs on a SFR, particularly if a tenant doesn't pay the water/sewer bill. In my state, that's lienable.

In FL, the property taxes drop based on the last sale price. Taxes in NJ go up no matter what, and for my SFRs, they went up 18% in the 2nd quarter (thank you Gov. Christie). SFRs require more maintenance than condos and if the tenants don't/won't do the lawn care, guess who does it or pays for it.

I guess my point is that a blanket statement about condos being a bad investment just isn't accurate. If they're in a good area that appreciated before, they will likely again. In the meantime, and it could be a good long time, they can certainly cash flow. SFRs aren't bulletproof investments either.

Bryan Hancock · Answer

Hi John...welcome to BP.

Condos are bad investments IMO.  Like Bill said they will fee you to death and you will be excluding a the meaty part of the buyer market.

It seems you have your head on straight and can qualify for a SFR.  Why no just take the path of least resistance and purchase an affordable home instead?  Why the focus on a condo?

Champak Shah · Answer

At first I oppose Condo-- however --based on info - location and demand --it may not be bad-

In today's market --most palces condos are very cheap -- 30 % t0 40% value -

As far as financing --if REO --  offer reasonable price and show Job Letter --
with $20% down --Lender may do financing-

Other option --if available by Owner at same discounted price --from a  desparate  seller --
then you can do subject to or Lease Option --

Depends on what city - state are you in --
SFR may be still better -- price will come back
up on SFR first --upon recovery --

Just wonder -- what city and what field --only  
$50K  with master's --is it that  bad out there ?

Better option --same area --near university --if you find  a 4 br house  -  then have one or two single students  as roomate -- they share common kitchen and living room or den --
basement will be nice --  get over half mortgage paid by them -- later if get married and buy other house --still keep as rental - rooming house and have three or four students  as tenants -- -

Steve Babiak · Answer

Some good comments in this other thread on why not to get a condo:
http://www.biggerpockets.com/forums/311/topics/56305-would-you-buy-any-property-

J Scott · Answer

If the condo will rent for $1200/month, it's likely that taxes, insurance, HOA fees, maintenance, marketing, capital costs, vacancy, turn-over costs, accounting costs, legal costs, property management, etc, will eat up about $600 of that every month.

That leaves you with $600 per month to pay your mortgage and take your profit.

If you put 20% down on the $135K purchase, and get a loan for the remainder at 6% interest over 30 years, your monthly mortgage payment will be $648.  So, you're losing $50/month.

Of course, if you put down a lot more money, you'll make a profit, but you'll sacrifice ROI.  For example, if you were to put down 38% in down-payment (about $50K), you'd profit $100 per month.  That's roughly a 2% cash-on-cash return -- you can make more from a short-term CD.

So, I would disagree with your assumption that the property cash flows...

John Hanson · Answer

[I'm excited... I smell a learning opportunity for myself!!!]

Thank you all so much for the replies.  It sounds like the major downfalls to purchasing a condo are:
1)  HOA Fees, 
2) lack of control, and 
3) excluding a many buyers.

Here are the reasons I'm interested in buying a condo as investment":
-Close to University
-Close to Public Transportation
-Close to Highway
-Close to Medical Facilites.  
-Prices were over 300K, now they are well Under 150K
-They will cash flow right away. (Will easily rent for $1200+ per month)

Info on the Condo's
-Price:  About $135,000
-HOA:  (right now (I know they could go up, and will check)): $290/month
-2bed / 2bath

Similar 2 bed 2 bath in a neighborhood nearby:
-Price:  $310,000

I'm mostly interested in the condo as an investment.  I'd move in... do somre renovations, and rent it out to students in the summer.  They are really in a great area.  There will always be demand as student housing, and it's a quiet complex (not dominated by students), so down the road I may wish to rent to older people who are stable, want to be near a medical facility, don't want a yard to take care of, and won't move as often.

I definitely hear your concerns, and would like to hear some more.  I guess my though is that I probably can't afford the $300,000+ house right now, and before posting this, I was thinking that if I could I'd by 3 or 4 condos in this complex TODAY!

If I rent a condo out, I could deduct the $3600 per year in HOA fees, and I would only have to worry about the inside of the condo.

Please give me more of your thoughts.  Are there things I'm not consideering?  [This is a teachable moment.  I am NOT attached to buying one of these condos] (Thanks)

Harry M. · Answer

I think the big problem with buying for yourself with the intent to rent out later is that the parameters are different. Buying for yourself, you're looking for somewhere you would like to live that you can afford. Buying as an investment, you are looking for something that will make you the most money with the least effort. Not that some of the factors that go into making these choices don't overlap, but getting them to line up enough that it makes sense for both is going to be tough.

As everyone else has said, you're probably better staying away from condos. Even for your primary home, a condo would be a questionable choice, though I suppose they are a somewhat less expensive option for people in more expensive markets who would have trouble affording a SFH. As an investment property, I wouldn't touch one with a ten foot pole. The reason? The HOA. This is like having a business partner who is making many of your decisions for you without regard to what is good for your business! Or viewed differently like having a property management company that charges 3-4x the going rate and can't be fired! In other words, NOT good for investors.

James Hiddle · Answer

Condo = Condon't

Des Shei · Answer

Ray,
I believe Bill is referring to the fact that condos that cater to senior living have less fees associated with them, which MAY be better if he intended to rent out later. However, as an overall investment strategy; condos really suck due to lack of control.

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