Pros and cons of owning Condo's

[Bet_to_Nguyen]

Hi all,

I often lurk in this form and I think there's a lot of good, intelligent discussion going on in here. Hopefully you guys/gals can offer me some advice on this situation.

For a little background to understand my financial situation, I'm an entry level structural engineer with a master's degree earning 50k/year. I've been working for about a year and am comfortable and happy with my job (large corporation) and plan on staying until I get my professional license (2.3 years away and decent pay raise) and maybe a few years after that until I have gained enough experience to start my own business.

I currently rent a condo that is very close to work (Atlanta) and am very interested in purchasing this place when the lease is up in December. These particular units (2bd/2ba about 1000sf) go for about 160k apiece and I will have somewhere around 25k to put down on it.

The way I understand it is that condos are generally not good investment ideas (assoc. fees, not owning the land), but I can't find a house that I can afford in my area (about 250k)and the condo is only 2 miles from the office).

Here are my questions: Do condos appreciate much? Is this a good idea for me given my financial situation? Should I continue to rent (460/month) until I can afford the house I want? I don't mind having a roommate, but I don't want to depend on splitting everything. Therefore my budget will allow about 1k/month as a house payment.

These are the questions that I think of most? Are there other things I should consider? Any suggestions/experiences will be helpful.

Thanks.

[DesertCat]

Your current housing expenses are $460 a month, but you want to increase them dramatically so you can buy in at what may be the top of a housing bubble?

You should compare your costs of owning vs. renting, if renting is much cheaper you should rent (cheap rents are also a sign that house prices are overvalued). Include all your costs, including insurance, HOA, and something for maintenance. Factor in your tax benefit. If you are factoring in renting out a room, assume it's vacant 10% of the time. On the renting side, factor in the interest you'll earn from investing your 25k.

If it's close, then the house wins because of the potential for appreciation.

Your other problem is that condo is usually just a fancy name for an apartment. When condos appreciate, owners of apartment buildings rush to "condo-ize" and cash in. So condos typically won't appreciate like houses. I used to own a fancy condo downtown on the river in PDX. After I bought, the market was flooded with condos, and another part of town became much more "trendy". Five years and no gain.

All in all, this market isn't one I'd rush to get in on. If the math is close I'd say you aren't missing out on anything. Next year you'll probably be able to afford something better, and prices may even have come down.

[KaneKungFu123]

in bangkok thailand the apartment i rent would cost about 30,000 USD to buy, yet costs $250/mo rent.

120:1 ratio.

you pay 460/month, yet would have to pay 160K to buy

350:1 Ratio.

[squiffy]

Complicated.
Four issues, at least. Each with subissues. Will take about 10 posts to fully discuss this.
Real estate in Atlanta.
Nationwide and regional real estate bubbles.
Owning a condo vs. renting.
Owning a home vs. owning a condo.

First, it's pretty clear CA, FL, and NYC are in bubbles. The rest of the country. It depends. My home in Dallas, TX has really not appreciated all that much since 1993.

I paid 183K in 1993. It's worth maybe 253K now, give or take. So about a 3% appreciation, just keeping pace with inflation. That may be average for real estate nationwide. But that is terrible compared to places like LA or SFO or NYC, where people actually WANT to LIVE. Rather than DALLAS where they are forced to live because it's cheap or you can find a job there.

My CA home I bought in 2002 for 200K. Just appraised at 420K in Aug. 2005. Big difference.

So you need to do a search of www.money.com and Wall St. Journal. There are many articles analyzing how overvalued various urban market are, based on rental prices or average income. If you really want to be sophisticated, you should study real estate by zip code as locations within a city can make a huge difference.

So one question is, if there is a bubble in your region, what will happen when it pops?

Some say prices will just stay even. Some say a small decline followed by recovery.

I tend to agree that a huge drop, as suffered by Boston and LA in 1992-1996 or so, is due to a huge and sudden loss of jobs. If people lose their jobs, they cannot pay their mortgages and are forced to sell. This can cause a dramatic drop in prices and a panic.

After the Berlin Wall fell and the Soviet Union collapsed in the late 1980,s in the early 1990s the U.S. reduced defense spending so that defense firms and aerospace firms cut jobs. The layoffs led to drops in home prices. Dramatic drops.

The current bubble is being fed by low interest rates and speculation. So as interest rates rise and if a recession hits and some people lose their jobs, prices could very well decline, though not as dramatically hopefully, as due to the layoffs in the 1990s in LA and Boston.

Still, GM and Ford are starting to have trouble making profits. As interest rates rise, they cannot sell as many cars. And people cannot buy 10 cars each. You really only need 2-3 at the most per avg. family. And they are having trouble funding their pensions and they are laying people off.

And 911 has really hit the airline industry hard and people are just not flying at the same levels they used to for business or fun. So layoffs are happening in certain industries. And people who lose their jobs, have trouble paying their mortgages.

So the point is a good one. If there is a bubble, and if Atlanta is part of it, and if a recession hits, and if interest rates keep rising, then home prices should decline, and do you really want to be buying real estate, condo or home, at the peak.

Why not wait for a decline and buy cheaper.

One problem is that as interest rates rise, the cost of borrowing money increases and it is not clear how those two conflicting factors balance out. Money and loans and mortgages get more expensive, so it's harder to buy a home, so home prices should fall a bit, but it's also more expensive to finance the purchase.

So you need to understand that relationship.

Clearly, as interest rates dropped, because banks had lots of money to lend and could repackage and resell their mortgage loans to third parties and foreign investors, home prices rose dramatically in desirable locations because it became cheaper to borrow money to buy homes. So cheap money means too much money chasing too few homes, hence inflation in home prices.

Raise interest rates and guess what. More expensive to borrow money. So what, maybe home prices go down?

Second, you really need to know Atlanta. Talk to a top selling successful realtor about condos vs. homes. Look at local statistics on home vs. condo appreciation.

I just saw a WSJ article last week that said condos are becoming more and more popular in cities where they did not used to be popular, such as Minneapolis or elsewhere, and condo appreciation was actually somewhat higher, unusually.

There are some super crowded places, like Honolulu and Hong Kong or Tokyo, or NYC, where the population is so dense and land is so scarce that condos are a great buy.

But in cities where land is plentiful, most people prefer the space and privacy of a single family home. Condos can be noisy and neighbors can be noisy and a pain. There was one case in California where a woman let her large fierce dogs attack and kill another woman in her building. Nice.

So you need to do your own research there. But tell us what you find and post your findings or links.

Almost every major city has tons of articles on real estate in the local papers, business papers, or city magazines.

Third, setting aside the other issues, real estate when held for the long term, even if it does take a huge drop, basically tends to recover. So yes, if there is a huge bubble, you may want to wait, but you could guess wrong. The bubble could keep going for another 3-5 years, and you could miss out on a lotof appreciation.

If you buy and hold, real estate will tend to keep pace with inflation nationally. And in some hot markets, big desirable beautiful important cities where lots of people want to live and work, you will see appreciation well above the inflation level.

So your investment is at least keeping pace with inflation, plus you may beat it. Any appreciation is tax deferred, or possibly tax free, if you live in it long enough and if your income is below a particular level, you can sell tax free, up to about 150K profit for an individual.

You are getting cheap leverage. You don't put down 160K cash. You put down 25K cash and borrow the rest.

So, if the 160K condo appreciates by 3%, you actually earn a tax free 4,800 on the 25K invested, which is a return of 19.2% on the money invested.

Due to leverage, your 25K controls 160K worth of property.

Right now, you are getting the lowest interest rates in 40 years. It doesn't get any lower. After a 2% tax break and 2-3% inflation, you are really only paying about 1% or 2% on the money. So pretty cheap.

The only question is whether you are way overpaying for the condo.

I just don't know Atlanta. Is it growing? Businesses moving in? Larger population and growth of business means more people to buy your condo if and when you want to sell. You have to understand the local economy, if it's growing, how it's growing, and why or why not.

Again, condo vs. home differs from city to city, but generally home is better than condo in all markets, with some exceptions.

If you cannot afford home, then it's simple you either buy condo or rent. Nothing to analyze. If you cannot afford it, or if you cannot make the payments, buying home NOT an option.

SO question comes down to condo or rent.

If there is a huge bubble maybe rent. If there is no bubble or modest bubble, as in Dallas, probably buy as prices are NOT as likely to collapse.

Think of it this way. Someone else can run the numbers for you.

If I rent a condo in Atlanta for 30 years. At the end of that time I am out $460 a month x 12 months x 30 years. But I have some extra cash, unknown amount per month, say $300-$500, because renting the equivalent condo is probably cheaper than buying it.

If I buy, I have to pay the mortgage, tax, etc. interest, maintenance. So my monthly expenses are higher. At the end of 30 years, I am out of pocket more cash, but I own a 160K condo that has appreciated at 3-5% or more per year.

So the renter has no home. The condo owner has a 160K condo, which has appreciated over 30 years and has either kept pace with inflation or beaten inflation, tax free appreciation.

The only question is whether the renter can invest the money he saves each month by NOT paying a mortgage or taxes, and can invest at a higher return than the leveraged 19% which the homeowner makes.

Remember, the money which the renter saves may be sizeable. But if he invests it in the stock market it is taxed whenever he sells the stock. Whereas you can live in the condo for 30 years.

I suppose you can complicate things by saying he puts the money into a retirement account and trades stocks with tax deferred profits. Or you can say he buys and holds stocks for 30 years like Warren Buffett.

Anyway, need some more accurate numbers to do a full comparison. But in most markets I am familiar with, the homeowner is way ahead of the renter. Usually the wealthy people are the landlords, not the tenants.

Since the signing of the Magna Carta it has been the landed gentry who held the wealth and power to make the laws. So even today, modern laws favor land and business owner. It's the Golden Rule. The people with the gold make the rules. So they favor real estate investment with mortgage interest discounts and depreciation deductions for rental properties and lower tax rates for long-term stock investements held more than a year.

The rich get richer because they own land and stocks and keep investing.

So why not buy land. Do you really want to rent for 30 years?

If the time frame is 30-60 years owning is better.

If we are in a bubble and prices will drop 40% over the next 2-3 years, then wait and buy at the bottom.

Long-term you should own land. But short-term, you should avoid over-paying for land that will drop in price by 40%, assuming you can tell there is a bubble and assuming you can time the bubble.

[FishHooks]

I personally think this whole housing bubble is overrated, I think it's like trying to time the stock market. I wouldn't be too worried about a bubble, but do your research of course because it can happen in some areas, but I think thats an exception not the standard. Normally when housing drops that a big indicator of a recssion, but you just can't time that, as land becomes scarce in hot places to live the house prices have no where to go but up. We could be in this "bubble" for another 5 years, who knows. I think people are mad they missed the tech bubble in the stock market and insist this housing bubble is going to happen. I am a firm believer that the market always corrects it's self, but it's a simple supply and demand here with housing. If this "bubble" does pop, it will most likely be followed by a recovery period followed by more expansion. Am I the only one who isn't really concered with a big housing bubble?

[RunDownHouse]

[ QUOTE ]
I personally think this whole housing bubble is overrated, I think it's like trying to time the stock market. I wouldn't be too worried about a bubble, but do your research of course because it can happen in some areas, but I think thats an exception not the standard. Normally when housing drops that a big indicator of a recssion, but you just can't time that, as land becomes scarce in hot places to live the house prices have no where to go but up. We could be in this "bubble" for another 5 years, who knows.

[/ QUOTE ]
You're absolutely right. On a national level, prices hardly ever fluctuate, even in recessions. Instead, volume takes a big hit. If someone is looking to sell a house for $200k, and the "bubble" pops and its now worth 100k, they're not going to sell unless they absolutely have to. They'll just sit on it. There can be bigger price volatility in local regions, but on the national level there really is no such thing as a housing price bubble.

I can support this with exact numbers if anyone cares.

[DesertCat]

[ QUOTE ]
I personally think this whole housing bubble is overrated, I think it's like trying to time the stock market. I wouldn't be too worried about a bubble, but do your research of course because it can happen in some areas, but I think thats an exception not the standard. Normally when housing drops that a big indicator of a recssion, but you just can't time that, as land becomes scarce in hot places to live the house prices have no where to go but up. We could be in this "bubble" for another 5 years, who knows. I think people are mad they missed the tech bubble in the stock market and insist this housing bubble is going to happen. I am a firm believer that the market always corrects it's self, but it's a simple supply and demand here with housing. If this "bubble" does pop, it will most likely be followed by a recovery period followed by more expansion. Am I the only one who isn't really concered with a big housing bubble?

[/ QUOTE ]

I think there is a clear argument that if you are going to live there for more than five years, you shouldn't worry about the "bubble". Long periods of ownership will negate overpaying, to a certain extent.

But that's only if rental cost is similar to ownership cost, if you can rent for signficantly less than buying, you should probably wait.

[Bet_to_Nguyen]

Thanks for all the replies, especially the advice on some of the statistics to look for. I looked up this particular unit and it's undervalued for the zip code it's in according to coldwellbanker.com. I'm gonna have to marinade on all of this information for a few weeks at least though. Too many different variables in play here.

[squiffy]

Here is one recent web article on condos. There are plenty of others. In some places, condos have been unusually hot. Which often means you need to be careful about overpaying for a condo that is overvalued.

http://money.cnn.com/2005/08/17/real...0509/index.htm

http://money.cnn.com/2005/08/25/news...reut/index.htm