Help me decide between renting an apartment or buying a condo

In My Humble Opinion
1

OK, I’m hoping to move soon, and I’m trying to decide if I should buy a place or rent a place. It would most likely be a condo or apartment, although I’d consider other options too. I’m looking for advice on what I should do.

As a quick overview of where I’m at now:

I’m in my mid/late 20’s and single. I’d more than likely be getting a place by myself, although there may be some roomate options as well.

Although I just started my new job, I like it enough that I intend to stay there for a while. Even if I were to switch jobs, I’d really expect to live in the same general area I am in now. The only way I see myself leaving the job I’m at now before maybe 2008 or so, would be if something really took a turn for the worst.

I’m debt free except for a car payment, but I don’t have much money saved up. Basically you could say I’m $0 for a net worth I guess.

During college and in the few years since I’ve graduated, I’ve lived in various houses and apartments all the time with roomates. I recently moved home due to the fact I was switching jobs, and that’s where I am now. I could stay here pretty much indefinitely, but I want to move asap. I expect I’ll move sometime between now and spring.

As far as the economic side of things:

I think I could get a decent 1 bedroom apartment in the $650 - $800 range.

Condo’s that I’d be looking to buy would be in the low to mid $100K range.

I make mid 30’s per year, probably closer to 40K with my part time job. I end up clearing a little more than $2000 a month after taxes and deductions and everything. To be honest, I don’t save enough money and waste way too much money just because it is there and available.

And now some of my questions:

  1. A lot of my friends claim they (or me) are “throwing their money away” on rent. Is this really true? How do I determine the financial difference between renting and owning? I know there are tax benefits to consider, what else factors into the equation?

  2. Is now a good time to buy a place, compared to maybe a year or two from now? I know interest rates and housing prices affect this, how do I research them? How else do I predict a good time to get a place, or is it pretty much a crapshoot? I’m in Wisconsin if that matters.

  3. Like I said, a decent single person condo in my area would start at about $100K, and probably get closer to $150K for something fairly decent (but not even necessarily great). Right now I don’t think I could afford much beyond the $100K according to the mortgage tools I’ve used at my bank’s website. Does this mean I maybe should try to rent for a year or two and wait until I (hopefully) have a raise or two under my belt, and some more money saved up for a down payment? Or would I be better up jumping on whatever the best I can afford is right now, and then moving years down the line if my money situation improves?

Besides the questions listed, I’d be interested in any other advice on this decision anyone has for me. I appreciate the time taken to read this post, and thanks in advance for the help.

2

Here’s a good Rent vs. Buy calculator from Ginnie Mae (there’s lots of other really great info on that site too). What makes the biggest difference is how long you intend to live there. Two years may not be enough to to offset the costs of selling a home. Plus, do a little research on the home values in your location. The Housing Tracker can give you an idea the general housing trends in your area and a lot of cities have MLS listing where you can keep an eye on how fast stuff is selling. (note: talking to a realtor may not help much; they have a stake in wanting you to purchase now, no matter if it’s really the right move for you now)

A lot of experts are saying the condo market has been overvalued by speculators looking to make a quick buck but that’s really dependent on your area. If condos really are headed for a fall and you jump on something right now, you could get stuck with a property that loses value and you’ll find yourself owing more on the mortgage than the property is worth. (BTW, when you look at what you can afford in condos, don’t forget that you’ll also have to pay a Home Owner’s Association fee which can be $200 to $300 monthly.)

3

I wouldn’t buy a condo here (DC metro area, Fairfax County) unless I was dead sure I could stay there for at least 5 years, possibly 10. The market has (as others have noted) been really overblown for years, and I see a definite chance of someone winding “upside-down” in their mortgage. In fact I knew 2 families that, in the mid 90s, had to take a large amount of cash to closing to sell their place for just that reason. Your area may be very different, of course.

As far as the costs of owning: Don’t forget the tax deduction aspect, though if you’re earning 40ish a year your tax bracket may not be that high. Your mortgage will mostly be interest the first few years so your net cost is reduced by (tax-bracket-percentage) of the payment.

If rent is comparable to condo (and a 100,000 mortgage would be - at 7.5% fixed, the payment would only be 627.00 if my spreadsheet is correct), it may be worth considering. But there are condo fees, plus maintenance you’d be responsible for if it’s a place you own (broken fridge? your pocket). And insurance, and property taxes (taxes are deductible too of course).

4

You really need enough downpayment so as to no thave to pay “PMI”- a type of “insurance” that protects your lender but not you. Talk about “throwing your money away”!

No, you get value for yor money, ie a living space. The “throwing their money away on rent” meme is marketing propaganda by the home Mortgage dudes.

5

If you’re truly worried about throwing money away, I’d say a possible option, if you’re living at home (rent free?) with only a car payment, would be to take a portion of that $2000 you’re clearing every month and invest it. It’s amazing how money grows in the long term. Heck, even if you rent you should put money away (assuming you can afford to).

Your money will work for you, and you won’t have to deal with the hastles and costs of home ownership that a real estate investment may entail.

6

Agreed. Ask your friends who tell you this how much of their monthly payment goes purely to service the interest on their mortgages. They’re probably throwing more money away on interest and fees than they would pay to rent a comparable place.

7

Buy a good solid brick house with a chimney. Proof against termites, inflation and riot. You can’t go wrong. Consider putting in a moat.

8

But not earthquakes. :stuck_out_tongue:

9

I would say hoard every cent you can right now. I lived with my parents through college, and tried to find a full-time job out of college. I had a couple of false starts, which threw me off- I thought I couldn’t afford to move out if I didn’t have a full time job. Eventually I got sick of making excuses for not moving out (when I desperately wanted to, yeah I know thats an oxymoron) and did so. In a year, from working 1-2 part-time jobs, and also frittering money away on silly stuff, I still managed to save $4000 which really helped out during the summer when I was only working 20 hours/week. I think if you really put yourself to it, you could do even better, maybe tell yourself “I’ll move out when I’ve saved X thousand dollars” (encouraging you to save a lot so you don’t have to live with your folks any longer than you want to)

10

What you want to compare is your expected net worth at the end of some reasonable amount of time (e.g. 5 or 10 years) from both renting and owning. This depends on many variables, but the big two are the difference between rent and a mortgage payment in your area and the expected appreciation of the property.

Let’s say your total cost of owning per month is $1000 (including condo fees, property taxes, and mortgage interest after the tax deduction) compared with a rent of $600. If you save and invest that extra $400/month in a 5% money market, you’ll have $27,200 in five years. Look up how much principal you’ll have paid off your mortgage in that time in an amortization table, and add it to the estimated appreciation of the house price. If it’s less than $27k, you’re not really losing anything by renting – you can use that money as a down payment at the end of the five years and be ahead of where you’d have been if you bought now. If it’s higher, buying makes more sense from a financial standpoint.

The big variable is, of course, the appreciation of the house price. If you’re in an area where speculation has driven up prices in recent years, it’s hard to guess where the price is going to go in the near term. If there’s a risk of the price dropping in the next year or two, I’d definitely hold off on buying until you have a better idea what the market is going to do.

11

From a slightly different perspective: my husband and I own a condo. Condo ownership is a tricky thing, because you frequently get the worst parts of apartment living (noisy neighbors, no yard, etc.) combined with the worst parts of home ownership (appliance breaks? no landlord to pay for it! roof leaks? no landlord to pay for it! Mortgage, homeowners’ insurance, homeowners’ dues, etc.).

The good things about owning a condo (as opposed to renting an apartment) is that we can paint, remodel, recarpet, etc., to our own tastes, without needing approval from a landlord (of course, we pay for it all). The other good thing is that we are building equity, so that we might be able to buy a house someday.

The bad things are that we do have to deal with noisy neighbors, and we don’t have complete control over major renovations on the building. We had to pay an extra $30,000 in the 2 years after we bought our condo, because the building needed work. The homeowners’ association (including us) voted to do the renovations now, so that we could enjoy them, instead of raising the dues to save enough to do them in 10 years (when we might not even be living there). Now, we agreed that this was a good idea, but even if we hadn’t, we’d have had to pony up our portion of the construction bill. That’s one of the downsides to owning a condo vs. owning a house – yes, both may have renovation needs, but in a house, you as the sole owner can decide to do it in phases, or put something off, or whatever. In a condo, the majority rules.

I’m not saying I wouldn’t do it again, but there’s a lot that it would have been really nice to know before we got into it. If you do decide to look into buying a condo, I would be happy to talk about what I’ve learned in the 3.5 years we’ve been owners, and to tell you what I would look for if I were doing it again. My email’s in my profile.