Thoughts on renting condo + buying a house

[snafu]

Over and above financial planning, being a landlord can throw your life into chaos. Renters can do things that are really nasty and the nicest people surprise you with calls late at night for a small repair, late or not paying rent, wrecking your unit, breaking condo rules and so much more.While your wife may be able to check their credit rating and employment, she wouldn't know they don't believe in cleaning their quarters, have fights and throw garbage at each other so coffee grounds are left stuck to the walls. One of the bloggers wrote that it took more than a month to repair the house after the Sheriff spent a month trying to serve eviction papers.

The whole eviction process is very difficult for landlords.

[uwbadgers19]

Snafu.....

Thanks for the thoughts. While yes, that is a risk we are aware of, we would hope that our higher rent, 1300-1400 for our 2 BR/2 BA condo would bring in better tenants. Of course, that's not a given, but I would be more confident in someone spending 1400/month to rent rather than 700/month.

"To break even with our condo and include all condo dues, taxes, rental insurance, and mortgage, it is 1375/month. We are currently paying ~1550 a month, basically to pay down a little quicker. The cost will go up slightly as we will be using a property manager to handle renting."

So need to alter this.....Our actually "pay off in 30 years" each month total with taxes/ins./condo dues is $1190. We've been paying the 30 yr like a 20 yr currently.

A few units have rented in the 1300-1400 range so even worst case getting 1200 wouldn't be too tough in our area (very business heavy).

My wife also confirmed that using our HELOC is allowed because the house is secured.

There is a school district we would prefer for down the road, but the way it looks, to get a house we would like would be over 300k.

I think we will plan for a ~250k house which will keep our monthly payments basically the same as now as we've calculated.

This sure is a lot to think about!!! I will be glad when we get through all of this!

[humandraydel]

I know it's not what you want to hear, but you can't afford it. It's really as simple as that. Remember, just because "the bank" (or your wife!) says you can afford it doesn't mean you can.

[uwbadgers19]

I know it's not what you want to hear, but you can't afford it. It's really as simple as that. Remember, just because "the bank" (or your wife!) says you can afford it doesn't mean you can.

Thanks for the thoughts. Why do you feel that way? Just trying to understand your thoughts. Thanks.

[humandraydel]

Thanks for the thoughts. Why do you feel that way? Just trying to understand your thoughts. Thanks.

It's too much risk and I'm not convinced you fully understand the consequences.

It doesn't seem like you fully understand or are accounting for the HELOC. After purchasing another house your savings will be wiped out. You don't have enough reserves (or income) to pay for 2 mortgages in case you can't find renters for the condo. You don't have reserves for maintenance on either the condo or the new house. You want to start a family soon? That's additional cost.

Don't get me wrong, you guys aren't doing bad financially. Your primary issue is LIQUIDITY. Zero savings and 2 real estate properties is not a good mix. My recommendation would be to sell the condo before buying a house.

[uwbadgers19]

It's too much risk and I'm not convinced you fully understand the consequences.

It doesn't seem like you fully understand or are accounting for the HELOC. After purchasing another house your savings will be wiped out. You don't have enough reserves (or income) to pay for 2 mortgages in case you can't find renters for the condo. You don't have reserves for maintenance on either the condo or the new house. You want to start a family soon? That's additional cost.

Don't get me wrong, you guys aren't doing bad financially. Your primary issue is LIQUIDITY. Zero savings and 2 real estate properties is not a good mix. My recommendation would be to sell the condo before buying a house.

Thanks for the thoughts. We were planning on purchasing at April at the earliest so using a 50k down payment we should have 35k in savings and 35k heloc. Sounds like it would be smarter to do 30k savings and 20k heloc. We also have 15k of emergency funding. If we got the 50k that way we would have 5k savings and 15k heloc remaining.

We would then open a heloc with 0 balance on new house right away for 10% of the homes value. Does that all make sense? Sound any better?

We have a side account in which we are saving for closing costs.

The condo can't be sold due to ratio of developer owned and normal financing not being accepted due to that.

[QuarterMillionMan]

I would agree with humandraydel. After the downpayment, how much left will you have in emergency funds/savings, etc? Will you have at least 8 months to 1 year of emergency funds?



Sorry I didn't notice this 2nd page.

[humandraydel]

We would then open a heloc with 0 balance on new house right away for 10% of the homes value. Does that all make sense? Sound any better?
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The condo can't be sold due to ratio of developer owned and normal financing not being accepted due to that.

Honestly? No, it all sounds worse now. I'm not trying to be mean or discouraging, and I realize that I am probably more financially conservative than most, but I wouldn't do it. Not being able to sell is another big red flag to me and I'm surprised the bank will let you open a HELOC given that situation. As for opening a HELOC on the new property, I find that further evidence that you are unprepared. You may as well just say "I'm going to apply for a new credit card with $20k balance, sound good?" A HELOC is a debt, not an asset

One final comment: I'm not saying this couldn't work, because people do this kind of stuff, but sometimes people lose a lot of money trying something like this. Personally, I would not do it because I find it too risky (and stressful!)

[snafu]

How much does a property manager charge for services in your community? What is their procedure for vetting potential renters? How do they handle repairs/problems? In this area they have a list of service providers and charge about 15% over and above the plumber/electrician etc. charges. Property manager average hourly rate here is $26. - $34.

I'm mentioning all this because it can get quite expensive and the risk is all yours. DH & I managed a small [6 unit] apartment bldg. for a couple of years. Based on location and size of units we decided our target market should be newly weds who would care about how their newly established homes looked. We were dead wrong! Worst tenants imaginable, never able to get their act together to pay on time, units were filthy, we had to replace fridge on most move-out due to stink, moved without giving notice, stole microwave and once stacked washer/dryer, broke porcelain sinks, always needed repairs late nights...and so much more.

[TBH]

I don't think this is necessarily a bad idea to keep the condo as a rental and buy a house, but I don't think you're quite ready.

I would:
* stop overpaying mortgage completely and throw all that money into a down payment fund. If you can, save up the entire down payment, even if it takes you another year, so that you don't have to use the HELOC. When you buy the house, if you have the $15K emergency fund plus the untapped HELOC for super duper emergencies, I think you'll be okay.
* I think you might have some expenses you're not tracking, because you have so much unaccounted for income every month. Did you account for entertainment, clothes, vacations, gifts? If you really do have that much extra income, then you should be able to save up a downpayment very quickly.
* stop thinking of the HELOC as an asset. People are right. You are not thinking of it the right way. If I had a HELOC, my goal would be to never, ever use it. You are motivated to pay down your mortgage early, which is great, but if you turn around and spend the equity in the form of a HELOC, why bother to pay it down in the first place? Better to pay the mortgage at the standard pace, and stop this HELOC habit. I know your wife is a mortgage broker, so she probably thinks of this technique as a normal part of financial planning, but people on this board are so debt-averse that talking about your HELOC as an asset sends off major alarm bells around here.

Again, I think you're in good shape and your plan is sound--except for the HELOC.

[disneysteve]

* stop thinking of the HELOC as an asset. People are right. You are not thinking of it the right way.

people on this board are so debt-averse that talking about your HELOC as an asset sends off major alarm bells around here. .

It isn't because we are debt-averse. It is because it is simply wrong. OP keeps talking about the HELOC as an asset. It IS NOT an asset any more than your mortgage, your student loans, or your car note is an asset. They are all debts. We can argue all day about bad debt vs. good debt but there is no denying that a HELOC is, in fact, debt. You shouldn't be borrowing your down payment. That is a very clear sign that you can't afford whatever it is you are thinking of buying. Your down payment needs to be cash in the bank.

[AsiaTraveler]

There is a school district we would prefer for down the road, but the way it looks, to get a house we would like would be over 300k.

No one has commented on this. This is a bigger deal than you think. If you are planning to start a family in the very near future as you say, then you're talking about wanting to move in about 5 years (less if you want your child to attend preschool/4K in that school district). Even without all the factors about the condo, HELOC, etc (which are also important but well covered by others), that makes buying the 250K house now foolish.

What is most important to you about having a house before having a family?

In my opinion, living in a 2 bedroom condo with a family is not that big a deal; just make different choices based on it (get smaller toys, go to the park more often, etc). Take the time to build up your savings and then move into the house you really want in the school district you want. Otherwise, you will waste a lot of money in the moving twice process. Not to mention making your financial life more precarious- not a place you want to be with a little one on the way!

Just remembered you said you live in Wisconsin: Ask around and find out how easy/hard it is to get into the preferred school district via open enrollment. You may not need to live in that school district at all if taking your child to school every day is a possibility for you (i.e. you won't get busing). That might change my answer some, but I still agree with others that you need to save more before moving.

[uwbadgers19]

Update

Thanks for all the tips everyone. Thought I'd update you a bit more, been a busy few weeks.

We will be building a house for 300k in the school district and are we want. We have paid 30k down and will pay the rest of our downpayment at closing, probably about 5k of ours and we will draw from our condo for 25k to get to 20%.

We will be keeping in check most upgrades in order to keep it close to 300k. Our house was based off another model, so included in our total were upgraded counters and wood flooring. We actually we probably downgrade to more carpet in some areas.

We will be having our property manager rent our condo, so our renters will pay our down payment. We understand it's not 100% ideal, but that's the way it's working. An article was published in our paper recently that our city, Madison/Middleton, has it's lowest rental vacancy in 7 years. The property manager charges 5%. If we rent in the 1300-1400 range we expect, we will profit after paying the prop manager between 150-250$/month, even with the condo's line included. Our break even would be 1200. There is a building similar to ours that rents units for 1250 that are 300 sq ft. smaller than ours.

Assuming a break even, the new house with mortgage/taxes/ins included, it will be about $180 more than what we have been paying on the condo (we have been accelerating payments thus the smaller increase for the larger mortgaged house)

We also were pre-qualified. We have calculated it all out many times, even if we had no renters we could afford all house payments, taxes, ins, etc and utilities. We also could continue paying our condo at our normal rate all taxes/ins/etc included. Of course, that would assume we couldn't even get a rental at all, which for any rental anywhere possible, but extremely unlikely in the area we are.

We also will open a 2nd mortgage on the new house and have been approved, but there will be 0 balance.

We have 15k in an emergency fund.

So, I think that is all. We are extremely happy, going to be in the best side of town with the most sought after schools and will have a busy spring!

[uwbadgers19]

Another update

Thought I'd post another update on our scenario as it's been a busy few months!

Condo is in process of getting rented at $1400/month. This nets us $121 after mortgage/condo dues/insurance/property manager are paid.

Our home being built total costs:
Value: 309k (had it appraised)
Mortgage: 20% down so 247,200 at 3.625% (just locked on Weds.)

The overall total payment difference between now and new house is + $197 in the new house. So our profit of condo basically covers the difference so it won't be too noticeable. Of course, they is more $ to spend on a house and we understand that, but overall we aren't taking on too much more. New house $1,735 vs Condo $1,540.

We are being gifted a snowblower + lawnmower once we move in. We also have lots of hoses, rakes, etc from our wedding in September.

Our actual loan is only for 305k, the additional 4k is overages we owe the builder We have saved 3k of it and my wife will get us to 4k very soon (she has ~6k net coming in this month).

Kind of included in this total $ we need is also closing costs we need and 1 year homeowners insurance and 1st month interest. Closing costs are lower because my wife works at the bank and we get some nice discounts.

We would have recently had this money saved earlier, however we recently fully paid for:

4 new tires for my car ~$600
Years worth of car/life insurance for both of us ~$600 total for all
House Appraisal ~$300
License Plate renewals for both ~$150 total

It's nice to have those big items done for a year. Have one big expense this month, I'm running the Boston Marathon! Flights paid for a long time ago, but still need to shell out for 4 nights hotel, which is Boston this weekend, SUCKS! Probably will be ~$900 total for hotel. Wife's parents are coming so they will probably buy us a few meals

Hmmm, I think that is all the big stuff lately! It's been busy and a bit stressful, but overall things have worked out pretty well. I know earlier in the thread people didn't like that we were using our condo equity (~29k) to help finish our downpayment, but that's what we decided on.

Over the last 3 months we have also increased retirements savings from 78k to 86k. We are 28 and 29.

I've had some fun lately see where we are networth wise, here is what I came up with. While not in the house yet, I added it to calculations

April 1 2013
78k---Retirement
175k---Condo Value (assessed in Nov 2012)
309k---House Value (assessed in Mar 2013)
15k---Trust Fund (accessible by wife's parents)
4k---Cash

-0---Credit Cards
-9k---Car (1% interest and will be paid off on schedule, auto withdrawals)
-247k---House Mortgage
-139k---Condo Mortgage

+581k - 395k = +186k I think I did this right.

[JBL]

I am a small landlord (rent two units out), and I saw that you're planning to hire a property manager to manage the condo if you decide to buy a house. I'd say that managing a condo rental is pretty low maintenance; you need to invest a good amount of time when tenants turn over, but aside from that it is pretty low maintenance. Not for everyone, but I would consider self-management more carefully.

Second, I'd recommend staying in the condo. You say 2 bedroom, 2 bath. That is plenty big enough for new parents and a baby. Condo's are easy to take care of and less of a burden when you're busy caring for a new child. Plus, the condo is very affordable for you two; that is important!

I know the allure of owning a house with a yard, but to tell you the truth, it's a lot of work and gets quite expensive. I'd stay in the condo and start looking seriously into moving if/when you are planning to have a second child. Especially before you're child get to school age, living in the condo and continuing to build savings will be a great way to go. Plus, in 5 years you may see the developer sell of most of the remaining units, allowing conventional mortgages to be approved, which will make the condo more valuable and easier to sell. Then you will be in a great position to move up into a great home of your dreams.

It's never fun to postpone dreams like owning a home, but it can really pay off. Especially if you see appreciation on the condo in a few years, if you sell, take your proceeds to use as a downpayment on a house, and be able to keep your liquid savings in savings for the future needs of raising a family.

Good luck!

Whoops! I see you've already committed to a house... I still recommend considering self-managing the condo. That property manager is eating way into your potential income from the rental. Condos are much easier to manage than buildings or single family homes; the association takes care of the grounds and structural stuff, you just need to take care of the odd internal repairs (which you pay for with or without a manager). You might have a contract but think about managing it yourself after the contract expires.