If you are a real estate junkie like myself, you might commonly see cheap condos in your area for sale. When I say cheap, I mean virtually giving them away. I thought about buying a condo, but ultimately decided to avoid them. Let me tell you the appeal to condos and what ultimately scared me away from them.
I think it’s best to look at actual examples of real estate. I’m going to show you a townhouse ( 3 bedroom / 1.5 bathroom) that has been on the market a while in one of the best school districts in the Cincinnati, OH region. The condo was listed for $34,200.
If you bought this condo for $30,000 (after negotiating) with 20% down, your mortgage payment (interest and principle only) would be only be $149.32. Taxes are actually lower for this condo as well, running about $126.50 a month. The Home Owner Association (HOA) Fee for this condo is $220 a month. Let’s assume the insurance is $600 a year or $50 a month.
That makes your monthly payment, all in, $545.82 a month. Your HOA Fee also covers water and sewage, trash pickup, landscaping, snow removal, a pool, a tennis and basket court, and more. These same townhouses are renting for $850 – $900!
Why wouldn’t every rent buy one of these types of properties to live in?
First off – this particular property needs about $10,000-$15,000 of work in my opinion, but it could be cleaned up.
The HOA Fee’s are high now, but they are only going higher. Some of the HOA’s have contracts that state it can only increase by a maximum % a year, but many of these contracts have maximum percentages of 8% or more! Trust me when I say 8% is not a flattering number to be compounded. If it hit 8% a year for 10 years – your HOA would be $474.96 month (+115%). Furthermore your property might be worth a lot less if your HOA gets higher.
HOA’s also have ways of doing “Special assessments” for big projects and repairs. Nothing like getting a letter stating that there is a “Special assessment” for a new roof. These types of assessments are usually foreshadowed far in advance, but can cost $100s or even $1000s. Nothing sounds worst to me than having a chance of getting a giant bill through an assessment – I personally don’t like to feel as if I’m out of control.
Speaking of special assessments – you better make sure the other condo owners are paying their HOA fees, because if the HOA itself is having financial problems due to people not paying their fees – it ultimately could come back to haunt the people who actually do care about the community. Whenever buying a cheap condo its important to make sure the HOA is not in any financial problems.
Don’t like your neighbors? Although it may feel like an apartment – it’s your home and its not going to be so easy to move. As an added bonus, your community is now a cheap place to live, which can attract the wrong crowd.
Ultimately, Cheap condos can be a great deal if you plan on staying long-term– but its basically just buying an apartment. If this townhouse would rent for $850, it might be just better to rent it for the following reasons:
- Flexibility – Can leave whenever you want
- You do not have to complete a costly and time consuming rehab
- You wouldn’t be subject to housing market problems
- You wouldn’t be subject to increasing HOA’s fees that could hurt your property’s value
- You wouldn’t be subject to any costly HOA “Special Assessments”
- Bad Neighbors? See Reason #1
- Something breaks (furnace, ac, fridge, oven, water heater, toilet, roof), it’s your landlord’s problem.
- Some people would argue that you can “Do whatever you like” to your property if you own, but remember you are subject to an HOA that has to approve your changes.
- Even if you did own the property, the amount of equity you would have been earning on your $149.32 mortgage payment would be laughable.
- You wouldn’t be getting any tax benefit if you owned the property because you wouldn’t have any real interest expense to deduct
By renting instead of buying you get all of the benefits and none of the problems for the cost of only about $300 more a month than your mortgage payment would be if you owned the property. Really think about all of the reasons above – all of the time and hardship – $300 a month, $3600 a year. Also noting that you will be saving a lot of money a year not having to maintain the property. To me, its worth paying the extra cash to rent this type of property. Also if there is a glut of these units, you can be assured that someone is desperate enough to rent them for more like $750.