Purchasing condo to live, later to rent?

Question

My husband and I currently have a house in MN that has been rented out for 2 years and is taken care of by a good property management company. We intend to keep this house as a rental.

We moved to PA 2 years ago and have been renting a 1-bedroom apartment. We're wondering whether it'd be a good idea to just spend what we've been spending in rent and purchasing a 2-bedroom condo instead with the idea that we'd make it a rental when we want to move up in house or move away.

Is this a good idea? What am I currently not thinking of that I should take into consideration to make this decision? Thanks so much!

Ziv Magen · Answer

Pure spreadsheet analysis - how much are you saving assuming 3, 4 5 years rental etc - VS how much you will make WORST CASE for this unit (look at similar profiles on offer around you right now to get an idea).

It sounds like you're taking this as a pure business decision as opposed to an emotional one ("I want to own where I live!" - "Yeah, but why?") - which is always a good first step for these sort of situations - see which numbers work better for you.

Good luck! :)

Jeff Bridges · Answer

You essentially need to do a simple business case analysis before you move forward with any condo purchase that would be short term owner occupant, and long term rental. There is the consideration of wanting to become landlord again, and then there is the estimated profit to see if it would be worth your time and effort: this is unique to every property. This way you will know if the condo would be profitable/ worth keeping as a rental after you plan to move out and convert to rental. if you do this after, you risk having a condo with negative cashflow.

Use rentometer.com to get ballpark rent estimates for a unit in your neighborhood. Look at craigslist etc to confirm what you might be able to rent it for (same units/ same condition/ amenities). Then take the estimated monthly income (Subtract 8-10% vacancy) and further subtract estimated monthly mortgage/tax/insurance payment based on your budget range. You can do this in a monthly equation or an annual equation, whatever you prefer. Finally dont forget to subtract the condo fee, which for much of the units, sinks the cashflow into negative or breakeven territory. The end result will be your estimated cashflow. Use this number to decide if that estimated cashflow is a) positive b) enough to make the time/ effort managing a rental for you. If you want to use a managment company, subtract another 10% from the rent. You'll find 10% management fee + condo fee makes it tough for many condos to turn a profit. They are out there and I own 2 profitable condo rentals myself, but its certainly not guaranteed or easy to find. Finally, some of the profitable condos might not be the ones you would ideally want to live in initially either depending on the neighborhood. finally, you NEED to check condo bylaws to ensure that renting is allowed and unrestricted before you purchase. some ban rentals or have restrictions and you need to know. good luck!

Lynn McGeein · Answer

Esther, My husband took a job in DC, so we rented our primary residence and moved east, rented around DC until we got familiar with the area, then last year bought a condo as it actually saves us almost $300/month over renting.  Plus, we get larger sq ft and small fenced back yard for our dog (probably why our rent was so high -- we had to pay pet deposits and pet rent).  We do plan on turning it into a rental when we're done with it, so made sure it worked as a rental financially when we bought it.  The major problems we see are that condo boards can choose to turn the complex into rental restricted with enough votes (meaning no rentals or only percentage can be rentals), special assessments or raises in condo fees could kill profit potential, and losing FHA eligibility could cut sales potential in the future if you'd rather sell than rent.  FHA eligibility is not just about owner occupied but also reserves, the board taking out too many loans, % of owners who don't pay condo fees, etc.  So there is a lot more risk in a condo.  We did it anyway as apartments here are getting ridiculous with the rent increases and the fees, and not having to move each year is worth the risk for us.

Ned Carey · Answer

In general if you can buy for what you are paying in rent that is a good idea. The exception is if you plan on moving and reselling in a short period of time, the closing costs will eat up any profit.

In your case you are not planing on reselling soon as you will keep it as a rental so buying makes sense - Maybe.  When you decide to offer the property for rent will you be able to rent for enough to make a profit? Reading between the lines it sounds like you could not rent the condo for positive cash flow today. Ther are a lot of hidden costs in owning a rental above PITI. Search for the 50 % rule here on the site.  Good luck - Ned