I know, totally random but this was really bugging me so I sat down to figure it out. As a former condo owner, and someone who purchased knowing my long term goal was to buy a single family home, I am often asked if it is a good idea. My knee jerk simple answer has always been NO – don’t buy a condo. I realized the other day, however, I have looked at it only from the perspective of not liking condo life – its a lot like high school…drama, cliques etc… so I wanted to look at it from a strictly numbers perspective.
To analyze if buying a condo as an investment, or stepping stone towards owning a single family home I decided to look at it with the following perspective. First I am going to take the average of 5 condos and apartments from towns in metro-west Massachusetts (Natick, Millis, Medway, Medfield, and Milford). I will assume that the average person looking for a condo given the overall goal of buying a single family home would be looking for a 2BR – 1BA for them/their significant other and one as a room for their first child.
Now that I have the price of the condo, I will use a mortgage calculator to determine the estimated monthly cost of the property assuming a 5% down payment on the condo. I will use that same 5% to estimate cash in hand from renting since you didn’t spend it on a condo. I will also factor in condo fees and taxes to the monthly cost of the condo and will assume utilities would be equal and not worth comparing. Also, while I am no tax expert, and not going to try and become one for purposes of this article I will factor a $1500 tax return bump each year. I will assume that no work has to be done to the condo to make it sellable again. The final assumption I will make is that you want to spend no more than 5 years in the condo.
I will also eyeball test out the top and bottom 5% of condos and apartments available in these towns. For example in Millis, MA the range for a 2BR 1+BA condo goes anywhere from $150K to $459K. I will be using zillow.com for the search.
Here are the prices of the condos I will use:
Now I expected Natick and Medfield to be higher, though Medfield was much higher than I thought. Based on all 5 of those towns the average 2BR 1+BA condo price would be $370K. Given that the Medfield prices are drastically different, I am going to take Medfield out of the mix giving us an average condo price of $257K. We now also know that you will need just over of $12K as a 5% down payment giving us a final mortgage cost of $245. One other item we didn’t factor in is closing cost on the mortgage. To account for that we will assume roughly $2500 and add that to the $12K we are putting in the bank for the rental calculations for a total of $14.5K in the bank if you were renting instead of buying a condo.
On the rental side, using a similar eyeball test, here is what we can expect to pay for rent in those 4 towns:
There were a limited number of rentals on zillow.com for these towns, so I cross checked against craigslist and found that the prices were at least in line. The average rental price is $1275/mo. Based on a 1.4% tax rate with PMI and home owners insurance the monthly mortgage cost would be $1600. I opted to include home owners insurnace because rental insurance is considerably less expensive (typically $100-$200 a year versus around $800 a year from home owners). We also need to add condo fees to the montly cost and will use $275 so your total monthly payment for a 2BR 1+BA condo would be $1875 verus $1275 for an apartment.
Streteched out over a 5 year period you could expect to save an extra $36000 by renting an apartment. If we look at the extra savings the condo owner would receive from taxes ($1500/yr * 5) the renter would have $28,500 saved with the difference in monthly payments. Obviously there is a lot more to this calculation.
Paying your mortgage each month, unlike rent will reduce the amount you owe on the mortgage, however in a 30 year fixed rate mortgage the amount you pay towards principal is about 1/3 of your total yearly payments. During the first 5 years you can expect to pay about $5000 a year towards the principal balance each year for a total of $25,000 paid down from your original mortgage amount of $245K leaving you with a balance when you go to sell of $220K.
Now, here is where it gets tricky. Like any investment you really have no idea what direction its going to go, you make an educated s.w.a.g (scientific wild ass guess). Lets look at the outcomes if the value of your condo goes down 10%, 5%, stays the same, increases 5% and 10% (yes I rounded a bit as this is theory). Also added in was 5% for real estate commission when you sell your condo.
-5% -10% Stays the same +5% +10%
Original Value $245K $245K $245K $245K $245K
New Value $233K $220K $245K $257K $270K
Difference -$12K -$25K na +12K +25K
Principal paid $25K $25K $25K $25K $25K
Cost of agent $12K $11K $12K $13K $13.5
Lawyer fees $2K $2K $2k $2K $2K
So lets look at the -5% scenario. You purchased for $257K, you put down $12K for a total mortgage of $245K. You paid down the mortgage $25K meaning when you sold you only owed $220K – essentially like putting $25K in the bank. If you sold at a 5% total property value loss of $233K you would get $13K back at closing, minus agent fees of $12K and lawyer fees of $2K leaving you having to pay $1K at closing + the $7500 you got back on taxes and didn’t use AT ALL so you have $6500 in hand if your condo went down 5% in 5 years.
Lets jump to having your property go up 10% in value. You purchased for $257K, you put down $12K for a total mortgage of $245K. You paid down the mortgage $25K meaning when you sold you only owed $220K – essentially like putting $25K in the bank. If you sold at a 10% total property value gain of $270K you would get $50K back at closing, minus agent fees of $13K and lawyer fees of $2K leaving you getting back $35K at closing + the $7500 you got back on taxes and didn’t use AT ALL so you have $42,500 in hand if your condo went up 10% in 5 years.
Let’s compare that to what you would have in hand if you were renting. Since you didn’t buy anything, you have what would have been the down payment in the bank earning a margial 1% would give you $12,500, the $2500 you would have paid for closing costs and the $36000 you saved on rent during that period – now also factor in not having to DEAL with selling your house…. keeping it clean, having to leave anytime someone wants to come see it giving you $51,000 in hand!
So if you are confident that you property value will go up MORE than 10% in 5 years, you are better off renting (give or take), you will obviously have to plug in your own numbers to see how you would fare.