To Buy or Not To Buy a Condo

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Topic Author
simpatico
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Joined: Thu Jan 19, 2012 11:20 am

To Buy or Not To Buy a Condo

Post by simpatico »

My husband and I are considering purchasing a vacation condo in Colorado. I know that it is a gamble, and most of you guys wouldn’t recommend ite. But if we were to purchase one anyway – there are still questions. We have a mortgage on the hourse with $150000 left and 4.3% interest. The vacation condo is $220000, and fees are $400/month, and taxed $1000/year. And we have $240000 in taxable account in index funds. So what should we do:
- Purchase condo for cash. We will have almost no cash left.
- Take another mortgage. That should help with taxes, but I am not sure that it is worth it… But we will have cash left earning interest.May be more help with taxes?
- Pay off the hourse and take mortgage on the condo. The interest rate will be lower than current 4.3. For instance, for 10-year mortgage the interes may be 2.85%. This way we’ll still have almost no cash left. But have some help with taxes.
We are going to rent the condo out, and just come ourselves few times a year. So there will be rental stuff... I am not sure how that plays into everything.
Could you please give me some advise?
sport
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Re: To Buy or Not To Buy a Condo

Post by sport »

It seems you would be buying the condo as an investment, not a second home. My reaction is that this is a large undiversified investment. You don't give the amount of your other investments, but I would be concerned about the lack of diversification. It also seems that you have to borrow money to make this investment, or use up nearly all your liquidity. I would suggest that neither of these options is a good idea. Then there are the problems associated with being an absentee landlord...

Jeff
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Re: To Buy or Not To Buy a Condo

Post by JW-Retired »

simpatico wrote:The vacation condo is $220000, and fees are $400/month, and taxed $1000/year. And we have $240000 in taxable account in index funds. So what should we do:
- Purchase condo for cash. We will have almost no cash left.
- Take another mortgage. That should help with taxes, but I am not sure that it is worth it… But we will have cash left earning interest.May be more help with taxes?- Pay off the house and take mortgage on the condo. The interest rate will be lower than current 4.3. For instance, for 10-year mortgage the interest may be 2.85%. This way we’ll still have almost no cash left. But have some help with taxes.
What ever you decide don't do it to "help with taxes". It doesn't compute. You are spending $3 to save 1$.
JW
Retired at Last
Topic Author
simpatico
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Re: To Buy or Not To Buy a Condo

Post by simpatico »

You have excellent points, of course. But we have some other investments in stock and bond funds in our
401k and IRAs. May be that condo could be diversification that we need
In real estate? Being remote landlord is awful, but we could use some local help...
Topic Author
simpatico
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Re: To Buy or Not To Buy a Condo

Post by simpatico »

"What ever you decide don't do it to "help with taxes". It doesn't compute. You are spending $3 to save 1$. "
I know that you are right, but still feel like I have to
Do something to fight 'marridge' penalty...
German Expat
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Re: To Buy or Not To Buy a Condo

Post by German Expat »

I was looking into Condo's and time shares (resell) in Colorado ski towns but when doing the math I could not make it work even with us being in a high (AMT) tax bracket. It was still cheaper to just rent via vrbo or go into a hotel for the couple skip trips we take per year. And no hassle around renting it out. I know people with nice ski condos or houses near the slopes but the only ones that seem to be happy with their investments are the ones that have serious money where the place makes no real dent to their net worth.
When my legs were tired last time in Steamboat and after 3 beers not feeling to ski anymore I looked at a couple slope side time shares with around 4 weeks per ski season access. They do look nice and in vacation mood you really need to restrain yourself. When doing the numbers a couple days later back at our house they do not make financial sense. But we are also the type of people that don't want to go back to the same place each year and tend to also go to Mexico during the winter for 1 week getting away from the cold.
We have friends that rent a place for the whole ski season together with 2 other couples and just rotate into it every 3rd weekend and sometimes during the week dependent how they can get their son out of school. Requires some agreement between the parties but for them it worked out quite well and they just finished their 3rd year doing it.
DualIncomeNoDebt
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Re: To Buy or Not To Buy a Condo

Post by DualIncomeNoDebt »

I write to dissuade you, in strong terms, from purchasing a vacation "condo," especially in a one-season town like Colorado. I've been to Vail, Steamboat, and Telluride many times. CO is dead unless it's ski season, so out of the starting gate you've got limited opportunities to rent.

Macro, vacation condos are generally horrendous "investments," and can be difficult to unload when you want out -- and you will. Take just the HOA or common dues/fees. Association fees will eat you alive. And you need to take a hard, detailed look at the bylaws, fees, assessments and caps, read every page and any addendum thereto. If your condo neighbors fall behind or defaults increase, your assessment is going up, and will stay up. Also, you need to inspect the entire property site, and inspect it well. If maintenance has been deferred and big-ticket items need fixing (such as HVAC, boilers, parking structures, common area improvements), it's coming out of your pocket.

Will you be a remote landlord? Good luck, because you'll be paying a significant management fee to whoever facilitates your rental. Do you really want the worry and stress over eating tens of thousands of dollars in mortgage debt and the damn HOA fees because you didn't rent it out?

I know I'd be sick of a vacation "condo" after just a few trips. Don't be so sure you'll be there a few times per year. You too may tire of it, can't properly schedule visits, etc. Then what? This is another problem I regularly see with condominiums -- difficult to unload. People with the cash to purchase vacation properties, they want detached homes and they don't want annoying neighbors or monthly fees, which will forever be a millstone on this property (and your neck) if you buy a condo. I live in a highly desirable vacation city with near-perfect year-round weather, but no way would I purchase a condominium here, either to live in or to rent: the market is littered with "condos" that no one wants and to this day people are dumping them, losing deposit money after backing out, etc.

Other responses are absolutely correct. Don't do this for the "tax" reasons you mentioned, throwing money away. Unless this purchase is financially meaningless to you, don't do it. If you want rental property income, buy a quality REIT and use some of the passive income to take a nice vacation. Pocket the rest and be thankful you didn't significantly increase your stress.
Topic Author
simpatico
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Re: To Buy or Not To Buy a Condo

Post by simpatico »

German Expat wrote:I was looking into Condo's and time shares (resell) in Colorado ski towns but when doing the math I could not make it work even with us being in a high (AMT) tax bracket. It was still cheaper to just rent via vrbo or go into a hotel for the couple skip trips we take per year. And no hassle around renting it out. I know people with nice ski condos or houses near the slopes but the only ones that seem to be happy with their investments are the ones that have serious money where the place makes no real dent to their net worth.
When my legs were tired last time in Steamboat and after 3 beers not feeling to ski anymore I looked at a couple slope side time shares with around 4 weeks per ski season access. They do look nice and in vacation mood you really need to restrain yourself. When doing the numbers a couple days later back at our house they do not make financial sense. But we are also the type of people that don't want to go back to the same place each year and tend to also go to Mexico during the winter for 1 week getting away from the cold.
We have friends that rent a place for the whole ski season together with 2 other couples and just rotate into it every 3rd weekend and sometimes during the week dependent how they can get their son out of school. Requires some agreement between the parties but for them it worked out quite well and they just finished their 3rd year doing it.
I came across the case study for Beaver Run condos. If we pay in full, then we can even make some money - see the link: http://www.amenta.com/breckenridgereale ... verrun.htm
What do you think about that?
Topic Author
simpatico
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Re: To Buy or Not To Buy a Condo

Post by simpatico »

DualIncomeNoDebt wrote:I write to dissuade you, in strong terms, from purchasing a vacation "condo," especially in a one-season town like Colorado. I've been to Vail, Steamboat, and Telluride many times. CO is dead unless it's ski season, so out of the starting gate you've got limited opportunities to rent.

Macro, vacation condos are generally horrendous "investments," and can be difficult to unload when you want out -- and you will. Take just the HOA or common dues/fees. Association fees will eat you alivDe. And you need to take a hard, detailed look at the bylaws, fees, assessments and caps, read every page and any addendum thereto. If your condo neighbors fall behind or defaults increase, your assessment is going up, and will stay up. Also, you need to inspect the entire property site, and inspect it well. If maintenance has been deferred and big-ticket items need fixing (such as HVAC, boilers, parking structures, common area improvements), it's coming out of your pocket.

Will you be a remote landlord? Good luck, because you'll be paying a significant management fee to whoever facilitates your rental. Do you really want the worry and stress over eating tens of thousands of dollars in mortgage debt and the damn HOA fees because you didn't rent it out?

I know I'd be sick of a vacation "condo" after just a few trips. Don't be so sure you'll be there a few times per year. You too may tire of it, can't properly schedule visits, etc. Then what? This is another problem I regularly see with condominiums -- difficult to unload. People with the cash to purchase vacation properties, they want detached homes and they don't want annoying neighbors or monthly fees, which will forever be a millstone on this property (and your neck) if you buy a condo. I live in a highly desirable vacation city with near-perfect year-round weather, but no way would I purchase a condominium here, either to live in or to rent: the market is littered with "condos" that no one wants and to this day people are dumping them, losing deposit money after backing out, etc.

Other responses are absolutely correct. Don't do this for the "tax" reasons you mentioned, throwing money away. Unless this purchase is financially meaningless to you, don't do it. If you want rental property income, buy a quality REIT and use some of the passive income to take a nice vacation. Pocket the rest and be thankful you didn't significantly increase your stress.
Well, I think I am convinced not to buy that condo. Thank you all so much for your advise and help! What REIT should I buy?
:) :)
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Taylor Larimore
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Re: To Buy or Not To Buy a Condo

Post by Taylor Larimore »

Well, I think I am convinced not to buy that condo. Thank you all so much for your advise and help! What REIT should I buy?
simpatico:

You received good advice and you took it. Congratulations!

Vanguard's REIT Fund (VGSLX) is as good as any.

https://personal.vanguard.com/us/funds/ ... IntExt=INT

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
German Expat
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Re: To Buy or Not To Buy a Condo

Post by German Expat »

simpatico wrote: I came across the case study for Beaver Run condos. If we pay in full, then we can even make some money - see the link: http://www.amenta.com/breckenridgereale ... verrun.htm
What do you think about that?
I can't see why I would want to buy a 600 square foot condo for more then 350k. That is barely more useful then a hotel room and was built in 1985. How well is the place kept up and will there be any special assessments coming up soon ? They did assume 35k rent and the management fee of 45% is extremely high. My question here is why even bother with the hassle for barely a return and all the risk associated with it. Their return number at the bottom also assumes you pay all cash, no special assessments coming up, no repair cost provisions, no provisions for replacing furniture or carpets. Not sure how well a condo holds up but I once read that high end hotels redo their rooms every 3-4 years.
We have a (soon) 7 year old and would like to have a 2 bedroom if we already go through the hassle of buying a condo. But starting in 7-8 years he will probably not want to go with his parents anymore so then a 1 bed room would do. Now for what part of your life do you buy it ? Also somebody else already mentioned resale of a condo being hard.
How often do you plan to go yourself ? You can only make the numbers work if you go a lot. We are close to Boulder, CO and could go quite often and still don't see the numbers work out. If you have to fly in and then drive on I-70 you won't go too often except if you are retired or retired soon.
I just would not bother with an investment with that low a pay back. You could do a little more research into time share resell. We had friends getting a 3 bed room time share in Steamboat via points their family had and we stayed at the Sheraton slope side. It can make sense if you buy time shares on the resell market and there are good forums (tug) that can guide you. We decided even against the time shares because we travel a lot international (family visits but also vacations).
As somebody else also mentioned summer is relative dead, the towns try to do a lot of events but it will be still much harder to rent out the place. You can get cheap condo's all over the mountains during this time period.
DualIncomeNoDebt
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Re: To Buy or Not To Buy a Condo

Post by DualIncomeNoDebt »

simpatico wrote:Well, I think I am convinced not to buy that condo. Thank you all so much for your advise and help! What REIT should I buy?
:) :)
I am relieved for you. There are a lot of transaction costs and fees that make a one-off condo vacation property a dicey, stressful proposition, and this is compounded if you are a remote landlord.

As for REITS, I own a couple of individual names (O and SNH) which I purchased when they were cheaper, and I also bought some preferred shares in the REIT sector that I picked up for an absolute steal when the markets were volatile. But I'm no market timer -- I simply was looking for quality low-priced names on a par basis. Personally I am not adding to my individual positions, but I have no idea if I am right or wrong. So you really should go for a nice REIT fund -- someone else recommended VGSLX and I'm sure others with superior fund knowledge can make seasoned recommendations to you. The REITs will pay you every month or quarter -- it's better than hunting for that rent check on some distant condo property, without the enormous sunk costs and transaction fees.
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SnapShots
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Re: To Buy or Not To Buy a Condo

Post by SnapShots »

I've own a town home - one of 14 units - in a ski resort in Colorado purchased in 2003. Four are full-time residents. Until recently no one rented their units. Two are now rentals. One full time the other a seasonal rental. We do not rent our place and now that we are retired spend a good deal of time there. Our HOA fees are very low -$200/mo - but in exchange for low fees we sometimes have large assessments.

In the mountains, summers are becoming more popular than the winters. However, you are limited to the number of days per year that you can rent. Rental fees charged are huge. Lots of people from our community own second homes in the area. Many rent them out and over the years have moved up to larger condos.

If I were buying again I'd look for a small home, in an area than has HOA fees for only snow plowing and rules to protect property values. I'd probably buy in town rather than on the mountain because home prices don't seem to fluctuate as much. You can hire a service to check on and rent your unit. The HOA fees in condo units are killers and you have no control over these or assessments - especially if you're in a large complex of condos that are investment properties and not used by owners.

We love Colorado and use our unit. Lots of people we know were happy with them as rental investments and use them infrequently. But, you should do it only if you have the money and don't need the rental income. Most important you must love the area and want to be there - otherwise you won't be happy.

Don't do it just as an investment. You need to really love it and want to be there.

It is a good time to buy as prices are low and the area is depressed. Horrible time to try to sell. Colorado is a boom bust state and prices are up and down. Mountain towns are especially affected.
the best decision many times is the hardest to do
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bottlecap
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Re: To Buy or Not To Buy a Condo

Post by bottlecap »

I would not do it as an investment - particularly when it would use up so much of your available funds. If it were 10% of your net worth, maybe the answer would be different.

You will get no help with your taxes because you will be paying interest. Then HOA fees. Then real estate taxes. Then insurance. And then maintenance.

Good luck,

JT
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