Condo time. Yes, you did just hear me swallow. I've made no pretenses about my apprehension with condos. To me, you're much better off being a renter than an owner of these types of dwellings. I won't get into those details, rather, I'll get into the analysis.
For this one, we had to go waaaaay back. Check out MLS# 225591. It's an older unit (pre-leaky), it hadn't seen a stitch of work in about 25 years. It was downtown, but not "Central Park" or other less than sunny sides of downtown. We'd only consider a downtown condo. In our hunting experience, they don't hang around long, so we'd look at this as a more liquid purchase than a lot of others we could make in this market.
Original ask was $229,900. It sold for $225K. We'd put 5% down and pay cash for closing costs. We'd also have $10-$15K for "updating" which this particular unit needed in order for us to feel good about the purchase. For full disclosure, we actually made the call to put in an offer on this unit after watching it for 3 weeks, but it had a conditional offer accepted that day. That was March 2007. And we're relieved.
Here's what it looks like for us:
We'd pay bi-weekly rapid. Even with taxes, monthly assessment, and bills, we'd fall well under the recommended 30% of gross income (we'd actually be 30% or less of net) which is just fine. On this purchase, we'd even likely go 5-year closed variable which would save us 0.1%. Not much, but it adds up and we can easily handle a 1%-2% interest rate hike.
So what does this look like 5 years from now? Again, we'll make some assumptions similar to yesterday.
Here's the 6% growth side:
Present value (actual): $225,000.
Future value (assumed): $301,100.
Mortgage principle paydown: $23,500
Total equity: about $100K.
Wow. I am honestly surprised. My risk is roughly half of what it was yesterday. My equity is only $60K less. That's like a kilometer to a mile really. OK. No it's not. But for barely being a blip on the risk factor side for us, I'd say a $100K equity in 5 years is a pretty good return. Too bad I know people who have hit that mark, with less risk, in less time, in better condos, over the past 3 years, and therefore tainting my expectations and those of everyone around us. But I digress.
Let's look at the downside now. There was some reasonable debate about my assumptions on the period 1994-1999 in town. I'm OK with that. Condo's on VREB aren't counted until 1995. So I have to shift my 5 year period ahead by a year. So we'll use downtown units from 1995-2001.
Difference: $7K or a whopping 5%.
This basically means you lost money. But not that much. You'd even come out ahead with equity on the principle pay down to the tune of almost $16K. If we did the upgrades of $10-$15K we figure we'd get 50 cents on the dollar come sale time (conservative) so we'd probably even break even.
I won't be commentating for a while, we're out condo shopping.
OK. No we're not.
What would happen if the condo market dropped 6% annually?
Present value: $225,000.
Future value: $149,000.
Difference less principle paydown: $52,600.
If it was only a 3% drop over 5 years?
Present value: $225K.
Future value: $186,500.
Difference less principle paydown: $15K.
Maybe we'll wait till we sell the place to do renos? Then we'd be even. Or maybe not.
Again, I've left out the taxes, MA and other expenses. This isn't a who wins the wealth war post. Just a little math playing around analysis for you folks to rip to shreds.