One of my first posts on this site was about how I was starting to lose my mind and considering buying a house without putting 20% down. After meeting with a real estate agent and discussing buying a first home and building my real estate empire (evil laugh), I have to admit that I have no idea what I’m doing. This is completely foreign territory to me. In general, the thought of buying a place and not throwing money down the drain is pretty attractive to me right about now. I’ve spent almost $33K in rent since I moved to LA in 2009 and that money is just gone. No equity, no return, nothing!
Digging more deeply into the numbers have made it pretty clear that buying a place, even if it’s just a one bedroom condo, makes a lot more sense. Right now I’m paying $1000 a month. The breakdown for the one bedroom condo would look something like this (not including real estate broker fees, loan fees, etc):
Purchase Price $150,000
Down Payment $ 10,000
Loan amount $140,000
Interest Rate 3.6%
Mortgage Payment $634.60
Insurance and PMI $195.83
Property Tax $152.55
Monthly Cost $1250.98
Using the mortgage amortization calculator from Bankrate.com, I’m able to see that after 5 years, my equity position in the property (if the value sees neither appreciation nor depreciation) would have grown from $10,000 to $24,000. Not bad! But wait, let’s play around with the calculator a little bit. If I pay an extra $100 a month into the mortgage, then my equity position will grow to just under $31,000 in five years. Not only that, the value of the mortgage will have dropped below 80% of the property value (once again, if values neither appreciate or depreciate). Although that is a big if, let’s assume that does happen. I would then be able to refinance (if rates were good) in order to reduce my PMI. If rates were not good, I could always just leave it be.
Either way, let’s look at the rental value for the one bedroom condo’s in this complex. After checking craigslist, as well as some other comparable items, a fair price seems to range from $1500 to $1600. I’m guessing that the $1500 range is more likely, even in 5 years and with inflation. So, I put my property on the market to rent and am able to find a good tenant at $1500 a month. At this point I am able to make an additional $250 dollars a month from my initial $10,000 investment. If you wanted to even skip the part where I lived there myself, I could buy it and immediately put it on the market to rent and collect the extra $250 a month. However, there is no way I want to be caught holding any property without a tenant. I definitely do not have the savings to manage that sort of mishap right now.
So where does that leave me now? Well, in theory this really seems like a good idea. But in practice I’m just not so sure. I run the numbers over and over again and while they work, they leave me feeling not so hot about the whole thing. The risk management side of me is terrified (or maybe that’s just the young adult side of me, who knows?) while another part of me is screaming for me to pull the trigger. Although the thought of finally owning some real estate and getting some (sort of) passive income is tempting, I really am not sure I’m ready to commit to that. I’m not terribly concerned about a property tying me down at all but still, who knows.
What do you think I should do? Is it a wise investment or a poor decision? Not going to lie, I could use some real estate advice right about now!