Should I buy this condo?

[younginvestor2013]

I am under contract to buy a new condo for about $358k. The new place is a 2 bed 2 bath in Chicago. My current place is a 1 bedroom 1 bath also in Chicago. The new place is desirable because it gives me more room and is more realistic for a long term residence.

I am curious to hear the ER community's thoughts on whether or not this is a frivolous purchase. Obviously, the more frugal, FIRE route would be to stay put in my current place.

STATS:
Age: 29
Taxable investments: $181k
Retirement Accts: $183k
Cash Savings: $88k
Current Home Equity: $60k (this is net of realtor fees, mortgage pay off, closing costs, etc). Note, I only put $40k into my condo when I bought it, so I've gained about $20k from market appreciation.

NET: $512k

I would put 20% down, so the cash to close amount on the new place would come out to about $75k-$80k. This would bring my NW to $432k after it's all said and done.

The new place would cost about $2,400 / month all-in (including PITI, utilities, HOA), and the current place costs about $1,650 / month all-in.

It essentially comes down to me saving less than I am now.

Current income: [2018] $95k with annual savings of about $21k.
Projected: [2018] $95k income with annual savings of about $14k-$15k.

I don't know why but something has me uneasy about the purchase. I don't think it would materially affect things, but essentially I am taking on an extra $105k in debt when it's all said and done. But this is my dream place, mortgage rates are still low, and the market is at an all time high, so that is what makes me wanting to pull the trigger. At the same time, it's all stressing me out....

Thoughts? Advice? Input?

Thanks in advance!

 

[Sunset]

Have you sold your existing place, or are you going to be carrying 2 places while you hope to sell the small one ?

You won't get much or anything in the way of the mortgage deduction going forward, so mortgages have become bad debt like CC's.

I do think a 2 bd is much better than a 1 bd for future living, although if you are planning marriage/kids, you may find the desire to move to a house (burbs) with grass is strong, as your kid plays on the balconey of the condo

 

[RunningBum]

Quality of life matters. I'll bet you could live even cheaper than you do now, but why deprive yourself?

Presumably the condo will appreciate over time as well, maybe not as well as other investments, but it could, and even if it's long term, you probably won't live there forever.

Another assumption, your income will probably also rise over time, and you can save more. $14K down from $21K is a lot, but if you're able to save another $30K/yr in a few years, the difference between $44K and $51K is a much smaller percentage.

Personally, I'd probably do it, assuming it really is a nice upgrade from your current place and since it doesn't eat up all of your ability to save. Your call though, it's not worth it if you're going to lose sleep questioning your decision. And bigger isn't always better.

 

[RunningBum]

I do think a 2 bd is much better than a 1 bd for future living, although if you are planning marriage/kids, you may find the desire to move to a house (burbs) with grass is strong, as your kid plays on the balconey of the condo

That's a good point too. If the place would really be good now, that's one thing, but doing it for an uncertain (?) future doesn't make as much sense.

 

[harley]

so mortgages have become bad debt like CC's.

Wow! Two totally incorrect statements within just 8 words.

Mortgages and CCs have their place, and are valuable to those who want to use them. Just because you don't like them doesn't make them bad.

As far as the OP, everybody needs a place to live. If you can manage the payments easily and want to live in the condo, go for it. The payments will become a smaller and smaller portion of your paycheck over time, and if interest rates rise the mortgage will be cheap money. Only you know if this is the right place for you, but I don't think I'd be happy living in a tiny place.

 

[ivinsfan]

IMO it's not the purchase price of the condo it's the extra 750 a month it will take from your cash flow.

At your age and being unattached at the moment I'd stay in the smaller condo, stash away the 750 and see if anything in your life changes. Or are you willing to look around for a roommate in that case you could possibly actually lower your monthly housing costs and still have a bigger place...This wouldn't have to permanent just for the short term or until something in your life changes.

 

[Aerides]

You are 29, this is your dream place, and you can easily afford it. Mortgage rates will only go up from here. I'm going to guess the location is slightly better too.

If there's any chance you might become part of a married couple in the next 2 years (ie, moving, home for a bigger family) then maybe pause. But if you're totally single or just dating casually (also a good idea at 29) I'd go for it.

Mortgage debt is far more palatable than other debt. Your networth will still exceed 98% of your peer group.

 

[Another Reader]

Unless you plan to live in the new condo for at least five and preferably ten years, I would not buy it. The acquisition and selling costs for this unit and the selling costs for your current unit will be hard to overcome with appreciation in a shorter period.

 

[younginvestor2013]

Thanks for all the input. Currently dating but my SO and I have no plans to move -in together in the near future, although I would be open to it but not for another 1.5-2 years.

Also, the location is actually slightly worse than where I live right now. It's only 8 blocks from my current condo (1 mile exactly), but in a totally different neighborhood. The area is still 'gentrifying'. It is not a horrible area, but definitely not as desirable as where I live now. It is close to the train and the lake still, which are big pluses for me.

I basically would be giving up my more desirable location now for more space and a nicer condo. I realized that the type of condo I want in my current location would be $500-$600k. It's kind of crazy that an 8 block radius can have that much of an impact on values, but that's city living for you.

Do you think I should go for the $500-600k condo in my most desired location? This would really prevent me from saving any money at all unless my income went up substantially.

So the compromise for me to purchase in the gentrifying neighborhood.......

Or do I stay ka-put.....

 

[aaronc879]

Unless you have a need for a second bedroom I don't see a reason to sell the place you already have. Moving from an owned property to another owned property costs a lot of money. I would only consider moving if you really dislike the current condo or expect to have a child in the near future.

 

[younginvestor2013]

Unless you have a need for a second bedroom I don't see a reason to sell the place you already have. Moving from an owned property to another owned property costs a lot of money. I would only consider moving if you really dislike the current condo or expect to have a child in the near future.

I agree, the closing costs on real estate are very expensive. Fortunately, in my situation, I can walk away and pocket $20k (even after closing costs) from my current condo. That doesn't include the $40k that I put into my condo when I bought it (it is on top of the $40k, so $60k all together). The real estate market has appreciated quite a bit, and my current condo was a bank owned property so I got a real good deal.

So while the closing costs are quite high, they would essentially be absorbed by the market appreciation.

 

[seabourne]

It sounds like you're planning on selling the first place to fund the downpayment on the second. Have you looking at renting out the first? It would leave you in a more levered position, for better and worse, but you have sufficient taxable assets to do it. Chicago is seeing a solid amount of rental development in the smaller footprint size, so it's worth considering. Curious which neighborhood(s) they are in (I'm on the north side).

A real question on this, regardless of rent or sell, is how stable your income is. You're increasing your fixed housing spending by 50%/month. It's not unsupportable at your income, but it reduces a lot of your wiggle room. That doesn't mean that it's not worth it, and Chicago doesn't have the overblown property market that some other cities are experiencing, but be certain that the better living space is worth it to you. The $800/month difference plus greater flexibility is not trivial, and is almost half of your current savings rate.

In your position I might rent the old and focus on paying down debt instead of adding to taxable investment accounts, partly due to the current stock market valuations and the inexpensive leverage, but it is almost certainly the higher risk move.

 

[Meadbh]

Real estate is all about location, location, location. Personally, I would stay where you are.

 

[ivinsfan]

Thanks for all the input. Currently dating but my SO and I have no plans to move -in together in the near future, although I would be open to it but not for another 1.5-2 years.

Also, the location is actually slightly worse than where I live right now. It's only 8 blocks from my current condo (1 mile exactly), but in a totally different neighborhood. The area is still 'gentrifying'. It is not a horrible area, but definitely not as desirable as where I live now. It is close to the train and the lake still, which are big pluses for me.

I basically would be giving up my more desirable location now for more space and a nicer condo. I realized that the type of condo I want in my current location would be $500-$600k. It's kind of crazy that an 8 block radius can have that much of an impact on values, but that's city living for you.

Do you think I should go for the $500-600k condo in my most desired location? This would really prevent me from saving any money at all unless my income went up substantially.

So the compromise for me to purchase in the gentrifying neighborhood.......

Or do I stay ka-put.....

I'm wondering about your comment that it's your dream home, you just called it a compromise.. so in that case I'd stay in my old place.

 

[ivinsfan]

I agree, the closing costs on real estate are very expensive. Fortunately, in my situation, I can walk away and pocket $20k (even after closing costs) from my current condo. That doesn't include the $40k that I put into my condo when I bought it (it is on top of the $40k, so $60k all together). The real estate market has appreciated quite a bit, and my current condo was a bank owned property so I got a real good deal.

So while the closing costs are quite high, they would essentially be absorbed by the market appreciation.

No your are using your market appreciation to pay closing costs...it's still real dollars out of your pocket.

 

[W2R]

Personally, I wouldn't buy it but of course it is up to you to weigh the pros and cons and make your decision.

 

[Milton]

I am under contract to buy a new condo for about $358k.

Sounds like you are committed. If so, I'm unsure why you're now seeking advice or input: the decision has already been made.

 

[SheitlQueen]

Since you are already under contract for the new place, can you get out of it without suffering financial damage if you change your mind?

 

[RunningBum]

Can I change my answer? Based on location, and more points from others and more info from you, I'd recommend against. Still up to you, of course. An area that's still gentrifying has a lot of upside, but more risks too.

What would you be using the extra bedroom/bathroom for? Do you have a lot of guests? Want a hobby room or study? Is the new place bigger and nicer otherwise?

 

[Milton]

An area that's still gentrifying has a lot of upside, but more risks too.

Now including random attacks by gangs of masked thugs: Mob dressed in black damages vehicles, smashes storefronts on Hamilton street; Black bloc takes street against gentrification.

What a world.

 

[freedomatlast]

I'd stay put. Starting out with a house that was much less expensive than what I could afford, and stashing as much as I could in Equity Index Funds in my 20s and 30s is what has allowed me to be FI today. Given the fact that the location of the new place isn't as good as the location of the old place, that would further cement my decision to stay put.

 

[younginvestor2013]

I can still back out. I am under contract and have $1k earnest money into it, but my attorney advises that it would be recovered if we backed out (at this point). The longer I wait, the harder it is to back out.

If I back out now, I'd only be out the $375 inspection fee.

The neighborhood is in Uptown (for those who are familiar with Chicago). I currently live in Wrigleyville.

The unit in question has a large 900 square foot private deck that I really would enjoy. In addition to the new condo being a 2 bed/2 bath (current condo is 1 bed/1 bath), it also has a very large living area that would allow me to have a full size table and plenty of room to entertain/host guests. Current condo does not have much living space.

The additional bedroom would just be used as an office for now. Realistically, it would not get much use aside from when family comes to visit, which is only once or twice a year.

So for me, the main attractions are: the huge private roof top (having 900 square feet of private outdoor space in Chicago is a big rarity and would be awesome to effectively double my living space in the summer months) and the extra common area space (room for a full kitchen table, bigger couch, bar stools in kitchen). Added pluses are the 2nd bathroom and 2nd bedroom, although not as big of a selling point (at this point anyway) as the bigger common area space and private roof top.

the main cons are: higher living expenses and hassle of having to move/sell current place. other minor ones are extra space to clean and maintain.

 

[seabourne]

The neighborhood is in Uptown (for those who are familiar with Chicago). I currently live in Wrigleyville.

Yep, those neighborhoods were going to be my guess. PM if you have specific questions about Uptown, as I've been living there for about 12 years now. Also, I do think that it's a good neighborhood to be moving into, though at that price point it's probably a big place and/or new. Would be happy to grab a coffee and discuss the neighborhood.

 

[Milton]

the main cons are: higher living expenses and hassle of having to move/sell current place. other minor ones are extra space to clean and maintain.

If those are indeed your only reservations, I'd say go ahead. They are generic costs of moving to any larger accommodation.

As your current condo is a bit small, you will probably be moving sooner or later. As you've found a new place that you love, might as well do it now and maximize your benefit/enjoyment.

STATS:
Age: 29
Taxable investments: $181k
Retirement Accts: $183k
Cash Savings: $88k
Current Home Equity: $60k (this is net of realtor fees, mortgage pay off, closing costs, etc). Note, I only put $40k into my condo when I bought it, so I've gained about $20k from market appreciation.

NET: $512k

I would put 20% down, so the cash to close amount on the new place would come out to about $75k-$80k. This would bring my NW to $432k after it's all said and done.

If you take cash and put it into a condo (or other asset), your balance sheet entries change but your net worth remains essentially the same. It's not like the 20% down just disappears into a black hole.

 

[younginvestor2013]

If those are indeed your only reservations, I'd say go ahead. They are generic costs of moving to any larger accommodation.

As your current condo is a bit small, you will probably be moving sooner or later. As you've found a new place that you love, might as well do it now and maximize your benefit/enjoyment.


If you take cash and put it into a condo (or other asset), your balance sheet entries change but your net worth remains essentially the same. It's not like the 20% down just disappears into a black hole.

Balance sheet stays mostly the same due to sale of current condo. Technically it will decrease a bit, but essentially I am putting $75k into new condo and selling current condo and cashing out $60-65k. So B/S will decrease by about $15k.