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.