condo purchase to rent out in 4 years. Is it worth it???

Question

Hey guys,
to rent an apartment in my good neighborhood (right next to Balboa park, San Diego), costs: 
-1bedrrom: 1000-1300$/month (average 1100)
-2bedroom: 1300-1950$/month (average 1600)
Data taken from www.rentometer.com

My fiance and I were thinking about PURCHASING a condo that we can stay in for 4 years, and then move into a house in a good neighborhood away from the city. (Houses per sq ft are almost 1.5-2 times more expensive in this Balboa neighborhood in comparison with condos). The plan was to RENT out this condo once we buy a house. This way we were trying to build EQUITY instead of building SOMEBODY ELSE'S equity.
But after analyzing the condo market, we figured out that once we move out of the condo and get it rented, our cash-flow will be 350-450$/month NEGATIVE!!!!!!! (Basically, it's 350-450$ more to OWN than to RENT). We looked at lots of different properties and played with numbers, and we STILL come out short, unless we find a condo that charges 35% less per sq ft and HOAs do not exceed 250! It's almost IMPOSSIBLE to find a deal like that.

I definitely do not want to be throwing money away, but doesn't it seem a lot more cost-effective to just RENT for 1-2 years, and then buy a house. In the meantime buy another property (as many as we can afford!) in Vegas, Phoenix or any other cash-flow cities. (we currently own a 4-plex in CA and a 2br house in Vegas). I really want to own, but I have to be LOGICAL. No emotions.
Besides, a 350000 condo will cost us (with the HOA fees) the same amount to spend a month as a 425000 house!!!.

What do you guys think?

Jon Holdman · Answer

Don't get wrapped up in "throwing money away on rent".  That's one of those myths propagated by those with an interest in you buying and selling real estate.  Your alternative is to throw money away on interest on a loan.  And the costs of ownership are higher than just the PITI and HOA.  The costs of a rental are higher still because of vacancy and dealing with tenants.  Especially in CA, which is tenant friendly.  A professional tenant can stiff you for several months rent and leave behind a mess.  In many cases, and I suspect this is one, renting is the cheaper alternative to buying.

Also consider the costs of buying and selling.  When you sell in good times, you'll spend 8% or more on commissions and closing costs.  In bad times (like now) another 3% for concessions to the seller.  And its about 2% when you buy.

Investing in rentals is very different than buying a residence.  The criteria are often very different .  People who buy then have to rent are "reluctant landlords" that are very often in a losing position.  Don't deliberately put yourself in this position.

IMHO you should only buy a property you intend to die in.  If you're planning to move, especially in a short time like four years, the transaction costs will kill you (ha!)

Shane M · Answer

Looking into doing this myself, another thing to watch out for are condo associations that are poorly managed, if they don't budget enough for necessary maintenance you could be stuck paying extra dues to cover the costs. Although you should be able to evalutate the state of the condos (roof, landscaping, pavement, etc) as part of your due diligence.

Edita D. · Answer

WOW, you guys rock!!! Thank you for all your great advises!!!!!!!!!!!!!!!!

Shari Posey · Answer

Steve has a great point! (Well, actually everyone had great points.)

Also, if you are without kids now why not rent the least expensive place you would ever consider living in and save the money so you can buy a nice place outside the city sooner? I do not know the SD rental market but in my area landlords will negotiate quite a bit. Check on Craigslist for apartments that have been on for a while and been dropping in price. How much are you paying now? Of course there's a cost to moving but if you can find a place $500+/mo cheaper it might be worth it for a few years.

Steve Luo · Answer

Seems that you can only afford the condo now.  Do you expect a big raise 4 years later that makes you qualify for BOTH the condo and your new residence?

Don Konipol · Answer

The property we choose to purchase as a personal residence often does not cash flow as a rental.  The property we buy as investments that do cash flow are not the type or location where we would choose to live.
Renting is not throwing money away.  Often interest, insurance, taxes, repair, maintenance, opportunity cost on down payment far exceeds the cost of renting a similar property.  Financially, ownership has two advanges.  First is as a form of forced savings (via principal payments, which increase in amoritized mortgages as the years go by).  Second is price increases, either as a result of inflation or a result of area growth/demand.

Edita D. · Answer

Hey Garret,
North park is an up and becoming neighborhood, as well as South park. Those are good areas to look for cash flow properties, if there are any.
I was looking at area Banker's hill/Hillcrest (north of Laurel and south of Robinson), it's on the west-side of the Balboa park, along 6th ave.

Garrett Yamasaki · Answer

Hey Edita D.,

I have been looking to invest in San Diego as well, but it is pretty hard to actually find promising cash flowing properties since San Diego is limited by land.

Where exactly are you looking near Balboa Park?  North Park, and South Park have some places that I think can cash flow.  I never really look at condos because of HOAs, but that's just me.

Mike Jakobczak · Answer

Well renting is not a bad idea in some markets.  For example Toronto, I can rent a place for 1400-1600/month downtown.  But if I were to buy it would bring my expenses in the 2500-3000 range /month.  So sometimes it's much cheaper to rent.

If your market is strong and is showing appreciation per year, it may be still wise to buy.  If you can find a property that is under fair market value, fix it up live in it and then re-sell after the 2 years, you may be able to make some money once you go to sell.  Even if you just got back all the funds you put into the property you are still coming out ahead.

Work out the numbers and see where you would need to sell to make a profit and see if it's possible.

condo purchase to rent out in 4 years. Is it worth it???

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