buying a condo

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fbmelms
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buying a condo

Postby fbmelms » Tue Feb 26, 2013 4:55 pm

My parents are looking at buying a condo for me to live in during law school and renting the second bedroom to another law student or grad student. Financially it makes sense right now because you can pick up condos pretty cheap and rents are pretty high in the area I'm looking. Does anyone have any experience with a situation like this?

qwertyboard
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Re: buying a condo

Postby qwertyboard » Wed Feb 27, 2013 11:32 am

What happens if you need to sell it after graduating from law school (if you do)? You are hoping the market will get better and it will be an easy sell in 3 years? It would totally make sense if your parents plan to continue renting the condo.

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cinephile
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Re: buying a condo

Postby cinephile » Wed Feb 27, 2013 12:14 pm

I don't have experience with this, but I see apartments for sale all the time by students whose parents did just what you described. They seem to have trouble selling them (in Boston at least). If you were planning on staying in that city and living there in the long term, then it'd make more sense.

paul554
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Re: buying a condo

Postby paul554 » Wed Feb 27, 2013 12:33 pm

Assuming you get a normal 30 year mortgage, this is a terrible idea. Your first three years will be huge amounts of interest payments and very little principle. Once you include closing costs and everything else chances are after 3 years you will be lucky to sell at a gain, more then likely you will sell at a loss. Unless your parents plan to keep hold of this condo for 7 to 10 years, then it is more cost efficient to rent.

Also please keep in mind that any "savings" you get from renting that second room out are lost if you get one bad renter. I own a rental house in Florida and let me tell you it can be a HUGE pain and financial burden if a renter falls behind and you have to evict them.

fbmelms
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Re: buying a condo

Postby fbmelms » Wed Feb 27, 2013 1:25 pm

I guess I was going to leave the decision on cost effectiveness up to my parents as its their money and I actually have no idea what their plan would be after I graduate, it might be a city i would stay in, it might not. I guess I was more concerned about whether or not it would be weird to live with someone my parents were collecting rent from. That's really what the roommate decision hinges on and not so much the money.

hurldes
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Re: buying a condo

Postby hurldes » Wed Feb 27, 2013 1:30 pm

Yeah I think it could get awkward if the roommate is late/skips on his payments, and your parents make you hound him for it. But that's unlikely if it's a law student.. I mean we're mostly responsible and know how borrow enough to live, right?

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cinephile
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Re: buying a condo

Postby cinephile » Wed Feb 27, 2013 1:47 pm

Why would you have to even tell this person your parents own the condo? Just pretend like you're both renters and you already found the place and are looking for a roommate.

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laxbrah420
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Re: buying a condo

Postby laxbrah420 » Wed Feb 27, 2013 1:50 pm

make it a great deal and make him pay up front. with student loans it doesn't really matter

dixon02
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Re: buying a condo

Postby dixon02 » Wed Feb 27, 2013 1:52 pm

cinephile wrote:Why would you have to even tell this person your parents own the condo? Just pretend like you're both renters and you already found the place and are looking for a roommate.


Lol, what? Probably because that would be a really weird fucking thing to do.

lawprospie
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Re: buying a condo

Postby lawprospie » Wed Feb 27, 2013 1:54 pm

dixon02 wrote:
cinephile wrote:Why would you have to even tell this person your parents own the condo? Just pretend like you're both renters and you already found the place and are looking for a roommate.


Lol, what? Probably because that would be a really weird fucking thing to do.


AGREED. If I were the renter and I found out I would think you are bat sh!t insane

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cinephile
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Re: buying a condo

Postby cinephile » Wed Feb 27, 2013 2:20 pm

Whatever. It's not like you disclose everything to your roommate.

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bernaldiaz
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Re: buying a condo

Postby bernaldiaz » Wed Feb 27, 2013 2:45 pm

paul554 wrote:Assuming you get a normal 30 year mortgage, this is a terrible idea. Your first three years will be huge amounts of interest payments and very little principle. Once you include closing costs and everything else chances are after 3 years you will be lucky to sell at a gain, more then likely you will sell at a loss. Unless your parents plan to keep hold of this condo for 7 to 10 years, then it is more cost efficient to rent.

Also please keep in mind that any "savings" you get from renting that second room out are lost if you get one bad renter. I own a rental house in Florida and let me tell you it can be a HUGE pain and financial burden if a renter falls behind and you have to evict them.


Yeah but keep in mind some of the money you are paying on the mortgage would be going to rent somewhere anyways. Take the Boston example. Say you buy a place and have a 3000 dollar a month mortgage. You would be paying 1500(ish) rent somewhere else anyways and can recoup the other 1500 from the roommate, so really there is no additional month to month cost. Factor in the tax savings your parents will get from deducting the interest and you may be saving money month to month. So even if you sell at the end of three years, while its not ideal, you probably don't need to make a gain on the property to make it not a bad idea. Of course this is assuming everything goes right (finding a roommate, the house not sitting on the market, etc.)

Also, I don't know anything about real estate so please tell me how wrong I am and what I failed to take into account.

fbmelms
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Re: buying a condo

Postby fbmelms » Wed Feb 27, 2013 3:10 pm

bernaldiaz wrote:
paul554 wrote:Assuming you get a normal 30 year mortgage, this is a terrible idea. Your first three years will be huge amounts of interest payments and very little principle. Once you include closing costs and everything else chances are after 3 years you will be lucky to sell at a gain, more then likely you will sell at a loss. Unless your parents plan to keep hold of this condo for 7 to 10 years, then it is more cost efficient to rent.

Also please keep in mind that any "savings" you get from renting that second room out are lost if you get one bad renter. I own a rental house in Florida and let me tell you it can be a HUGE pain and financial burden if a renter falls behind and you have to evict them.


Yeah but keep in mind some of the money you are paying on the mortgage would be going to rent somewhere anyways. Take the Boston example. Say you buy a place and have a 3000 dollar a month mortgage. You would be paying 1500(ish) rent somewhere else anyways and can recoup the other 1500 from the roommate, so really there is no additional month to month cost. Factor in the tax savings your parents will get from deducting the interest and you may be saving money month to month. So even if you sell at the end of three years, while its not ideal, you probably don't need to make a gain on the property to make it not a bad idea. Of course this is assuming everything goes right (finding a roommate, the house not sitting on the market, etc.)

Also, I don't know anything about real estate so please tell me how wrong I am and what I failed to take into account.



I'm sure someone will be happy to.

paul554
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Re: buying a condo

Postby paul554 » Wed Feb 27, 2013 4:03 pm

bernaldiaz wrote:
Yeah but keep in mind some of the money you are paying on the mortgage would be going to rent somewhere anyways. Take the Boston example. Say you buy a place and have a 3000 dollar a month mortgage. You would be paying 1500(ish) rent somewhere else anyways and can recoup the other 1500 from the roommate, so really there is no additional month to month cost. Factor in the tax savings your parents will get from deducting the interest and you may be saving money month to month. So even if you sell at the end of three years, while its not ideal, you probably don't need to make a gain on the property to make it not a bad idea. Of course this is assuming everything goes right (finding a roommate, the house not sitting on the market, etc.)

Also, I don't know anything about real estate so please tell me how wrong I am and what I failed to take into account.


I don't know a huge amount about real estate and rentals so anyone else feel free to chime in.

In regards to the tax savings, this is not going to be a lot. Unless your operating at a loss your interest in addition to any other deductible expenses simply take away from your net profit. Actually, if the parents end up making money on this venture then they will have to pay more taxes. Adding to this is the complication of letting their child stay in the rental property for free while renting to someone else. My very basic understanding of this is that they have to somehow factor this in on their schedule E as personal use days or write off the rent at fair market value, again this is something a tax accountant would be needed for.

Personally I think the biggest problem here is that the whole venture is a large gamble. Unless the parents would want to buy a piece of property in the area and use it as a rental regardless of their child going to school then they should not buy it. Remember a $125,000 condo, on a 30 year mortgage will cost you over $250,000 in the end and you may have to be prepared to make the payments every month regardless of whether you have a renter or not.

Edit:
On a side note, my wife purchased her house before we met and now it is a rental. We have had 4 renters in 5 years despite diligent background checks and credit checks. We have also paid over $8,000 in various repairs and upkeep, some spread out and some coming all at once. We also are required to still maintain homeowners insurance in addition to paying county taxes and paying our property manager. To top it all off, the value of the home then decreased by 30% with the market crash. Luckily my wife makes enough to cover our rent, the house payment and still save for a new home when I finish law school. Unless your parents are in a similar financial situation they should avoid something like this.

fbmelms
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Re: buying a condo

Postby fbmelms » Wed Feb 27, 2013 4:26 pm

My parents are financially able to make the payments on a condo and owned rental property in Colorado for 15 years. My mom asked me about a room mate the other day because they figured if they could get an extra 500- 600 a month why the hell not. I was curious if anyone had any experience either collecting rent on a room that they owned or on a lease that was only in their name while living with that room mate and whether or not that was difficult.

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ManoftheHour
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Re: buying a condo

Postby ManoftheHour » Tue Mar 12, 2013 3:40 am

My friend and I are actually thinking about doing the same thing. The thing is, we'd be able to pay off most of it by the time I graduate. Keep in mind that finding renters will be a pain in the ass, even if you lowball all of the near campus housing with a low price.

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ManoftheHour
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Re: buying a condo

Postby ManoftheHour » Tue Mar 12, 2013 3:46 am

paul554 wrote:
bernaldiaz wrote:
Yeah but keep in mind some of the money you are paying on the mortgage would be going to rent somewhere anyways. Take the Boston example. Say you buy a place and have a 3000 dollar a month mortgage. You would be paying 1500(ish) rent somewhere else anyways and can recoup the other 1500 from the roommate, so really there is no additional month to month cost. Factor in the tax savings your parents will get from deducting the interest and you may be saving money month to month. So even if you sell at the end of three years, while its not ideal, you probably don't need to make a gain on the property to make it not a bad idea. Of course this is assuming everything goes right (finding a roommate, the house not sitting on the market, etc.)

Also, I don't know anything about real estate so please tell me how wrong I am and what I failed to take into account.


I don't know a huge amount about real estate and rentals so anyone else feel free to chime in.

In regards to the tax savings, this is not going to be a lot. Unless your operating at a loss your interest in addition to any other deductible expenses simply take away from your net profit. Actually, if the parents end up making money on this venture then they will have to pay more taxes. Adding to this is the complication of letting their child stay in the rental property for free while renting to someone else. My very basic understanding of this is that they have to somehow factor this in on their schedule E as personal use days or write off the rent at fair market value, again this is something a tax accountant would be needed for.

Personally I think the biggest problem here is that the whole venture is a large gamble. Unless the parents would want to buy a piece of property in the area and use it as a rental regardless of their child going to school then they should not buy it. Remember a $125,000 condo, on a 30 year mortgage will cost you over $250,000 in the end and you may have to be prepared to make the payments every month regardless of whether you have a renter or not.

Edit:
On a side note, my wife purchased her house before we met and now it is a rental. We have had 4 renters in 5 years despite diligent background checks and credit checks. We have also paid over $8,000 in various repairs and upkeep, some spread out and some coming all at once. We also are required to still maintain homeowners insurance in addition to paying county taxes and paying our property manager. To top it all off, the value of the home then decreased by 30% with the market crash. Luckily my wife makes enough to cover our rent, the house payment and still save for a new home when I finish law school. Unless your parents are in a similar financial situation they should avoid something like this.


This.

Don't do it unless you guys can make a huge down payment (by huge, I mean that you're almost done paying it off). The interest will wipe away any "profits" you "make" from your stay at said area.

Martha_01
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Re: buying a condo

Postby Martha_01 » Wed Jan 01, 2014 1:23 am

I also faced same situation when I went to Arizona for MBA. My parents were comfortable to buy a condo for me as I have decided to stay in Arizona for job also. But, one of my friend, who is in luxury real estate in Arizona, advised me that buying your own house just for 5-6 years does not make any sense. Then I decide to rent out a condo and finally rented it with help of that friend.

kartelite
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Re: buying a condo

Postby kartelite » Fri Jan 03, 2014 12:08 pm

cinephile wrote:Why would you have to even tell this person your parents own the condo? Just pretend like you're both renters and you already found the place and are looking for a roommate.


Why on earth would you do that? What difference would that make to a roommate?

If I found out my roommate lied to me and said they were just renting when they owned the place, the only reason I'd care is I'd know I'm living with a really strange person.

kartelite
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Re: buying a condo

Postby kartelite » Fri Jan 03, 2014 12:47 pm

bernaldiaz wrote:
paul554 wrote:Assuming you get a normal 30 year mortgage, this is a terrible idea. Your first three years will be huge amounts of interest payments and very little principle. Once you include closing costs and everything else chances are after 3 years you will be lucky to sell at a gain, more then likely you will sell at a loss. Unless your parents plan to keep hold of this condo for 7 to 10 years, then it is more cost efficient to rent.

Also please keep in mind that any "savings" you get from renting that second room out are lost if you get one bad renter. I own a rental house in Florida and let me tell you it can be a HUGE pain and financial burden if a renter falls behind and you have to evict them.


Yeah but keep in mind some of the money you are paying on the mortgage would be going to rent somewhere anyways. Take the Boston example. Say you buy a place and have a 3000 dollar a month mortgage. You would be paying 1500(ish) rent somewhere else anyways and can recoup the other 1500 from the roommate, so really there is no additional month to month cost. Factor in the tax savings your parents will get from deducting the interest and you may be saving money month to month. So even if you sell at the end of three years, while its not ideal, you probably don't need to make a gain on the property to make it not a bad idea. Of course this is assuming everything goes right (finding a roommate, the house not sitting on the market, etc.)

Also, I don't know anything about real estate so please tell me how wrong I am and what I failed to take into account.


Generally, an investment in a condo over 3 years is a bit risky, mainly due to swings in housing prices. But, on average, you will come out ahead (I bought a condo in grad school in 2007, so I know this isn't always the case).

Here's a breakdown of the costs and benefits:

Costs
Mortgage (principal and interest)
Property tax
HOA dues
Maintenance expenses
Insurance
Income tax if roommate
Closing costs on purchase
Brokerage commission on sale
Opportunity cost from down payment

Benefits
You live rent-free
Rental income if roommate
Tax deduction on mortgage interest, property tax, half of HOA dues if roommate
You are highly levered to gain from any appreciation in the housing market

Let's look at a hypothetical $500,000 two-bedroom condo purchase, with a down payment of $100,000, and a 30-year mortgage on the balance of $400,000 at 4.5%. Let's also make the following assumptions:

HOA dues: $500
Property tax: $500
Rental income from roommate: $1500
Brokerage commission: 6%
Closing costs: $10,000
Parents' marginal tax rate: 30%
Return on 3-year CD: 5%
Housing price appreciation: 5%

To ballpark this (not taking present value of intermediate cash flows), we have the value of the condo increasing to $578,813 after 3 years, but after we sell it and pay commission we're down to $544,084. We also paid the mortgage down to $379,738, so we have $164,346 of liquefiable home equity.

We also made 36 monthly payments of $2027, or $72,972. Also, we paid $36,000 in HOA dues and property tax, so this brings the outlay up to $108,972.

But, we get tax deductions of $52,700 mortgage interest, $18,000 property tax, and if we have a roommate $9000 in HOA dues, or $79,700. At a 30% marginal rate, this saves us $23,910.

We also get $1500*0.70 after-tax monthly income from roommate, or $37,800.

So, we're left with $164,346 - $108,972 + $23,910 + $37,800 = $117,084.

But remember, you initially put down $100,000 and had $10,000 in closing costs, and at 5% over 3 years the opportunity cost of this is $127,339.

So, you come out $10,255 behind - BUT, you lived rent-free, so your effective rent paid per month was $10,255/36 = $285 per month. Not bad.

Obviously this is a bit simplistic (no insurance or maintenance costs assumed, though HOA dues should cover anything external), but this is a way to think about it. Issues like capital gains tax could come into play as well, but that's situation-dependent.

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Lwoods
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Re: buying a condo

Postby Lwoods » Fri Jan 03, 2014 1:41 pm

fbmelms wrote:My parents are financially able to make the payments on a condo and owned rental property in Colorado for 15 years. My mom asked me about a room mate the other day because they figured if they could get an extra 500- 600 a month why the hell not. I was curious if anyone had any experience either collecting rent on a room that they owned or on a lease that was only in their name while living with that room mate and whether or not that was difficult.


I had to find a roommate two months into fall of 1L year. I posted on Craigslist and included certain details about myself (vegetarian, non-smoker, law student, not a neat-freak, pets) in addition to photos of the place because people are usually at least as concerned about the roommate as the actual apartment, if not more.

I lucked out. My roommate became one of my best friends, and I think including some information about myself led him to see what a good fit we were from the posting. It doesn't always go so well, but if you plan in advance, you can take your time to be choosey.

I don't think cinephile's suggestion is really all that insane. I mean, lying to a roommate is not a good idea, but I don't think it's that much different when your parents are the landlords instead of someone else. You need the roommate to pay rent regardless, so I don't think that's a fact you need to broadcast from the outset. Just, you're looking for a roommate, here are details about the apartment, rent, neighborhood, and a little about yourself. Then delegate the credit / background check to your parents once you find someone you like. Be honest about it, but don't give potential renters the impression from the outset that they can disrespect the landlords because their your parents.

kartelite
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Re: buying a condo

Postby kartelite » Fri Jan 03, 2014 2:33 pm

Lwoods wrote:
fbmelms wrote:I was curious if anyone had any experience either collecting rent on a room that they owned or on a lease that was only in their name while living with that room mate and whether or not that was difficult.


You need the roommate to pay rent regardless, so I don't think that's a fact you need to broadcast from the outset. Just, you're looking for a roommate, here are details about the apartment, rent, neighborhood, and a little about yourself. Then delegate the credit / background check to your parents once you find someone you like. Be honest about it, but don't give potential renters the impression from the outset that they can disrespect the landlords because their your parents.


Yeah, no need to broadcast it, but I doubt it makes a difference to anyone. I rented out my second bedroom to a classmate, never made him sign a lease agreement or anything - no it wasn't difficult to collect money...do you really think law students are going to shirk from paying their rent?

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KatyMarie
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Re: buying a condo

Postby KatyMarie » Thu Jan 09, 2014 5:55 pm

I don't know who if anyone is actually looking for advice on this topic, but I bought a foreclosure condo in 2009 with my parents while in Undergrad. They basically paid for it, and used my first time home-buyer's credit for renovations. I live there still and make rent payments to my parents, rent out the 2nd bedroom to a roommate who makes up the gap between my rent, and what would cover the mortgage+HOA fees.

Depending on your parents, it's worked out well so far. I've had 7 different roommates since moving in, so at this point I have an idea of what kind of dynamic works well, and what doesn't. It's a pretty specific situation, but PM me if you're looking for advice on it.

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BaberhamLincoln
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Re: buying a condo

Postby BaberhamLincoln » Thu Feb 20, 2014 3:37 pm

I randomly found this thread and thought I would ask opinions on my somewhat-similar situation.
I live in Chicago and plan to attend a school in this area. There are some condos here at great prices.
Schools I am looking at are estimating 1400/month for living expenses. The condos I am considering would cost me exactly that or less per month to OWN (of course, with a heavy downpayment first that I luckily saved up for).

Any thoughts on this? I would NOT do as the OP, I would have no roommates. The condos are all studios/1-bedrooms and it would just be me living there so I wouldn't have to worry about finding a renter or having a shitty renter. Just paying my own payments every month. Also, unlike the OP, this would be owned by ME not my parents and I would be looking to hold onto it for as long as humanly possibly since I will stay in Chicago after I graduate and either live in it myself or rent it out to someone else after law school.

Thoughts?
Thanks guys.

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kay2016
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Re: buying a condo

Postby kay2016 » Thu Feb 20, 2014 7:34 pm

leigh912198972 wrote:I randomly found this thread and thought I would ask opinions on my somewhat-similar situation.
I live in Chicago and plan to attend a school in this area. There are some condos here at great prices.
Schools I am looking at are estimating 1400/month for living expenses. The condos I am considering would cost me exactly that or less per month to OWN (of course, with a heavy downpayment first that I luckily saved up for).

Any thoughts on this? I would NOT do as the OP, I would have no roommates. The condos are all studios/1-bedrooms and it would just be me living there so I wouldn't have to worry about finding a renter or having a shitty renter. Just paying my own payments every month. Also, unlike the OP, this would be owned by ME not my parents and I would be looking to hold onto it for as long as humanly possibly since I will stay in Chicago after I graduate and either live in it myself or rent it out to someone else after law school.

Thoughts?
Thanks guys.



Unless you have a good chunk of savings that is NOT going to the down payment don't do this. That COL expense is going to be your income for the next year, if not 3 (no working during 1L and such).. That doesn't include food and bills and clothes and other stuff.. And it likely doesn't include summers either. So rent taking up almost all of yor COL would be terrifying to me




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