When most of us think of buying a home we think of the nice detached house with a picket fence and a nice backyard. Most of us have come across the idea of buying a condo at one point in time. Buying a home or buying a condo will depend on your individual needs and lifestyle. Below are some quick tips that will empower you to make a better decision.
What is a condo?
“Condo” is short for condominium and describes a type of real estate ownership. You are essentially buying an apartment. Both look identical in appearance and you cannot tell an apartment complex from a condominium development simply by looking at them. The differences are legal and reflect a different level of interest in real property. From a technical point of view you are the owner of the airspace within the boundaries of the condo unit only. All other property in the development is considered to be common and an individual condo owner will only have a fractional interest in this.
Advantages of Buying a Condo
The advantage of buying a condo lies in its affordability. This means that a buyer will have to come up with a smaller down payment. This can be enticing to first time home buyers who are short on cash.
Generally condos are easier to maintain because you only have ownership of the apartment space itself. Large items like the roof, gutters, siding, and landscaping will be maintained by the home owners association (HOA). For this reason many retirees buy condos because they can no longer maintain a single family home.
Locations in urban areas
Many high end condo units are being built in the urban areas of cities within walking distance of entertainment, dining, nightlife, and high paying jobs. This is especially attractive to buyers who like fast paced environments but do not own a car.
Generally speaking condos do not appreciate as fast when compared to similar detached homes.
HOA dues and assessments
HOA dues and fees can be very expensive relative to the mortgage payment. They can also “assess” large one time fees to fund new roofs or siding. Keep in mind that HOA’s have the authority to foreclose on your property so paying dues is mandatory.
Rules & restrictive covenants
There are many rules and restrictive covenants regarding condos. It is imperative that you get a copy of all the rules and restrictive covenants from the home owners association and read every word of it!
How does a condo differ from a single family detached house?
With the single family home you are also buying a parcel of land and hence have ownership of a larger amount of real property. With ownership comes more freedom and responsibility. All landscaping, yard work, roof and gutter work is the responsibility of the home owner.
Single family homes will almost always appreciate much faster than condos in similar areas and are thus more economically viable. This allows home owners to create a larger amount of equity and get a larger check at the closing table.
Easier to sell
Detached are in more demand because of their versatility. There is usually more square footage and room for larger closets and amenities. A house with a fenced in yard are attractive to owner with pets or ones with a family. This makes them makes them easier to sell because they appeal to a larger pool of buyers.
Absence of an HOA
The absence of an HOA will give the homeowner greater freedom in designing and modifying their home. Also, money that is not given to an HOA can be used in other areas such as upgrades, or paying down the principle on the loan. Also, having the option to grill out with your friends in the back yard is a nice feature that allows a greater sense of freedom. Keep in mind that many homes in new construction subdivisions will have some form of a home owners association so never assume there is not one in place just because it is a detached home.
Having more distance between yourself and your neighbors affords a great opportunity for quiet enjoyment of your property. Urban environments and having neighbors in close proximity gives rise to nuisances such as hearing load footsteps above you or overhearing a neighbor fight with a spouse etc.
Ultimately you have to decide what’s most important to you. Condos can be great to a retirees who cannot maintain single family homes but do not want to rent. Single family homes are the ideal place to build equity for those in it for the long term.
8,000 Baby Boomers turn 65 every day (they were born between 1946 and 1964). They will be making many decisions on retirement and lifestyle living. What do they need to consider? Here are some trends to watch:
- Baby Boomers fall into two categories: Planners and Procrastinators. They either Plan for retirement (choosing where and how to live) or they Procrastinate and let others make the decision for them.
- If they move, they prefer warmer climates, lower cost-of-living (taxes and housing) and low or maintenance-free residences. Mowing the lawn is not a task they want to bother with. Walkability and convenience to medical facilities will be important, so small and mid-sized cities are gaining in popularity and affordability. College towns are either preparing or have in place education programs that provide Baby Boomers with an opportunity to return to class. Quality of Life is important to them and Life-Long-Learning is a part of that. Many move to be closer to grandchildren (or further away sometimes!)
- Many prefer to Age-in-Place in their current home. Depending on the style of residence they live in, this option may or may not be possible, since the cost to remodel may not be feasible. A consultation with a Certified Aging-in-Place Specialist can help them make the decision (the National Association of Homebuilders Remodeler’s Council offers this designation nationally and maintains a database for users to find contractors in their area).
- There will be a steep increase in the “Suddenly Single” population. Many Baby Boomers will face a divorce or the death of a spouse, which will change their lifestyles dramatically. Planners will adapt to these changes more easily than Procrastinators.
- There will be an increase in housing options, in addition to what’s already available. The “Village” concept allows Baby Boomers and Beyond to Age-in-Place while those in their surrounding neighborhood provide social support and services for them, for a fee. Granny flats (a small residence is built on the property for the grandparent) are another concept that is slowly being implemented through zoning changes. Co-housing will gain in popularity, especially among the growing numbers of singles (many are women) who pool their resources to live with others in a communal environment. Multi-generational housing is a concept that is being explored by builders. It allows Baby Boomers, and their parents and children, to co-exist under one roof. This solution can help families live comfortably, since many of the Baby Boomers’ children are saddled with student loan debt, and Baby Boomers are caring for their parents. Baby Boomers do not want all want to be segregated into age-specific retirement communities; they prefer inter-generational interaction. Look for competition to ensue when downsizers compete against first-time buyers for condos! And purchasing a second home, which will become the primary one when they retire, is on the upswing again. Renting will be a popular option for those who don’t have the down payment money or inclination to own.
- Regardless of the type of housing decision they make, Baby Boomers will still need to de-clutter their homes. Many have been in their homes for 20 years or more and they have accumulated years of memories. Aging in Place requires de-cluttering to allow freedom of movement in the home; moving requires sifting through attics, garages, and basements to reduce the amount of possessions they take with them and prepare the home for prospective buyers.
- Look for an increase in home inspections. As Baby Boomers age in place, many who have been in their homes for years have deferred maintenance issues that arise. A professional home inspection will find many problems which can be solved by professional contractors. Water seepage (mold), drainage issues, pests, and other issues are often discovered when a house is de-cluttered. Solving these problems will help Baby Boomers stay in their homes safely.
- Fitness will increase in popularity. Baby Boomers will want to stay in shape so they can keep their medical expenses down in retirement. Fitness centers that cater to the Baby Boomers’ needs will continue to sprout up around the country.
- Many Baby Boomers will retire from their current job and launch new careers that provide stimulation and satisfaction. Many others will continue to work part time, whether by necessity, or the desire to balance their days with work and play.
- Volunteering and “giving back” will prove more popular. Baby Boomers grew up when the Peace Corps was started in 1961; they now have time (and money) to travel and do good for others.
- Baby Boomers want recreational activities that include exercise like swimming, boating, walking, and biking. Golf is not the favorite pastime for this group as it was for their parents.
- Baby Boomers don’t want to be reminded they are getting older. This fact will encourage companies to develop new ways of providing “invisible aid” to this independent-minded generation, whether it is easier removal of jar lids or redesigning a kitchen or bath to accommodate the changes they face. Companies that provide services that cater to their needs will increase as well.
- As Baby Boomers age, whether in place or through a move, there will be a shortage of qualified help to assist them. Housing options will need to include services to accommodate those needs. Many tasks, from simply turning a mattress to taking out the trash to transportation services will be challenges to overcome.
This generation redefined traditional values and is not afraid of change. The next several years will show how they will re-invent retirement!
While many people position home ownership as one of the clearest paths to a sound financial future, it isn’t always the right choice for every individual. In some instances, renting can be a better strategy as it avoids the many related costs of homeownership and does not run the risk of becoming “underwater.”
There are several benefits to both renting and buying, and individuals need to consider a range of issues in order to make the right housing decision for their particular situation:
Renting has its benefits:
- It’s cheaper. In many markets rental costs can be quite low compared to mortgage costs, making renting an attractive alternative. A lower payment every month gives people the ability to pay off other debt, making it particularly attractive for younger people with student loan or credit card bills.
- It’s flexible. Renting allows individuals to quickly move in order to accept job transfers or pursue other opportunities. They can often sublet the rental or simply work with the landlord to break the lease early. Buyers that are caught in down markets might not be able to accept a loss, so they get effectively stuck in their homes.
- No maintenance. This is a classic benefit of renting that can really add up. If the dishwasher breaks in a rental, then you simply call the landlord. Avoiding repairs and maintenance is a considerable cost, especially if you purchase a home that requires more substantial work.
- No real estate taxes. A $500,000 home in Southern California can also have property taxes of $6,000 to $8,000. This represents an extra $500 or more a month for homeownership.
- Dive in the pool. Many apartment complexes are offering gyms or pools to attract renters. These amenities would be very costly in a private residence, and represent considerable value for renters that want luxury without the burden of a big mortgage.
Buying also makes sense:
- Tax benefits. Despite some calls from politicians to remove it, the mortgage interest deduction likely isn’t going anywhere. This deduction can be significant, especially for those filers with expensive homes with a higher tax bracket, as it helps people stretch to afford higher-priced areas.
- Fixed payments. Renters can often expect an annual (or once every two to three year) increase in their rental rates. Homebuyers that purchase a home with a 30-year mortgage can lock in a fixed rate (excluding any rise in property taxes). The benefits are even greater for those borrowers who can swing 15-year loans.
- Interest rates remain low. The cost of buying is still historically low, which makes buying an attractive investment for the long term. If rates rise, then renting begins to look more appealing, especially in pricier markets in California and New York.
- Pride of ownership. This is a more intangible benefit that comes from owning something instead of renting it. Owners typically spend more time on cleaning and improving their homes which helps instill a valuable sense of pride.
- Price appreciation. When renters occupy a property, they don’t stand to gain at all if the price of the condo/house goes up. In fact, this will likely cause the landlord to push for more frequent or higher price increases. Appreciation does of course help the owner by boosting the value of the property and giving the homeowner a financing option through equity.
When comparing rentals against available homes, be sure you do a true apples-to-apples comparison. Judging the cost of a two bedroom rental condo versus a three bedroom home with a big yard isn’t a true comparison. Look at comparable properties in order to best judge the true costs of each option.
Another thing to consider when buying a home is something economists call “opportunity cost.” In this context, the cost relates to the investments you could have made with down payment money if you rented instead of buying. So if you spent 20 grand on a down payment and stayed in that home for 15 years, then you could look at how much that money would grow under different investment scenarios. You typically need a security deposit for a rental, but that’s a much lower sum and is returnable if the property is left undamaged.
Buying often makes more sense for people that are planning to stay in a neighborhood for a long period of time. Home buying has many upfront costs (agent fees, taxes, etc.), so a longer time frame means those costs are spread out, so they annualize to a fairly low amount. Buying a home requires an investment in time and money, which can be hard to justify if you plan on leaving in a few years.
When people think of investing their money in the market, they first think stocks, bonds and mutual funds. However, what Wall Street doesn’t tell you is there is an alternative asset one can add in order to diversify their portfolio: real estate.
Real estate investing expert Preston Despenas answers a few questions on how investing in real estate be an easy and effective way to diversify your investments, including your retirement savings plan.
Why do you recommend investing in real estate?
Preston Despenas: Real estate is a great investment because it’s a hard, reliable asset unlike stocks, bonds and mutual funds. Real estate investments also have several benefits including mitigating some risk by adding diversity to a portfolio, it can generate monthly income from rents and properties. Real estate investments can also be structured to include leverage in the form of a mortgage, which can make your investment dollars go farther.
You may be wondering about the risks and responsibilities of owning a home and managing tenants, and I will explain the hassle-free landlord options in a bit.
How can real estate be incorporated into a retirement savings plan?
PD: Adding income-producing real estate to a retirement plan is a terrific option. If you are interested in adding real estate to your retirement savings plan, I suggest you first talk with an IRA custodian. When adding real estate to your retirement savings plan, according to IRS rules, the assets need to be held in a self-directed individual retirement account (SD-IRA), which is administered by an IRA custodian.
A custodian or qualified trustee is responsible for administrative services, due diligence and filing the proper IRS reports, among other things. It’s important that the funds are transferred to a self-directed IRA, which will allow you, the account owner, to direct the account trustee or custodian to make a broader range of investments, including real estate.
Another benefit of adding real estate to a self-directed IRA is that it can provide risk diversification to a retirement portfolio. All assets come with degree of risk, such as stocks, bonds, mutual funds and ETFs. Real estate is also an asset, but it has a couple of unique features compared to the other more traditional assets in retirement accounts. First, it is a hard asset – meaning it is an actual building and/or piece of land. Second, sometimes the value stocks, bonds and mutual funds can move in the same direction at the same time. Real estate values are not fully-correlated to the moves of the stock market and sometimes might move in the opposite direction. Combined with rental properties’ ability to also produce a steady stream of income, real estate has the potential to protect your portfolio against inflation.
Lastly, some investors don’t have the available funds outside of their retirement savings to purchase real estate. Using a SD-IRA allows investors to add the income-producing property to their retirement account and it allows them to secure non-recourse financing on the property so they can have a mortgage and not have to pay for the entire property outright.
What are things investors should consider when investing in real estate, especially if they’ve never been a landlord?
PD: Investing in real estate sounds difficult; however, with the right tools and guidance, it can be an easy and successful process. Investment firms with experience working with self-directed IRA options can help make investing in real estate a passive and hands-off addition to your portfolio.
While there are many benefits to going the traditional route of renting real estate properties, renting real estate on your own also means taking on significant amounts of responsibility, both when buying the property and while owning it. Many investors don’t have the time and expertise to assume the duties that come with owning and managing a rental property, and that’s why some real estate investment firms offer a hassle-free approach by providing a management service or tool to help ease the maintenance of the long-term investment.
Real estate investment firms are helping buyers purchase residential properties in distant cities and manage them efficiently. They can help secure on-site property managers to help investors maintain the rental property, manage the tenant relationship and seek new renters when needed. In addition, some offer online management tools to help eliminate the day-to-day headaches of being a landlord.
Additionally, real estate investment firms can provide investors access to properties in a variety of markets. They look for properties that have positive economic indicators, low vacancy rates and prices and have the potential to garner relatively high rents. This allows investors to have access to properties with the best rents, long-term economics, and purchase price entry-points in order to get the best overall return on their investment.
It is important to remember that if you add real estate to a retirement savings plan, in accordance to self-directed IRA rules, the investor is not allowed to live in or visit the rental property, SD-IRA investors need to delegate the needs of the income-producing property through their property manager by working through their trustee or custodian.
What are the advantages to non-recourse financing?
PD: Finally, there are two primary advantages to non-recourse financing when it comes to real estate investing. First, it is the only type of financing allowed with investing in real estate through a self-directed IRA. It allows the investor to leverage their portfolio, so they don’t have to purchase the property outright and stay IRS compliant. In addition, it does not hold the borrower personally liable for defaulting on the loan and the property itself is collateralized asset. This allows for the ideal low risk, high reward investment.
Secondly, non-recourse financing is a great option for foreign nationals to invest in US residential income properties. Like SD-IRAs, it is the property that is the collateral in the loan and the borrower doesn’t need any special approval. Thus, these loans can be much easier to secure for foreign investors that might have to meet higher borrowing standards at US banks.