Buying when only planning to stay a few years?

Question

My husband and I are moving to Iowa in a year and would like to try to own a home for the first time. I noticed that there were many more condos available in our price range than single family houses. Even with the monthly association fees, they are either comparable or less expensive than a regular house.

We only plan to live in Iowa for 3-4 years. We are used to living in apartments and thought it would be wise to buy a place so we'd be able to recooperate some of the money instead of renting a place and never seeing that money again. Even if we sold for a loss, we would still get SOME money when we left, isn't that correct? However, I would like some advice on this. Are there huge drawbacks to selling a place (a condo especially) after only a few years? I'm afraid I know next to nothing about real estate and could really use some advice.

Answer 1

The majority of your payment will go towards interest for the first several years. Therefore, you will only pay a small portion of the outstanding balance of the loan. Most likely you will pay Realtor fees when selling your house, which often amount to about 6% of the sales price.

At the end of four years on a 7% loan of $100,000 for 30 years you would have paid about $3,300 of your balance leaving you with $96,700 balance. If there was no appreciation on the property and you sold for $100,000 the 6% of Realtor fees ($6,000) would be about $2,700 more than you paid on your principal. This is just the nature of amortization. This is a very crude example but this would mean at the closing table the buyer would be paying $100,000 and you owe $96,700 (Mortgage Balance) and $6,000 (Realtor Fees) which equals $102,700. Meaning you will actually cost money to sell your home.

Follow this link and look at how much money is going towards principal and how much is going towards interest.

http://www.hsh.com/cgi-bin/flap.cgi?prin=100000&int=7.00&term=30&strt=Jan&stry=2007&full=No&ppay=0&apay=0&pay1=0&ppno=0

The other factor you want to look at is you are not always able to sell your home when you want to. What if you had to make payment on your home for 6 months after you moved because you couldn't sell. That could easily be thousands of dollars. You will not run into this problem if renting.

There are also many expense when buying a home (usually about 3% of sales price). This is for the origination of the loan, lawyers fees, appraisals, inspections, and so on. You will also have escrows for taxes and insurance added to your monthly payment, you will be responsible for repairs, and so on.

On the other hand, in a strong appreciating real estate market it may make perfect sense to buy. You do get tax right offs which will help to offset the added expense of buying compared to renting.

The bottom line any money you make from owning a home for 3-4 years would be from appreciation not the monthly payment on your mortgage, and it would be futile to predict what the market conditions will be in 3-4 years, especially for a condo.

Answer 2

My wife and I did exactly what you are thinking about doing and it has turned out to be a great deal. We moved to Boise, Idaho almost 2 years ago (2 years in August to be exact). When looking at the prices of rent, we found that we could buy a condo for just about what the nicer places in town were going for. We decided to buy a small 2 bed, 1 bath condo for 89,000. Our goal with the place was to keep it for 2 years and sell it, we also did not want to aggressively pay down the mortgage so we have only done an interest only loan which was a bit risky but has turned out to be a good thing. The place is now worth abotu 125,000 and we will have a nice little down payment for our next place.

If you decide to purchase, make sure that you will keep the place for at least 2 years, otherwise you will have adverse consequences when you sell (your gain on the property could be taxed). If you sold for a loss, you would not get any money on the property, so don't go in and assume that you will make money guaranteed, because that is not true. If the property you buy costs 100,000 and 4 years down the road you sell it for 100,000 you will lose money after the realtor fees are included. I would be willing to say that purchasing and holding a place for 3-4 years would be a great thing though. If you have any other questions, just drop me an e-mail.

Answer 3

I think the reason it makes more sense to rent in your situation is that there are fees involved in purchasing and selling a house or condo, so even if you sell it at the same price that you paid for it you will loose money because of the fees involved in both transactions. Another drawback is that any repairs that need done while you own it are your own expense unlike when you rent, so if you are unlucky enough to have a major problem in the 3 or 4 years you own the condo or house you will loose even more money. I don't see allot of difference in buying a condo and renting because most condos are built just like apartment buildings anyway, so you are just going to loose money to in effect rent from a bank only with all the risk.

Another thing to consider is that in 3-4 years you will have to find someone to purchase your house/condo or else you will still be paying the bank for it on top of the new place you move to.

The tax savings argument is bogus, you are going to spend more money to "save" a very small percentage of what you are paying.

You also won't be "paying down your mortgage" because nearly your entire payment will be going to interest for about the 1st 10 years of any 30 year mortgage. So, again, you are only renting from the bank.

Answer 4

Whether or not you get SOME money back depends on your downpayment and how big a gain (loss) you get when you sell. Bear in mind that, on a $100K mortgage at 6.5% annual rate, after four years of making payments, you will have reduced your principal owing only about $5,000. The remainder will have gone to pay interest. Don't forget, as well, probably real estate and selling fees on the condo, which can run to about 7% of the total sale price.

If you still decide to go forward, insure that you check all condo bylaws and maintenance funds. If you purchase a condo which does not have a maintenance fund in place and the entire building happens to need a new roof, what will you do ? Yes, they will expect YOU to pay for your portion of the roof, since some of it covers YOUR head.

Sit down with your husband are start a list of possible expenses vs your chances of market inflation. It may or may not be as pretty as you think it will be.

Answer 5

If you are sure that you would be living there for more than 2 years, then I would suggest buying. The tax advantages of owning are usually better than just renting. As long as you are certain that you will be able to afford the mortgage, property taxes, Home Owners Insurance, Home Owners Association (if there is one) and maintenance costs for at least 2 years while you are living in the property, then it would be a great investment. But don't forget that you must live in the property for a minimum of 2 years in order for you to take the profit if there is one when you decide to sell. Even if you break even, the tax advantages on your income will be beneficial. I would also check into the cost of living there versus where you are right now, as it may go down or up significantly depending on what state and area you are living in right now.
If you still have concerns, contact an Iowa real estate agent and ask them to give you the benefits of owning a home versus renting there. Good luck!

Answer 6

There really are no drawbacks to buying. A large portion of the interest you pay on a mortgage is tax deductible, and mortgages are interest-heavy in the front, which means you pay the most interest in the beginning and that would make it a good idea for someone who was only planning on being in the house for a few years. Resale will all depend on the market at the time and in that area, but generally property of any kind appreciates over time so you should make a profit when you sell. Make sure you get a mortgage with no "pre-pay" penalties so if you do move in 3-4 years you don't get a penalty from your mortgage company. Good luck!

Answer 7

Yes you will lose some money if you're only planning to live in a house for 3-4 years. I recommend talking to a real estate agent and express your needs and concerns. Although, I recommend a Condo/Townhome where the market is active and strong, and hopefully last during your 3-4 year stay. I still recommend talking to a real estate agent and maybe the bank to see if this wil hurt you financially or help.
Good Luck!

Answer 8

If you planning on staying for any longer than two years, I would typically recommend buying instead of renting (without knowing anything about the market in which you are searching).

Even if you don't make any money on the sale (though historical performance of real estate in the US strongly indicates that you will), you will certainly benefit from the tax savings and the paying down of your mortgage.