I Am Thinking About Buying A Condo, The Napkin Math

The Math Behind A Condo Purchase

I find that I try to complicate my life unnecessarily. Part of the reason is the fear of the unknown and another is just that the human mind needs something to do.

I have recently contemplated buying a primary residence. My financial adviser thinks it’s a good idea, it makes sense numbers wise. It would be a condo in the $150,000 range and my payments including the HOA, taxes, insurance, principal and interest would be about what I am paying now for my rent.

Argument For Buying – Hedging Against Inflation

I can think of a bunch of reasons why I should buy. That fear of the unknown I mentioned earlier has a lot to do with the rental market. Rent goes up around here at 5-8% and usually closer to 6%. As of right now hot water is free but who knows when that might change.

Also, when I own something I have complete control over it, so my mind thinks. I can finally put stuff up on the wall and decorate and remodel the way I please (more things to keep my mind busy).

A $150,000 condo here usually has an HOA of around $200/mo and taxes in the $1,500/yr range. I would need about $30,000 for the down payment and nearly $5,000 for closing costs. There are plenty of calculators can take a lot more than this into account to determine whether the purchase is worthwhile or not. Over a long enough time, lower cost homes, even condos, will be slightly more favorable over a rental with these calculators.

What’s appealing to me is a low overhead once the condo is fully paid off. I would have monthly expenses of:

  1. HOA in the $250 range (it goes up with time)
  2. Property taxes of  $125
  3. Property insurance of $30
  4. Property maintenance of $50

This would add up to $455 per month. If I deduct the tax-deductible portion it would come out to $400 per month. Not bad for a place to live in Portland.

What the $150k Would Make if Invested In The Market

Of course this doesn’t take into account the $150,000 I paid in order to buy this condo. It doesn’t take into account any interest I paid for the mortgage, closing costs and any remodeling expenses I had. Let’s say that all added up to $170,000. If I invested this money it could make me somewhere around $500 per month after tax.

So, if I didn’t own and rented I would pay let’s say $850/mo. $500 would be covered by this $170,000 that I invested, so I would really be paying $350/mo. With the real estate paid off I would lose out on the $500/mo AND I would be having an ongoing payment of $400/mo (from the calculation above).

What About the Property Value Going Up

Yes, the argument could be made that the condo would go up in price. Possibly… however, the average condo isn’t the most effective investment. It probably will keep up with inflation… that’s about it. Don’t forget, there is the closing costs and somewhere around 6% of selling costs which probably will eat heavily into any profits at such a low price range.

I am currently paying $740 per month for my tiny studio. I am quite comfortable and don’t have any reason to move. The rent is likely going to go up when my lease expires, probably to around $780.

Renting For Life – The Cost

In order to generate $780 per month with my current passive income strategy of investing in the stock market I would need around $240,000 invested, give or take. As rent goes up my investments will likely go up as well. Therefore, an investment of $240k may just provide me with enough income to cover my future rental expenses.

However, wall street and the real estate market don’t always move in synchrony. Inflation could hit the rental market quite aggressively and combine that with a bear market and the $240k may not even come close to covering rent.

Purchasing A Condo

If I took $150,000 of my investments right now and purchased a condo I could bring my housing expenses to as little as $330 per month. This number includes the HOA dues and annual property taxes.

$150k invested on wall street could potentially net me $500 per month. This isn’t enough to cover my rent, as shown above. However, it would be enough to purchase the condo and likely keep its value and maybe even go up. I would need another $100k invested to generate the $330/mo for the HOA and property taxes.

By being invested in real estate I would also diversify my portfolio. Of course it would have to be a decent condo that I can rent out easily in the future.

Financing The Condo Instead Of Buying Cash

If I decided to put down 10% and obtain a mortgage at ~4% for 30 years I would have a total monthly housing expense of $1,003. This includes HOA, taxes, and principal + interest. By doing this I would only need to use $15k of my own money (which would generate a negligible monthly passive income).

$150k condo financed with 10% down and no PMI.
$150k condo financed with 10% down and no PMI.

The other $135k would continue to earn me passive income, about $450/mo. Since the interest portion of my monthly mortgage payments would be around $450 during the initial amortization schedule, this would be a wash. But, after the first couple of years my interest would go down but my investment would continue to produce $450/mo.

In the above mortgage calculation I didn’t take into consideration that a portion of the real estate and mortgage interest is tax-deductible. Therefore, obtaining a mortgage would be beneficial in my case.

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