In the last year, I’ve been having discussions with clients about good reasons to buy a condo vs renting an apartment. If you’re single and have been paying market rate rents for the last several years, you know rent prices sky rocketed. You find yourself moving every few years in search of better rent, better space or maybe even less space. And then you ask yourself, “Why am I paying $1995/month on a 1 bedroom apartment with nothing to show for it at the end of the lease year?
Average New Jersey 1 Bedroom rents in luxury apartments:
- Jersey City, NJ starting at $1990
- Bloomfield, NJ starting at $1995
- Maplewood, NJ starting at $1800
- Edgewater, NJ starting at $1990
- Hoboken, NJ starting at $2500
- Montclair, NJ starting at $1850
- Ridgewood, NJ starting at $1665
Depending on the complex, the square footage range in size with some fairly small. Let’s do the basic math.
Annual Expenses on RENT alone if rent is on average $1995/month = $23,940/year
As a realtor, I often wonder how does one pay that much rent a year and be okay with it? Even a financial planner would say, “Say What?” So let’s dive into the benefits of buying a condo instead.
#1 Your mortgage payment is less than rent
That’s the number 1 reason to buy a condo vs. renting. So let’s use an example to determine when this theory is true and when it isn’t. First, figure out how much it would cost you to purchase the property. In some scenarios, let’s say you might not be purchasing a luxury condo, but you might do even better–score a 2 bedroom condo in a garden style or traditional style apartment complex. Let’s say the average sale price for condos in Jersey City (1 bedroom) is $175,000 and with $6000/property taxes; HOA dues of $350, home owner insurance of $800 (may be considerably less for a condo, but let’s just be conservative). Take a look at what your monthly mortgage payment would be utilizing a conventional loan (20 percent down payment).
Take a look at that! Your monthly mortgage ends up being less that your rent!
Let’s say you decide to use an FHA loan (3.5% down payment), take a look at the breakdown.
Check that out! Your mortgage payment even with PMI (private mortgage insurance) for when you’re not placing a 20% down payment on a purchase is STILL less than your rent.
2. After 30 years you own the property out right
Let’s just say you did go with the 30 year loan and did nothing more than stay there or even rent it later on–you OWN the property out right at the end of term. Now you don’t worry about your interest payments, only property taxes, HOA and home owner’s insurance.
So let’s do that basic math using the figure above (for ease) using today’s dollars.
Monthly taxes – $500
Insurance – $67
HOA – $350
(no more PMI)
Grand Total – $917/month
That’s just $917/month vs. the $1995/month.
3. Built in retirement account
That’s right, let’s say you don’t want to keep the condo for whatever reason and decide to sell it. If someone paid your mortgage and again just in today’s dollars and you decide to cash out for the same price you purchased if for $175,000 there’s some retirement money for you.
4. Rental income
Again using today’s dollar and rents. Let’s say your home is paid off after you purchased your home in your 20s or 30s, and you maintained the mortgage in a 30 year term.
Market rent: $1995
What you pay: HOA, taxes, insurance -$917
Rental Income: $1995-$917 = $1078
You’re basically collecting $1078/month because someone is paying market rent! That’s the power of real estate!
5. Estate for your children
What? Children and estate? Of course, this is legacy wealth we’re talking about. Think about that…you have a paid off asset that you can pass on to your children.
6. College fund
Now with children comes college! Tap into the equity of your paid off asset to fund college! But please do this carefully. If college tuition is $50,000 a year for 4 years, this may not be a smart move.
7. A place to come back to when you retire
Here’s what happens realistically as we grow older. Suddenly the single family home is just over bearing. Landscaping and snow removal is no longer fun or possible. Of course you can hire a company which is a valid option since you would only need them in New Jersey 6 months out of the year. When you married and purchased a home, you didn’t think about buying a cape cod or ranch home (these are the homes where the bedrooms are situated on the ground floor), and now going up and down those stairs are straining on your knees. Or worst yet, you’ve become an empty nester because your children have relocated or purchased a home of their own. What to do with that big house then? Funny enough, you can actually RENT that big house out and move right back into that 1 bedroom condo.
What’s amazing then is (using today’s dollars), if your paid off condo monthly expense is $917/month and you have planned your retirement goals out smartly, then all that extra income is for you live comfortably and not worry about landscaping or snow removal ever again! Go enjoy life, clean less or if you outsource someone to clean, it also means less expense to clean!
Listen I know I didn’t even address the tax benefits of owning a home! Factor in the mortgage interest deduction, your monthly payment is even LESS. Wow.
The other question you may be asking is what would be the total interest paid over 30 years–smart question. On a $175,000 purchase and 3.5% down payment, your overall interest $116,337 (that’s 30 years). But again if someone helped you pay it down , then how bad is $116,337?
The key is this, don’t overbuy on a condo if the market rents are actually cheaper. Case in point a luxury 2 bedroom condo I had sold to a client 3 years ago in the $400k range is now re-selling in the $700k range. No matter how you crunch the numbers, the monthly mortgage payment ($3700/month using a 20% down payment) far exceeds market rents. In THAT scenario, you are definitely over buying and may be hedging a market area for appreciation returns. Yikes, unless you’re in love with the condo and area, that’s a WHOLE lot of mortgage to pay over the course of 30 years.
These numbers get even more interesting if you manage to get your home paid off faster in 15 years. Pretty amazing if you do, because then you’re cha-chinging rental income in your younger years.
But if you did nothing and just rent for 30 years and let’s pretend your rent remains $1995/month for 30 solid straight years, then you just basically paid out $718,200 for 30 years. I don’t know about you but if you had purchased a $175,000 condo and add interest of $116,337 for a total of $286,337, that sure beats out $718,200 any day.
See what I mean?
Wait another naysayer reader might add, yes but what if I have relocate for work? What if I don’t like the building anymore? Friends you still have options! You can still sell, and consider the time you paid on your mortgage as “rent” but reduced rent. Not the right market or time to sell? Then rent it just like how you used to rent. Now you have rental property tax benefits! Wow. No excuses friends. As long as your purchase has mortgage payments that are lower than your average market rent, then you’ll be just fine.
The above list represent common reasons to buying a condo vs. renting but I know some of you may say, but I can buy a house instead! And you are absolutely correct in that comment. What matters is what your home goals are and to live within your goals and criteria. In fact you can do both, purchase a condo as a starter home and then either keep the condo or sell to transition into a home. It just comes down to what your goals are.
Want to talk to me about this or have you been on the fence with the buy vs rent debate? Give a call 973-723-2005. I’m happy to chat with you about your search and what you’re home goals are. More importantly, to get you off the tenant fence!