Buy house for cash or invest?
I know this question has been asked a thousand times, but my situation is somewhat unique and I’m looking for guidance. Relevant details: I own a home in Southern California, 450k remaining on mortgage. Home value is approximately 1-1.1M. I am not a high wage…
I know this question has been asked a thousand times, but my situation is somewhat unique and I’m looking for guidance. Relevant details: I own a home in Southern California, 450k remaining on mortgage. Home value is approximately 1-1.1M. I am not a high wage earner (working on that), so the mortgage is a serious burden. I can do it, but it’s tough. Option 1: Sell the house and with the 550-650k profit pay cash for a condo, never have to worry about a mortgage again. Major improvement in monthly expenses, obvious “peace of mind” advantages. Option 2: Invest the money and live at my parent’s house for free. Not ideal in terms of social life or ego, but it would allow me to build up some serious savings. From a purely financial standpoint, what makes more sense? Thanks!
Collected discussion
Because if I can pay cash for a condo my monthly expenses are greatly reduced. Even with HOA fees and taxes, it’s less than rent. Plus, I can sell it if necessary and likely make a profit.
All good points. Mortgage + taxes + insurance = $2800. If I bought a condo, I’m looking at roughly $500 HOA + $500 property tax, so roughly $1000 a month in carrying costs. So a clear reduction in monthly expenditures, BUT the condo will increase in value at a lower rate than the SFR.
it will cost you about $75k to sell it. you could rent it out and use the rent to either pay rent somewhere cheaper or live for free at your parents. what's your rate on the mortgage?
I don't think it's the end of the world either way, but I think you're making a few contradictory statements that you might need to resolve? I am not a high wage earner obvious “peace of mind” advantages Can you afford special assessments, repairs, etc.? I would find owning a condo to be less peace of mind if I had low income/low assets. Or will you still have significant assets even after using up the money to buy the condo? Even with HOA fees and taxes, it’s less than rent. Plus, I can sell it if necessary and likely make a profit. I think you're forgetting that with renting, you would keep the ~600k and be able to invest it. If you're assuming housing prices will continue to rise (to make a profit), you should also assume that the stock market will continue to rise in whatever timeframe you're thinking. This would be like 60k/yr nominal EV (or whatever you think) that you won't get with the condo. Or are you very bullish on housing prices but bearish on the stock market?
Yes, I’ve considered this, too. Mortgage is 3%, rental value of house is maybe $3500-4000. So not a big profit after paying $2800 bill.
Yeah, I’d keep the 3% mortgage. Current rates are more than double that. You can deduct the interest from the rental income as well as taxes, insurance, maintenance, property management fees, etc. Also, since you’re in CA, prop 13 will reset the tax basis upon a sale so you get the benefit of a lower tax bill which will increase your rental profit. Keep in mind that a portion of your mortgage payment is principal which is money you are paying your future self (i.e. savings @3%). If you do decide to sell, look into having the buyer assume your mortgage. That rate is valuable.
From solely a financial standpoint, living for free at your parents and investing is the obvious answer. From a life standpoint, I don’t know that it makes sense at all. But you asked only about finance. Free rent would always beat having a housing payment on the finance only side.
You’d have the cash from the house sale already though, so no need to sell a condo for cash in the future. Plus if the HOA fees and taxes are close to the cost of rent anyways, it makes no sense to
Don’t think about chasing profits, think about mortgage coverage. Move to parents’ house and have someone else pay the mortgage so you save that monthly expense. You can even start paying a portion of your monthly payment against the principal. If you sell within 3 years, you can still shield your taxes against first $250K in profit (must live in home at least 2 of last 5 years). Someone here will bring up that you may not be eligible to keep that 3% rate as a landlord but this happens all the time. In 3 more years you’ll have more equity and hopefully rates are more attractive for your next home purchase.
Why a condo? Why not just rent a decent apartment?
Since you asked for purely financial standpoint, it’s always going to be live with parents and then save/invest as much as humanly possible. That’s the unfun but best financial standpoint.
Um. Living for free is always cheaper. Money gives you the freedom to do what you want, and also not do what you don't want. Nobody else can decide your priorities
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Me personally I’d probably get the condo for peace of mind and privacy those are priceless put away the difference and in a year or 2 you should have a solid emergency fund if you don’t already have one then go from there
Mortgage debt is a tool. Use it! That million dollar property will probably be worth $2,000,000 in ten years, so $100,000 a year. How much will you save a year living with Mom and Dad? Is condo living your preferred lifestyle? What will you be paying for property tax on a $600,000 condo vs your current taxes on your SFH because of Prop 13?
Do you like your parents and do they like you? If yes and yes, then the correct financial decision is to live with them. Also consider, if you put $500k into the stock market it can lose 20% of its value. It happens. If you're young and can wait it out, then fine, but you could be living with your parents for a while. Buying any house or condo should not be considered an investment, it is mostly a lifestyle decision.