Just bought condo; crazy to take out HELOC to buy a parking spot?

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middistancerunner
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Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by middistancerunner » Fri Jun 01, 2018 5:33 pm

Hi forum,

My partner and I just closed on a condo today (!!!), and I am hoping that you might be able to help with a situation that might arise over the next month — we might need to make a decision on buying a parking space in the condo’s gated lot.

Background: we live in a VHCOL area and have been renting a condo we love for the past two years. A month ago our landlords proposed we either buy the condo from them or they would raise the rent. We love the unit, building, and our neighbors, and had told them in the past that we would like to buy it from them eventually. We had been saving up for a down payment, but the proposal took us by surprise, and we only had about $100,000 in cash, of the $120,000 needed for 20%. We decided it was the right decision to go ahead and buy it anyway, but the unexpected timing meant that we had to do two not-ideal things: a) completely decimate our E-Fund, and b) borrow $20,000 from my partner’s parents, in the form of a no-interest, very chill/flexible loan, to be paid back over 2-3 years “ideally.”


The question: We just spent our life savings on this place. Should we stretch even more and figure out how to put $30,000-$60,000 into a parking space in the building’s gated lot, if the decision is forced on us in a few weeks?


********************************************************************************************

Home purchase details:
-Paid 20% down, on $593,000 purchase price, with almost no closing costs
-Total monthly outlay on PITI + HOA is $2850, which is $50 more than we were paying in rent
-Because we don’t have to move or buy new furniture, and we had to prepay on property tax, HOA, and interest for July at closing, we are in the unusual new homeowner position of having our monthly expected housing expenses go down a lot over the next couple months, which will help in rebuilding our e-fund.

Income:
-Her: $130,000 faculty job; obtained PhD 2 years ago.
-Him: MBA, at director level in the biopharma sector, which tends to pay well but be unstable. Recently laid off, just started taking in unemployment at $2800 per month (30 weeks left), actively interviewing for new jobs. Last position reached $170,000 plus 20% bonus. Expecting similar from a new position, but may take a few months to find the right role.

Cash:
-Between us, we have $4,100 in liquid cash as of today at closing. I.e. we have basically nothing.
-I’m meticulously tracking our expenses and from what is going in and coming out I expect that by 6/30 we will have about $16,400 in the bank (in the scenario where my partner hasn’t yet found a job.. things are obviously much easier if he does.)
-No debt other than this new mortgage and the parental loan.

Retirement:
-Her retirement: $30,000 in a Roth IRA, currently mostly held in Vanguard Federal Money Market with the idea that it is our very-worst-case-scenario E-Fund during the rebuilding period. $5,000 in a TIRA. Just started maxing my HSA and contributing to a 403b, but <$1000 in them right now. Generous employer match will kick in in a few months.
-His retirement: $31,000 in a Roth IRA, $43,000 in a 401k.



The situation:
-We currently rent a parking spot in the building’s gated lot from someone who indicated they want to sell it pretty soon. Our parking spot lease is up in late June. If at all humanly possible we will attempt to just rent the spot from him again ($2,200 per year) and defer this decision to a later date. But we worry we may not have that option.
-There are not enough parking spots relative to units and spots (1 spot for every 3 or 4 units) and they are in high demand with low turnover; we have a neighbor who we know is actively looking to buy one and has been unsuccessful.
-There is on-street parking, but it’s a pain, and as our area gentrifies/changes we expect it to get worse.


Questions for Bogleheads:
1. We think a spot will improve the condo’s property value especially as the area changes. How exactly do we value the investment consideration/what the spot is worth?
2. How much could we in theory borrow against the house for a parking spot? Can we get a HELOC or home equity loan so soon after closing, before we have even made our first payment? It appraised at $600,000, so if we can use that number (can we?) we currently own about 21%. I’ve seen some indications that some banks will do HELOCs up to 15% of the home’s equity. By my calculations, that means we might be able to borrow up to $35,600. We are guessing he might ask anywhere between $30,000 and $60,000 for the spot.
3. If he wants more than we could get in a loan, is it worth it to dip into our retirement to make this happen? The contributions on my Roth can be taken out tax and penalty free. I suspect the answer here on Bogleheads will be hard no, and I am also pretty sure this wouldn’t be something I’m willing to do, but I wanted to raise the question.
4. Is there any other way to make this happen that we haven’t thought of?
5. Would you do this?


Debt scares me more than most people, and I am already terrified by the whole mortgage thing, and so a large part of me thinks this idea is insane and we shouldn’t even consider it unless he gets a job in the next week or two, given how much we just stretched. Another part of me thinks that in all likelihood, as long as the price isn’t insane, this is really the rational thing to do just from a property value perspective. If we had been given the opportunity to roll in a parking spot in exchange for an extra $40,000 on the mortgage, we would have.

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Pajamas
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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by Pajamas » Fri Jun 01, 2018 5:52 pm

Since there is 1 spot for 3-4 apartments with high demand, I would try to buy it at that price of $30-$60k given the opportunity because future opportunities may not arise since the spots will probably be offered by owners to people buying their apartments first.

I would value it at the present value of the expected cost of renting it over time and wouldn't consider appreciation or depreciation in making the decision.

If buying it, don't consider only the cost and cost of financing but also any HOA fees, property taxes, and other future related expenses.

Sorry, I don't have any suggestions about financing it other than to say that I would be very, very reluctant to withdraw money from retirement accounts to buy my primary home including a parking spot associated with it unless it were clearly very much less expensive to buy than rent and even then I would have a hard time doing that.

student
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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by student » Fri Jun 01, 2018 5:59 pm

1 spot for every 3-4 units, I would say you need to get a parking spot. I am assuming the faculty position is tenure-track. I am also assuming that he will get a position soon.

middistancerunner
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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by middistancerunner » Fri Jun 01, 2018 6:12 pm

Pajamas wrote:
Fri Jun 01, 2018 5:52 pm
Since there is 1 spot for 3-4 apartments with high demand, I would try to buy it at that price of $30-$60k given the opportunity because future opportunities may not arise since the spots will probably be offered by owners to people buying their apartments first.
I think for the most part spots are deeded to units and owners don't split off their spots from their units during sale of the unit. That this person wants to sell the spot seems unusual. So, yeah.
Pajamas wrote:
Fri Jun 01, 2018 5:52 pm
I would value it at the present value of the expected cost of renting it over time and wouldn't consider appreciation or depreciation in making the decision.
PV of $2,200/year, at 6%, over 30 years, is about $31,000. I suspect they''ll want a bit more than that, and it seems likely the cost of renting it will also go up. So I am guessing the negotiated price would about reflecting the present value.
Pajamas wrote:
Fri Jun 01, 2018 5:52 pm
If buying it, don't consider only the cost and cost of financing but also any HOA fees, property taxes, and other future related expenses.
I didn't know there could be HOA fees/property taxes. I will have to enquire about that!
Pajamas wrote:
Fri Jun 01, 2018 5:52 pm
Sorry, I don't have any suggestions about financing it other than to say that I would be very, very reluctant to withdraw money from retirement accounts to buy my primary home including a parking spot associated with it unless it were clearly very much less expensive to buy than rent and even then I would have a hard time doing that.
:? That's kind of my feeling: it's an obviously good idea to buy it, financing aside, but there is no obviously sensible way to finance it right now for us, other than maybe a HELOC/home equity loan, which I don't know much about and which might not cover it all. :x

middistancerunner
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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by middistancerunner » Fri Jun 01, 2018 6:14 pm

student wrote:
Fri Jun 01, 2018 5:59 pm
1 spot for every 3-4 units, I would say you need to get a parking spot. I am assuming the faculty position is tenure-track. I am also assuming that he will get a position soon.
Yes, it is tenure track, so it's pretty secure for the next 3-5 years.

And yes, he'll get a position soon almost undoubtedly, but I am of the kind of background (grew up in poverty) where I want to always to plan for the very worst case scenario, so it's hard for me to think about biting off even more financial commitment before we are on firmer ground.

It's nonetheless helpful to see peoples' gut reactions on this; so far it seems to confirm my suspicion that this is obviously a good idea, aside from financing wrinkles.

Nutmeg
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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by Nutmeg » Fri Jun 01, 2018 9:06 pm

I am not sure how you should finance the purchase of a parking spot. However, I think you should consider the concept of imputed interest for tax purposes on the loan from your partner’s parents. It is possible that an exception applies. This article explains the situation better than I can:

https://www.lbmc.com/resources/tax-effe ... mily-loans

furwut
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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by furwut » Fri Jun 01, 2018 9:10 pm

I haven’t owned a car since 2003. In 2004 I bought a new construction condo along with a car space. I’ve had no
problem renting it as, like you, there are fewer car spots then units in the building and no easy street parking.

When it comes to reselling the condo, I believe, having a parking spot is very desirable. I know many buyers will not even consider a condo without a parking space.

mac808
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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by mac808 » Fri Jun 01, 2018 9:15 pm

From what I've seen, the odds of being able to HELOC within 6 months of closing are low. You'd likely need to line up alternate financing.

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Cycle
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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by Cycle » Fri Jun 01, 2018 9:23 pm

I'd get the parking spot. Even if I didn't have a car. My brother and his DH are in that situation and they just rent out the spot.

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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by Big Dog » Fri Jun 01, 2018 9:33 pm

I agree that owning the parking spot will add value to your unit. But, the recent layoff is concerning, and not sure now is the time to acquire more debt.

OTOH, could you swing a lease-purchase option or some other creative financing from your current space owner. Perhaps put something down and bump the rent xx dollars, some of which is applied to the sale.

Or, maybe the current owner would like some nice interest-bearing income and s/he could finance the deal. You put down say, $10k, and he finances the balance at say, 6%. Much better than she can earn from a bank. And its 'secured' on a spot that he knows well, and will reclaim should you default.

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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by Watty » Fri Jun 01, 2018 9:59 pm

middistancerunner wrote:
Fri Jun 01, 2018 6:12 pm
I didn't know there could be HOA fees/property taxes. I will have to enquire about that!
I am not familiar with condo insurance but you should also check with your homeowners insurance and that will likely go up too.

middistancerunner
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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by middistancerunner » Fri Jun 01, 2018 10:08 pm

Big Dog wrote:
Fri Jun 01, 2018 9:33 pm
I agree that owning the parking spot will add value to your unit. But, the recent layoff is concerning, and not sure now is the time to acquire more debt.

OTOH, could you swing a lease-purchase option or some other creative financing from your current space owner. Perhaps put something down and bump the rent xx dollars, some of which is applied to the sale.

Or, maybe the current owner would like some nice interest-bearing income and s/he could finance the deal. You put down say, $10k, and he finances the balance at say, 6%. Much better than she can earn from a bank. And its 'secured' on a spot that he knows well, and will reclaim should you default.
Those are interesting ideas. From what I know of this person's needs and setup, it is not difficult to imagine something like this could work for them. Do you have any suggestions or resources for how one might structure such a deal? I'm sure a handshake wouldn't be sufficient! Get a lawyer?

As for the layoff, agree on that. Worth noting that it was absolutely nothing to do with my partner in terms of his abilities or employability - he was hit by a round of restructuring that had nothing to do with him... something that's common in his sector. When he took the job I assumed the 170,000+ salary included a risk premium to reflect the possibility of this happening. I'm pretty amazed and honestly proud of us that we managed to buy a condo in the middle of one of us not working - we both contributed assets, and qualified on my income only. That I know we can afford the condo on one income is comforting in general for me about the level at which we bought, in terms of long term planning. In our area people with our backgrounds/income tend to buy a LOT more house.

Nonetheless, it's clear we're stretched to the max at this exact moment; I wish we had a little time to recover before facing the parking problem!

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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by middistancerunner » Fri Jun 01, 2018 10:13 pm

mac808 wrote:
Fri Jun 01, 2018 9:15 pm
From what I've seen, the odds of being able to HELOC within 6 months of closing are low. You'd likely need to line up alternate financing.
Can you elaborate on this? Is it just that this is what you have seen in practice, or is there some kind of rule in place?

middistancerunner
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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by middistancerunner » Fri Jun 01, 2018 10:14 pm

Cycle wrote:
Fri Jun 01, 2018 9:23 pm
I'd get the parking spot. Even if I didn't have a car. My brother and his DH are in that situation and they just rent out the spot.
We do own a car, and get significant consumption value out of having the spot rented currently!

But I agree, if we were to ever get rid of the car, it'd take no effort at all to rent it out.

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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by furwut » Fri Jun 01, 2018 10:16 pm

Watty wrote:
Fri Jun 01, 2018 9:59 pm
middistancerunner wrote:
Fri Jun 01, 2018 6:12 pm
I didn't know there could be HOA fees/property taxes. I will have to enquire about that!
I am not familiar with condo insurance but you should also check with your homeowners insurance and that will likely go up too.
I don’t think i pay any additional property insurance for my spot. It may even be that the condo’s master insurance covers it. In our condo docs parking is classified as a Limited Common Element (LCE). LCEs are reserved for the exclusive use of a resident but maintenance and repair responsibilities (and insurance?)remain with the HOA. The HOA adds an additional $17/mo to my condo fee for the spot.

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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by student » Fri Jun 01, 2018 10:23 pm

middistancerunner wrote:
Fri Jun 01, 2018 10:08 pm
Nonetheless, it's clear we're stretched to the max at this exact moment; I wish we had a little time to recover before facing the parking problem!
It will get better. You have a high salary as, presumably, an assistant professor. From this, I am guessing that you work at a tier 1 university. So there is almost no chance of it getting into financial trouble. Once you earn tenure, you will have a very stable job. The condo with parking is around $650,000. After $100,000 down payment, not counting the $20,000 from partner's parents, you owe $550,000. So that is between 4 and 4.5 times your salary. It is tight but manageable. So four more years to go before tenure. If money is tight, you can look for opportunity to teach a summer course. If my assumption is correct that you are at a tier 1 university, then you are likely to have to be successful in applying for grant anyway, so it is likely that you will have summer salary from the grant. You should be ok.

Edit: The above was written with respect to only one salary.

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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by middistancerunner » Fri Jun 01, 2018 10:38 pm

student wrote:
Fri Jun 01, 2018 10:23 pm
middistancerunner wrote:
Fri Jun 01, 2018 10:08 pm
Nonetheless, it's clear we're stretched to the max at this exact moment; I wish we had a little time to recover before facing the parking problem!
It will get better. You have a high salary as, presumably, an assistant professor. From this, I am guessing that you work at a tier 1 university. So there is almost no chance of it getting into financial trouble. Once you earn tenure, you will have a very stable job. The condo with parking is around $650,000. After $100,000 down payment, not counting the $20,000 from partner's parents, you owe $550,000. So that is between 4 and 4.5 times your salary. It is tight but manageable. So four more years to go before tenure. If money is tight, you can look for opportunity to teach a summer course. If my assumption is correct that you are at a tier 1 university, then you are likely to have to be successful in applying for grant anyway, so it is likely that you will have summer salary from the grant. You should be ok.

Edit: The above was written with respect to only one salary.
Your guesses are pretty good, though I wish I were as confident about tenure as you are for me :P

Fortunately I am in an academic field where there are lots of private sector opportunities for PhDs; I feel I can most likely expect to be able to move to a high-paying job if I miss tenure.

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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by JFKtoSFO » Sat Jun 02, 2018 12:40 am

We were in a very similar situation with our condo. I know in our VHCOL area, we were able to get a HELOC shortly after with a place that would do 90% LTV. It was a slightly higher interest rate, so when we were at 80% LTV (which happened just a few months later thanks to crazy real estate appreciation) we moved it to a credit union and accelerated payoffs until it was gone.

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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by jabberwockOG » Sat Jun 02, 2018 12:56 am

You may be able to loan yourself some the money from your 401k balance depending on if your employer allows that option.

I'd figure out a way to buy the parking spot considering they are in demand and in short supply. Negotiate hard since you have been renting it and you are an instant no effort buyer from your parking spot landlord.

Having said that, still if someone had told me 30 years ago that some folks would actually pay $30-60k for a parking spot....seems completely crazy.

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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by middistancerunner » Sat Jun 02, 2018 1:12 am

JFKtoSFO wrote:
Sat Jun 02, 2018 12:40 am
We were in a very similar situation with our condo. I know in our VHCOL area, we were able to get a HELOC shortly after with a place that would do 90% LTV. It was a slightly higher interest rate, so when we were at 80% LTV (which happened just a few months later thanks to crazy real estate appreciation) we moved it to a credit union and accelerated payoffs until it was gone.
How long was the “shortly after” when you were able to get the HELOC, if you don’t mind me asking?

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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by runner540 » Sat Jun 02, 2018 1:20 am

$2850 mortgage with >$10k monthly salary doesn't sound crazy, but I would (1) stop all 403 contributions until you rebuild a healthy emergency fund, and (2) batten down the hatches on all discretionary expenses.

It wasn't clear to me if you are both on the deed and Mortgage, amd whether you are married or not. If not, consider what legal documents will be needed to protect you both and your shared asset.

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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by Cycle » Sat Jun 02, 2018 7:44 am

middistancerunner wrote:
Fri Jun 01, 2018 10:14 pm
Cycle wrote:
Fri Jun 01, 2018 9:23 pm
I'd get the parking spot. Even if I didn't have a car. My brother and his DH are in that situation and they just rent out the spot.
We do own a car, and get significant consumption value out of having the spot rented currently!

But I agree, if we were to ever get rid of the car, it'd take no effort at all to rent it out.
Also, they rented out their 2nd bedroom for a few years.... Not that they needed to as one is an investment banker and the other owns several stores.

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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by Pajamas » Sat Jun 02, 2018 10:36 am

jabberwockOG wrote:
Sat Jun 02, 2018 12:56 am
Having said that, still if someone had told me 30 years ago that some folks would actually pay $30-60k for a parking spot....seems completely crazy.
What about $1 million for a parking spot?

https://www.nytimes.com/2014/09/10/real ... -spot.html

When I first saw this, I thought it was a marketing gimmick but there have been other buildings in NYC also offering parking spots at $1 million although no information about the prices at which they actually sold. Parking spaces have been recorded as sold for $200-$500 thousand in a lot of cities, including Boston, London, and Hong Kong.

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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by Ben Mathew » Sat Jun 02, 2018 1:53 pm

I think you did well buying the condo. And, if you are able to get a parking spot for at the prices you mention, you would do really well to buy the spot as well. As to how to finance it, I have no idea. :( Beg, borrow, but don't steal!
middistancerunner wrote:
Fri Jun 01, 2018 5:33 pm
1. We think a spot will improve the condo’s property value especially as the area changes. How exactly do we value the investment consideration/what the spot is worth?
You're renting a spot for $2,200. If you discount that by a real interest rate of 4%, the spot is worth $2,200/.04=$55,000. If you discount by 3%, it's worth $2,200/.03=$73,000. If the spot sells for less than $60K, I think it would be a very good deal even with no real price appreciation. (This assumes no other costs like increased HOA.) You said your total montly costs for the condo (PITI + HOA) is $2,850/mo. If you split out the principal+interest from this total, I can back out the implied discount rate on the condo. We could then apply the same discount rate to the parking spot and see what that yields in terms of pricing.
middistancerunner wrote:
Fri Jun 01, 2018 5:33 pm
3. If he wants more than we could get in a loan, is it worth it to dip into our retirement to make this happen? The contributions on my Roth can be taken out tax and penalty free. I suspect the answer here on Bogleheads will be hard no, and I am also pretty sure this wouldn’t be something I’m willing to do, but I wanted to raise the question.
Taking $X out of your retirement accounts penalty-free in a given year is mathematically the same as reducing your contribution by $X. Whether it's okay to do so depends a lot on whether you expect to max out your tax-free space in future years. If you expect to be maxed out in the future, then you should bend over backwards to maximize your contributions now. The money that doesn't go in today can never go back in later. If on the other hand, you'll have excess tax free space available in the future, it's not that big of a deal. You're effectively taking from your tax free account now and putting it back into a tax free account later.

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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by midareff » Sat Jun 02, 2018 2:22 pm

Not crazy at all based on personal experience. Extra spot here was $10K which upon condo purchase was negotiated to roughly $7K. Parking spots are at a premium here and I bought from the developer. I used the spot for visitors and g/f's for several years and since remarried to a non driver have rented it the last 5 years which are close to covering the purchase cost.

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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by Big Dog » Sat Jun 02, 2018 5:40 pm

Those are interesting ideas. From what I know of this person's needs and setup, it is not difficult to imagine something like this could work for them. Do you have any suggestions or resources for how one might structure such a deal? I'm sure a handshake wouldn't be sufficient! Get a lawyer?
yes, you both would probably be better off with counsel. But these types of things are quite common, so it shouldn't cost too much. Here's an example for a home, but a parking space is the equivalent of real property, so it should still apply.

https://www.nolo.com/legal-encyclopedia ... 30164.html

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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by Sweet Betsy » Sun Jun 03, 2018 6:56 am

In your position if the spot becomes available for purchase i would buy it. You may be able to find the money for the purchase through personal loans through your banks or credit unions. It will be tight until your partner is employed again but you should be able to pay the loans off relatively quickly once he is receiving a paycheck.

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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by Oddball » Sun Jun 03, 2018 7:47 am

middistancerunner wrote:
Sat Jun 02, 2018 1:12 am
JFKtoSFO wrote:
Sat Jun 02, 2018 12:40 am
We were in a very similar situation with our condo. I know in our VHCOL area, we were able to get a HELOC shortly after with a place that would do 90% LTV. It was a slightly higher interest rate, so when we were at 80% LTV (which happened just a few months later thanks to crazy real estate appreciation) we moved it to a credit union and accelerated payoffs until it was gone.
How long was the “shortly after” when you were able to get the HELOC, if you don’t mind me asking?
We bought our place about 3 years ago and got a HELOC for home improvements closed 2 months later at 90% LTV

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Re: Just bought condo; crazy to take out HELOC to buy a parking spot?

Post by RickBoglehead » Sun Jun 03, 2018 9:15 am

To me, the overriding thing is the layoff. No one can predict when a job will materialize, least of all the person looking for the job. It's not within your control. I would be very, very leery of going further in debt until that situation resolves itself.

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