Condo Purchase Question -- Am I getting in way over my head?

Question

Hey all,

First time poster and home buyer here. I've recently gone into escrow on a 3 bedroom 2 bathroom condo that I'm hoping to rent out a room or two to help out with mortgage payments. My only issue here is that I have about 190k saved (mostly invested in the s&p 500). 52k of which is in retirement savings accounts and 13k of which is in an HSA, so in reality I really only have 125k to use as a down payment and closing costs, or 150k if I take out a loan against my 401k.

That being said, I was hoping to put 20% down on a property with a purchase price a little under 700k. But after seeing the property, I think it will need some extensive repairs (new flooring, scraped popcorn ceiling, minor upgrades to bathrooms (new hardware, resurfaced tub, etc)).

Would it be wise to potentially put 10% down and use that extra cash to account for any repairs that may need to be made?

What would be the best way to proceed?

Yours truly,

-Mark

John Mocker · Answer

Mark,

With Condo's there is an additional layer of decision making.  Consider if the Association will allow the renovations that you want.  Does not sound like any of those would be an issue but the Condo Board or the Management company may be able to give you more info.  I would also find out if they have been budgeting enough for replacement of the things that wear out (roof, siding, etc.)

From an insurance perspective, be sure to find an agent that understands the insurance for condo unit owners in your state.  The Association Bylaws and Declarations will give you info on the parts of the condo you own (could be the sheet rocking, cabinets, fixtures, etc. ) and what is the Associations.  You need to insured the building items you own (called Improvements & Betterments or Additions & Alterations in many policies).  You also will need to insure your belongings, Liability, Loss of rents/additional living expense.  Also talk to your agent about Loss Assessment coverage and Equipment breakdown.  Also let them know about the rental of parts of the unit in case they need to endorse the policy.

Remember, your policy will not cover your Tenants belongings or their Liability.  They need to have renters coverage for that.

Mark Mensah · Answer

Thanks for the response, Brad! Rates are skyrocketing now so I'm getting a little nervous. Aiming to put 10% down and have a substantial cash buffer to cover renos at this point. I appreciate the feedback!

Brad Jacobson · Answer

Hey Mark,

You're the man.  Way to save so much and be investing from a position of strength!

My opinion is that the 30yr fixed rate mortgage is one of the best, if not the best, financial tool available anywhere.  You'll never get access to less expensive money ever.

You'll also only be able to take advantage of the owner-occupied, low money down loans a few times throughout your life.  The rest of the loan you'll get will be investment style and will require you to put 10-25% down.

Based on that, I'd only put down the minimum, 0-5% and save the rest to enable you to continue investing in more properties or being able to rehab out of pocket.  The return on your investment of 10-20% down isn't going to yield hardly any difference from 0-5% down.  You'll get the same appreciation, tax, loan paydown, etc. benefits either way as long as you just buy the property.

Buy the property with as little down as possible and then start saving all of that good house hacking money for your next investment and put 20% or whatever down on it would be how I'd manage your situation personally.

Good luck!

Scott E. · Answer

I have always put as little down as possible on my primary residence purchases. 3%, 5%, or 10% down. You will pay some mortgage insurance, but it should be minimal on a loan that size. And this will leave you with extra capital for initial renovations, ongoing repairs, and other unrelated emergencies that may come up.

You are ok from a savings standpoint to make this purchase in my opinion. But you didn't share anything about your income. If you only put 10% down on the deal, are you going to be in a comfortable debt-to-income position in the event you don't have roommates or tenants? You need to be able to comfortably afford the payment yourself. Any additional 'house hacking' rental income is icing on the cake.

David Choe · Answer

Hey Mark!

Congrats on your 1st property.  Just my 2 cents but I would go in with less i.e 10% down for a few reasons:  1)  you have repairs/upgrades that you've already identified  2) reserves for emergencies or if a roomie or two back out 3)  diff in monthly expenses is not that big a difference and mortgage insurance (MI) will come off shortly possibly after 1 to 2 yrs.   The only benefit to putting 20% down is to avoid MI and a slightly smaller mortgage payment for the slightly smaller balance.   Play around with some mortgage calculators to see what pencils out better for you!

Best of Luck!

David Choe