^ Except for the fact that it's on Klotter Street ;) 

 

Well I think a lot of people who think buying a condo is going to be hassle-free are going to find out the hard way.  The dip in prices after the housing collapse is over in OTR and there aren't any single-family homes or many 2-families.  You're typically stuck in some sort of goofy HOA with 2 or more buildings, setting the stage for some future dispute that will turn everyone in your HOA into enemies. 

 

Also, the freedom to rent out your home if you move either to a different home or to another city is huge.  Screwing around at age 40 or 50 with some damn condo you can't rent is a retirement planning disaster. 

 

 

 

Condo rentals can be handled lots of ways, ie percent which may be rented out established by HOA, etc etc. anyone know what's being used in these developments?

Most of them have a limit--I can't recall what it is in my HOA. 

 

I am with Jake on the idea of buying a place on the hillsides.  I think you could totally find some good places to rehab north of liberty, too.  Honestly, if you are looking for bang for your buck (i.e., making real money) on buying something south of liberty, you are probably two years too late.  You can definitely still find places to live and live in an awesome neighborhood, but you are paying the premium that people a few years ago didn't have to pay as early adopters. 

Most of them have a limit--I can't recall what it is in my HOA. 

 

I am with Jake on the idea of buying a place on the hillsides.  I think you could totally find some good places to rehab north of liberty, too.  Honestly, if you are looking for bang for your buck (i.e., making real money) on buying something south of liberty, you are probably two years too late.  You can definitely still find places to live and live in an awesome neighborhood, but you are paying the premium that people a few years ago didn't have to pay as early adopters. 

 

 

People get too emotional when buying homes and condos.  If you're emotional there's somebody you don't see on the other side of the transaction who's going to make money off your foolishness. 

 

 

 

 

 

 

Condo rentals can be handled lots of ways, ie percent which may be rented out established by HOA, etc etc. anyone know what's being used in these developments?

 

There was an effort in our condo complex on Central Parkway to limit the % of rentals (unless a financial hardship could be shown).  The idea was that an ownership building would be a better place to live than a complex that becomes a defacto rental property (over time more and more units are being rented by the owners).  The effort failed with not enough people voting for the amendment.  Now that we've bought another place in OTR (for our growing family) we've ultimately decided to rent out our current unit making the "problem" worse.

Condo rentals can be handled lots of ways, ie percent which may be rented out established by HOA, etc etc. anyone know what's being used in these developments?

 

There was an effort in our condo complex on Central Parkway to limit the % of rentals (unless a financial hardship could be shown).  The idea was that an ownership building would be a better place to live than a complex that becomes a defacto rental property (over time more and more units are being rented by the owners).  The effort failed with not enough people voting for the amendment.  Now that we've bought another place in OTR (for our growing family) we've ultimately decided to rent out our current unit making the "problem" worse.

 

The condo complex where my grandparents lived on the west side is devolving into almost ghetto conditions.  The units ranged in price between $90-130K back in the late 80s when the complex was built but now most of the units sell for around $70,000.  So as the old people have moved into nursing homes one-by-one they've turned their unsellable condos over to property management companies. They've had drug activity move into what was formerly a retiree paradise with a fake guard shack.  Now the debate is whether to hire a real security guard to patrol the complex every night to deter car break-ins. 

 

Sounds similar to other experiences friends have had in lots of other cities.

Sounds similar to other experiences friends have had in lots of other cities.

 

Condos are still a relatively new product.  They didn't really exist in large numbers until the 1980s.  But now we're seeing the value of that era's condos erode in many cases.  People traded one set of risks for another.  The extreme circumstances since 2008 really exposed the cracks in subdivision and condo HOA's. 

 

The other big problem is that a one bedroom room condo, and certainly a studio, makes zero sense whatsoever long-term.  A couple won't stay a couple for very long that is constantly stuck in one another's immediate presence.  You need to at the very least have two bedrooms if not two floors.  You need a man-cave.  My dad's man-cave is in his detached garage.  He very well might be in there right now.  Good luck making that happen in Westfallen.   

 

Sounds similar to other experiences friends have had in lots of other cities.

 

Condos are still a relatively new product.  They didn't really exist in large numbers until the 1980s.  But now we're seeing the value of that era's condos erode in many cases.  People traded one set of risks for another.  The extreme circumstances since 2008 really exposed the cracks in subdivision and condo HOA's. 

 

The other big problem is that a one bedroom room condo, and certainly a studio, makes zero sense whatsoever long-term.  A couple won't stay a couple for very long that is constantly stuck in one another's immediate presence.  You need to at the very least have two bedrooms if not two floors.  You need a man-cave.  My dad's man-cave is in his detached garage.  He very well might be in there right now.  Good luck making that happen in Westfallen.   

 

 

Disagree. I don't mind living in close proximity with my significant other in an urban environment, because, if I am sick of him, I don't feel a desire to retreat to a 'man cave;' I'd want to go to the bar down the street.

So what you're saying is that unless you have two bedrooms, life can't work? Because one bedrooms and studios are such a new idea...

 

I think the problem, and I've seen this in many of your posts over the years, is that you can't seem to see things based on the needs or desires of someone who isn't you. Not everyone is in a relationship for starters. And people are holding off on that step of life for a lot longer these days which is why smaller units are fine for many people. Not everyone wants to sacrifice location for the less urban, less connected hillsides. Some people aren't looking solely based off the "bang for your buck." If that was the case, why not just move to somewhere on the West Side since home prices are so cheap over there? The intended client for properties like this are nowhere near retirement and looking at is as a bad retirement investment is laughable at best since that's decades off. These are intended as first residences for a lot of people, not as an investment rental property. Just because something doesn't suit your needs doesn't mean it's a bad idea, it just means you aren't the intended client.

A condo in a dense area with few single family houses is a much different product than a condo building in a sea of affordable single family houses. It's hard to sell a condo in cheviot orvwestwood when you could buy a house within spitting distance for an equal price.  As with all real estate it comes to location location location.

I toured the Westfalen II condos a few weeks back. The studios struck me as quite small, yes. Like your bed is in the living room is in the kitchen small. Like you're cooking in the bedroom small. Like where would the tv go(?) small.

 

But if you think of it more as a pied a terre, an expensive crash pad for an exec who lives quite far away, or someone who is in town only for a short period of time a month, but still wants a place to call home, then it makes more sense. 

 

I mean, looking at the studios, it was honestly hard to envision where a bed would go...where a tv would go etc. But it is not for long term nesting and domesticating. It is an in/out place where you probably won't even use the kitchen. A murphy bed or convertible sofa would be the best bet.

For what it's worth, my experience with my condo association is the exact opposite of the nightmare scenario Jake is describing. The HOA has no regulations limiting the number of renters, which means that if I move somewhere else, I can rent out my unit without getting anyone's permission. The downside is that, since there are over 30% renters in the building, I could not get a traditional Fannie/Freddie backed mortgage. Fannie/Freddie also don't allow the amount of retail space in the building to be over a certain percentage. So I was limited to only a handful of local banks that would loan to me.

So what you're saying is that unless you have two bedrooms, life can't work? Because one bedrooms and studios are such a new idea...

 

I think the problem, and I've seen this in many of your posts over the years, is that you can't seem to see things based on the needs or desires of someone who isn't you. Not everyone is in a relationship for starters. And people are holding off on that step of life for a lot longer these days which is why smaller units are fine for many people. Not everyone wants to sacrifice location for the less urban, less connected hillsides. Some people aren't looking solely based off the "bang for your buck." If that was the case, why not just move to somewhere on the West Side since home prices are so cheap over there? The intended client for properties like this are nowhere near retirement and looking at is as a bad retirement investment is laughable at best since that's decades off. These are intended as first residences for a lot of people, not as an investment rental property. Just because something doesn't suit your needs doesn't mean it's a bad idea, it just means you aren't the intended client.

 

Houses and condos aren't toys. It's unfortunate that even after the housing collapse the TV shows still have everyone thinking shopping for houses is fun and cute.  The fact is that the fleeting decisions you make early in in life have massive implications when you're 65.  The younger you are, the more important it is to make sound decisions.

 

If you only stay in a small condo for 5-7 years with a 30-year it's almost impossible to make money or even break even on its resale.  Look at the amortization schedule on a 30-year and you're paying majority interest each month until the 15th year.  Obviously if you have cash you're in a different situation.   

 

Again though, if someone is looking to live in OTR, has the money to put a down payment on a property, and doesn't want to rent, these ARE a cheaper alternative. Let's say you buy one of these, live there 5-10 years, only have to pay 600-650 a month on mortgate, HOA, taxes, etc. you're still coming in under what rents in the are are currently at. And that doesn't take into account the fact that rents are increasing wildly. Hell, right next door are $1,500/month one bedrooms. Buying one of these wouldn't only because someone thinks it's "fun and cute." You're making a lot of asinine assumptions about the reasoning behind buying one of these. But based on how you've talked about younger people (the ones likely to buy these) it's not a surprise that you think someone could only make a fleeting decision without doing their research and understanding what they're getting into by owning.

Again though, if someone is looking to live in OTR, has the money to put a down payment on a property, and doesn't want to rent, these ARE a cheaper alternative. Let's say you buy one of these, live there 5-10 years, only have to pay 600-650 a month on mortgate, HOA, taxes, etc. you're still coming in under what rents in the are are currently at. And that doesn't take into account the fact that rents are increasing wildly. Hell, right next door are $1,500/month one bedrooms. Buying one of these wouldn't only because someone thinks it's "fun and cute." You're making a lot of asinine assumptions about the reasoning behind buying one of these. But based on how you've talked about younger people (the ones likely to buy these) it's not a surprise that you think someone could only make a fleeting decision without doing their research and understanding what they're getting into by owning.

 

and if you threw in an extra $100-150 a month for the mortgage, you could make some serious strides in making the principal go down more quickly while still paying less than nearby rents.  Doesn't seem crazy to me.

 

Now would I want one of these? No. I'm at the stage of life where I like having space and our house in Northside suits me swimmingly.  But it's not hard to imagine YPs moving to town and thinking that these would be a decent start place for themselves.

I definitely agree that buying one of these condos, or any condo in an urban area, can be a good decision for many people. (And, it's presumptuous of me to even say that; it's evident from the market.)

 

Regarding the Westfallen condos specifically, I'm glad they are small. Any significant new development with average unit sizes of 2000+ sq. ft. would scare me off from a long term perspective. It seems likely that the land resources of America are finally going to outrun the ability of Americans to pay to maintain them. That seems true for everything from our transportation infrastructure to our housing stock. One bright spot is the repopulation of urban centers with stacked small units, leading to lower per unit maintenance and energy costs. How do 25+M people live in Seoul? They mostly live in units that would be small compared to Westfallen (yes, even the studios), and as mentioned before, they go out for fun (hence, the Karaoke bar as opposed to having people over for Karaoke). I do not think they are less happy.

 

The pictures of Westfallen do not concern me. I am interested in how the underlying utilities were installed and the quality of the HVAC, windows, kitchen cabinets, and roof/gutters. The squeaky/uneven floors are not a concern if they are original (which many would prefer), and it's hard to explain squeaks if they are new. And I know enough that badly taped drywall joints do not indicate anything about those items. Frankly, if I were interested in a unit at Westfallen, I'd probably use those superficial items as a way to drive the price down because the average person might not be able to see past them. Then, I'd hire someone for $2000 to re-mud the ceiling and move the fan.

For the price range the fixtures and finishes were on par with everything else in the neighborhood for the studios. I'm looking in OTR and Downtown in this price range and though there are several spots where you can get more space, you're sacrificing SOMETHING for that space. For instance, there was an 1,100 square foot condo on Court Street I liked but it was on the fifth floor with no elevator which was making it hard to sell. That and it was 30k more than the most expensive studios in Westfalen. There was a great 2 bedroom on Main Street, though it had some shoddy work as well such as a door into a bathroom that hit the toilet, but was a great space. But it was directly over MOTR and there were ear plugs by the bed. A HUD property also on Main had three floors (ground level, second level, and basement) but it was in SERIOUS need of work. Like, at least $50k of work. There are two units for sale on Vine Street of very similar finish quality to Westfalen. One is a studio for $119k, the other is a one bedroom for $165k. The prices in Westfalen are literally directly on par with what's around it. And you're directly on the streetcar route and half a block from Washington Park, have communal outdoor space in the back, and have low HOA's for the area. If the higher priced studios in the Nicolay can sell like they did with a $248/month HOA, I have trouble believing these won't sell fine. I mean, 5 are already pending and they only came on the market this weekend.

Again though, if someone is looking to live in OTR, has the money to put a down payment on a property, and doesn't want to rent, these ARE a cheaper alternative. Let's say you buy one of these, live there 5-10 years, only have to pay 600-650 a month on mortgate, HOA, taxes, etc. you're still coming in under what rents in the are are currently at. And that doesn't take into account the fact that rents are increasing wildly. Hell, right next door are $1,500/month one bedrooms. Buying one of these wouldn't only because someone thinks it's "fun and cute." You're making a lot of asinine assumptions about the reasoning behind buying one of these. But based on how you've talked about younger people (the ones likely to buy these) it's not a surprise that you think someone could only make a fleeting decision without doing their research and understanding what they're getting into by owning.

 

The people I'm directing my comments at are those with little to no help from their families and student loan debt hanging over their heads.  So if you have no debt, you've got a wealthy family, and you made $75K your first year out of school, I'm not talking to you. 

 

The facts are on my side when I argue that people should focus on getting multiple streams of revenue, and your primary residence can be one of them if you buy a multi-family or rent out rooms.  You can do that with houses and multi-families in decent Cincinnati neighborhoods that sell for the same price as these studios.  You could be earning $10,000 or even $15,000 in rent per year on a $100,000 home or you can be earning $0 on a $100,000 condo.  Imagine throwing extra income at that house to pay it off in five years, then earning $10,000 per year for the next 50 years.  That's what I'm doing right now.   

 

 

 

 

 

Well that doesn't describe me, so you are talking to me. Are income properties a great investment? Yes. Does that mean that someone who you just described should be buying them because that's what you're doing? No. Someone who is trying to cut expenses by living, working, and playing in the same location of the city can do that in something like this. If they lived in a $100,000 dollar home, they might need to own a car. Their job might not allow for them to manage an income property so they might have to hire a manager of their investments. They also could, you know, not want to take on the hassle of being a landlord. Some people don't have any desire to do that, even if it does make financial sense. Again, you just reiterated what I'm talking about with your last sentence. "That's what I'm doing right now." That's great, good for you. But everyone else isn't you, nor should everyone be doing the exact same thing.

Somehow this page hasn't gotten the off topic lightning strike yet...

Somehow this page hasn't gotten the off topic lightning strike yet...

 

There was a lightning strike South of Liberty!?!  Was it because all of the scrap metal laying around because of the stupid streetcar?  This wouldn't have happened if we had invested in a new Brent Spence Bridge instead of trolleys.  ;-)

Well that doesn't describe me, so you are talking to me. Are income properties a great investment? Yes. Does that mean that someone who you just described should be buying them because that's what you're doing? No. Someone who is trying to cut expenses by living, working, and playing in the same location of the city can do that in something like this. If they lived in a $100,000 dollar home, they might need to own a car. Their job might not allow for them to manage an income property so they might have to hire a manager of their investments. They also could, you know, not want to take on the hassle of being a landlord. Some people don't have any desire to do that, even if it does make financial sense. Again, you just reiterated what I'm talking about with your last sentence. "That's what I'm doing right now." That's great, good for you. But everyone else isn't you, nor should everyone be doing the exact same thing.

 

 

Also, the money saved on not owning a car is a valid one, but only if that money is regularly invested.  A lot of people, including myself back when I didn't have a car, like to think they've discovered the secret to fame & fortune because they're not paying to own and insure and repair a car.  But if you're blowing that savings on beer and concert tickets like I was then you're not getting ahead.

 

For the sake of argument, if it costs $500 to own, maintain, fuel, and insure a car, and suddenly that all is applied to an IRA and other investments, that's *still* not enough to ensure a comfortable retirement.  Plus, you're still likely going to be paying $200/mo on bus fare and periodically taking taxis or renting a car, so it's not *that* much of an advantage in most cases.

 

But the larger point is that $500 per month is a significant improvement to any retirement plan, but you need to be investing way more than that, like $20,000 per year.  Again, if you're bringing in $10-15,000 per year in rent, you're getting there. 

 

 

 

Who is the mod for this section of the forum?

^If you have an issue, just hit the "report post" button and a moderator is notified. 

Who is the mod for this section of the forum?

 

I believe that would be ColDayGod.

I bought a condo in the "Midtown" area of Detroit in 1997. It was an unrehabbed historic building. Before buying the condo, I went to the City of Detroit Building and Saftey Department and looked at the file for the condo.  There was nothing that looked too negative in the file. I also asked to see the condo meeting minutes and by laws.  Since the condo was dirt cheap, I was able to pay off the mortgage in about two years. When I bought the condo, it was mostly owner occupied.  During the twelve years I lived there, most of the owners moved out and rented their units so it became mostly a rental.

 

This can be a problem if you want to sell the condo because banks are reluctant to provide mortgages when the balance becomes more renters than owners. Luckily, when I wanted to sell the condo, the neighborhood had become "hot" and someone bought the condo for cash. It would have been difficult for anyone to get a mortgage.  Also, the condo had no parking or central air which would have made it hard to sell in a neighborhood that was not "hot".  I still only got back what I paid and what I put into it.

 

I think it's best to consider the location, the sanity of the other condo owners, the record of inspections and violations and still try to buy at a low price if you can.  There will always be surprises once you get into a place

I live in a mid-rise building with apartment-style condos. Our building regulations which I signed onto when I moved in here in 1996 prohibit owners from sub-leasing their units to anyone other than direct family members (parents, siblings, children only). No cousins or uncles or aunts. So my building is almost entirely owner-occupied which helps keep it in pretty good condition.

My grandparents from both sides of my family moved into the same condo complex in the late 1980s.  One is in phase 1 and the other is in phase 2.  They had years of litigation over the people in phase 2 being forced to help pay for the replacement of rotting wooden balcony railings in phase 1 (phase 2 had metal railings).  It turned into a petty condo complex civil war.

 

They also had wild disputes over the waterfowl kept in the complex's decorative pond.  Numerous kids and old people were attacked by one of the swans, then in another infamous incident an old lady fall through the ice trying to feed one of them.  It was one stupid petty thing after another, for 20 years.

 

Then the recession hit and condos that had been purchased for under $100,000 fell from a peak approaching $150,000 down to $60-70,000.  All of the condo people didn't know who to blame so they blamed Obama.  My grandparents got ill in 2011 at the same time and had to move to a old people's home and couldn't sell the condo, as had been their plan, to pay the outrageous up-front cost to move in.  So they had to borrow money from my parents at the very time I was going to borrow money from them to buy a house. So I missed buying a house at the very bottom of the housing market.

 

They did end up selling the condo within 3-4 months, but the sale price was well below what they paid for the place originally back around 1987.  Meanwhile my other grandma still lives in the complex, so I see how it's deteriorated.  Many of the condo owners are now out of town and many others are foreclosed and empty.  The imitation of Florida "resort" living populated mostly by white retirees that existed when it opened in the late 80s has been replaced by a strange mix of people, many of them renting. 

 

I think the condo association might collapse shortly as the roofs, privately-maintained roads, and clubhouse and pool are all going on 30 years old and are going to need major work.  No doubt the HOA has been failing to collect fees from the many foreclosed and otherwise vacant condos.  This puts the burden on the relatively few who remain. 

 

I bought my 2BR, 2BA apartment-style condo for $46,000 in 1996. It was valued at $60K by the county for tax purposes in 2006. A condo of similar size to mine across the hall sold for $65,000 that same year, yet it lacks a balcony whereas mine has a balcony. So I think I could have sold mine for $70,000 in 2006.

 

Then the recession hit in 2008 (yep, I'm sure that was Obama's fault too). My condo fell in value by 2010 to $38,000, according to the county. This was verified by a private appraiser when I tried to refi my $39,000 mortgage but I wasn't offering cash to offset the fact my mortgage was now underwater. There were six vacant units in my building with two under bank ownership and one that sold at a sheriff's sale for just $18,000! Fortunately the banks are cleaning up the two units they own and putting them back on the market. Increasingly the units in my building are selling again, one by one. I have no intention of moving and many of my neighbors are happy here. In fact, I'm installing a new central HVAC unit in my condo this week to replace the one that's original to the building -- and is the same age as me (46)!

Great article about the fallacies of home ownership (and by extension condo ownership):

http://www.washingtonpost.com/opinions/catherine-rampell-americans-think-owning-a-home-is-better-for-them-than-it-is/2014/04/21/5e9f4dd2-c979-11e3-93eb-6c0037dde2ad_story.html

 

According to a stat the writer cites, American homes increase in value by an average of less than 1%.  Now, if you own a 2-family or 4-family, or are single and rent out a room or two in your home, then you vastly improve the investment.  In fact, by Warren Buffet's definition, a home actually becomes an investment at that point, because there is actually cash flow, like a dividend stock. 

 

I return to the critical problems with condos...that 1. the HOA's scare me and 2. they typically can't be rented with the ease that a home can.  That said I might very well buy one at some point, but not under the illusion that it's an investment. 

 

I also would like to point out that anyone who is 30~ years old looking to buy a first home might consider buying a very small house near a college that they can pay off quickly and eventually turn into a student rental.  I am hoping to pay off my house by age 40, then buy and move to another house and have a portion of the rental income fund an IRA.  If you have rental income fund one $5,500 IRA per year, and that IRA averages the market's 100-year 6.5% return, that income will turn into approximately $350,000 by age 65.  Plus, you get to keep collecting the rental income until you actually sell the house, so if you live to be 85 you will collect 20 more years of income in addition to enjoying the IRA payoff. 

 

 

 

 

The appreciation element is slightly more complex than that article explains, though the truth is somewhat more complex and therefore maybe not as WaPo-friendly.

 

The 0.3% real returns is a good number to keep in mind, but remember that almost everyone buys real estate highly leveraged.  If you paid 20% down, that 0.3% return is 1.5% on equity, at least to start.  If you put 10% down, it's 3% to start.  However, as you begin to pay down the principal, you become less leveraged and your gains on capital begin to track the actual 0.3% statistic more and more each year.  More importantly, however, remember that the 0.3% stat is just an average.  There are some people who will not fare so well, and leverage turbocharges losses as well.  That's the real reason I'm very nervous as a homeowner.  With 20% down, a 20% drop in the sale price wipes out 100% of my capital; a 10% drop still wipes out 50%.  And, of course, it is inherently non-diversified (the amount of my down payment was considerably more than double my holdings in my largest stock holding).  If I see the value of some stocks in my 401(k) (I self-direct a solid portion of mine outside my firm's cafeteria plan) and IRA decline by 20% or more, I certainly don't lose sleep and I sometimes feel my ears perking up--the market may have just declared a sale on a company I'd be happy to own a little more of.  If I saw home prices in my neighborhood decline by 20% or more, I'd feel myself growing older on the spot.

I had a discussion with a coworker about home ownership.  We discussed doing a 15 yr loan vs 30 yr.  He is a very successful guy who makes a lot & could probably pay cash for his home but has a 30 yr loan so he can invest the majority of his money rather than pay down the debt.  Higher return on his money that way he says. 

Housing isn't sold in shares, except for (I'm joking) time-shares.  But you make a good point -- when the housing market sinks, you can't rush in and buy more shares like you can with stocks, ETF's, etc. 

 

Now investors can and did do that back circa 2009...anyone with cash and some balls was feasting upon cheap homes and undervalued rental property.  But honestly who were those people?  Either the super-wealthy or those who happened to inherit a ton of cash in 2008-2011.  The little house across the street from me was purchased for $50K in 2009 and now that son-of-a-bitch has it parked on the market for $89,000 and he's not budging.  It's definitely not worth $89k -- he's waiting for some sucker to come along and fall in love with it and overpay in a swell of "house fever". 

 

 

 

 

 

 

 

I had a discussion with a coworker about home ownership.  We discussed doing a 15 yr loan vs 30 yr.  He is a very successful guy who makes a lot & could probably pay cash for his home but has a 30 yr loan so he can invest the majority of his money rather than pay down the debt.  Higher return on his money that way he says. 

 

Yes that's certainly possible in theory but you do invite an element of risk. The house of cards collapsed for many people in the fall of 2008, with many people with 30-years underwater.  Something truly extreme has to happen to drop underwater on a 15.  2008 was pretty damn extreme, and no doubt many people with 15's foreclosed, but that would have been because they lost one or two incomes. 

I had a discussion with a coworker about home ownership.  We discussed doing a 15 yr loan vs 30 yr.  He is a very successful guy who makes a lot & could probably pay cash for his home but has a 30 yr loan so he can invest the majority of his money rather than pay down the debt.  Higher return on his money that way he says. 

 

Yes that's certainly possible in theory but you do invite an element of risk. The house of cards collapsed for many people in the fall of 2008, with many people with 30-years underwater.  Something truly extreme has to happen to drop underwater on a 15.  2008 was pretty damn extreme, and no doubt many people with 15's foreclosed, but that would have been because they lost one or two incomes. 

 

On the 30, the early years, one is paying a ton of interest and not paying down principle also. If you a 30 i would hope that the thought process is

you plan on owning it a long time.

The 30-year amortized mortgage didn't exist until 1937, when the FHA was established and the government took over the risk from the banks.  It's a flimsy financing scheme, since it relies on a combination of inflation and rising home values to make it work.  Plus so many fools enter into retirement still owing 10 years of payments on their house. 

I had a discussion with a coworker about home ownership.  We discussed doing a 15 yr loan vs 30 yr.  He is a very successful guy who makes a lot & could probably pay cash for his home but has a 30 yr loan so he can invest the majority of his money rather than pay down the debt.  Higher return on his money that way he says. 

 

Yes that's certainly possible in theory but you do invite an element of risk. The house of cards collapsed for many people in the fall of 2008, with many people with 30-years underwater.  Something truly extreme has to happen to drop underwater on a 15.  2008 was pretty damn extreme, and no doubt many people with 15's foreclosed, but that would have been because they lost one or two incomes. 

 

On the 30, the early years, one is paying a ton of interest and not paying down principle also. If you a 30 i would hope that the thought process is

you plan on owning it a long time.

 

Well, the alternative thought process of gottaplan's coworker isn't completely irrational, either, though we chose the 15: Figure the monthly payment on a 30-year is about 2/3 of the payment on a 15-year.  If housing averages about 0.3% and equities average about 6.5% in real terms over most given long-term (10+ year) periods, then you've got 1/3 of what would otherwise be your payment making the higher, market-based return over that period, in addition to the leveraged price appreciation of your house.  Even after deducting for the fact that many of your payments on the house will be swallowed by interest on the 30-year, the gains on the conserved assets could theoretically be enough to make up the difference.

 

My wife and I decided to take the other risk: When you sign on for a 15-year, you are concentrating your saved income more in your house, and faster, which would not be advisable in a vacuum--but you are at least partially compensated for that nondiversification risk via considerable savings in interest payments.

 

Both arguments have some merit--in both cases, assuming you have the necessary discipline to follow through with the particular strategy.  The critical element of financial discipline in gottaplan's friend's strategy is you actually have to have the discipline every month to invest that extra savings; there are always temptations.  (Gorram it, another Woot-off!)  For the 15, the critical moment is up front: It is even more critical with the 15 to not buy more house than you need and to bargain hard to get the best purchase price possible--the former because you still want to be able to diversify somewhat notwithstanding your mortgage payment, and the latter because the 15 rapidly concentrates your equity into the house and the leveraging effect of any drop in price has a lot more of your equity to chew up before it becomes simply the bank's problem.  Honestly, I have serious doubts as to whether I successfully followed the second part of my own advice with respect to the place we bought, but those are the implications of that strategy.  And we definitely did hold ourselves to well within our comfort zone on price, even if we might have overpaid for our specific place (we got probably the best house in an average neighborhood, which is its own, separate kind of risk).  There are mortgage lenders who would cheerfully have let us borrow 50-100% more than we did.

Plus so many fools enter into retirement still owing 10 years of payments on their house.

 

There are so many factors involved in this situation that it actually is foolish to make such a blanket statement.

There are mortgage lenders who would cheerfully have let us borrow 50-100% more than we did.

 

My wife and I bought a house last year and we had the same thing happen at our bank.  When they told us how much we could borrow we looked at them like they were crazy (because they were).  Then it dawned on me that this is exactly how so many seemingly responsible people get in over their heads on their mortgage.  We borrowed less than half of what we were approved for and I couldn't imagine spending any more than we did and still being comfortable with the payment.  People need to understand what they can afford, not what they are able to borrow.

 

I found the 15 vs 30 year mortgage debate interesting as well.  We decided to go with a 30 year for a couple reasons.  First, interest rates were (and still are) historically low.  We got a 3.75% rate on a 30 year compared to about 2.9% offered on a 15 year.  The amount saved in the long term simply didn't outweigh the added monthly cost.  We also reasoned that we can always pay down the 30 year faster if we have extra cash.  This way the minimum monthly payment is lower just in case something were to happen (job loss, medical emergency, etc) that makes us cash poor.  Essentially, the way we're going now will make our 30 year loan more like a 15 year loan but without the higher minimum monthly payments.  We value the security of having that lower monthly payment requirement.

>The critical element of financial discipline in gottaplan's friend's strategy is you actually have to have the discipline every month to invest that extra savings; there are always temptations.

 

It's like dieting or joining a gym -- you can talk all you want but you have to actually do it.  I'm happen to be pretty bad at those two things but for whatever reason don't mind working a second job and attempting to save as much as possible every month. 

 

 

Plus so many fools enter into retirement still owing 10 years of payments on their house.

 

There are so many factors involved in this situation that it actually is foolish to make such a blanket statement.

 

We can to a large extent mitigate risk in our own lives, but we have to imagine absolute worst-case scenarios, which are times when we have several complicated situations going on simultaneously.  For example rather than inheriting a modest sum of money from a deceased parent or grandparent, as had been expected for decades, having to instead interrupt our own savings plan to bail them out.  Same thing might happen with a sibling or friend.  Rolling casually into retirement with debt of any kind increases the likelihood of getting wiped out. 

 

 

I always heard growing up that owning a condo was a bad investment.  I did buy one several years ago and also lived in it for quite a while.  I've been

lucky to have had no problems with renters.  But when I'm ready to sale, I might run into some problems.  And I do know people that have had a lot of problems with owning condos. But so far, I've been very lucky.

I always heard growing up that owning a condo was a bad investment.  I did buy one several years ago and also lived in it for quite a while.  I've been

lucky to have had no problems with renters.  But when I'm ready to sale, I might run into some problems.  And I do know people that have had a lot of problems with owning condos. But so far, I've been very lucky.

 

Funny, when I was growing up in the 70s and 80s, it was almost cliche when hearing someone say "I'm considering buying a condo" to respond with "Ah, good investment."

I always heard growing up that owning a condo was a bad investment.  I did buy one several years ago and also lived in it for quite a while.  I've been

lucky to have had no problems with renters.  But when I'm ready to sale, I might run into some problems.  And I do know people that have had a lot of problems with owning condos. But so far, I've been very lucky.

 

A successful "investment" is usually one that generates revenue.  If you bought a $100,000 condo back in 1990 and collected rent on it before selling it for $50,000 in 2014, then you made a lot of money.  If you lived in it the whole time, you might have broken even as compared to paying rent.  The problem is that if you upgraded the condo while not charging rent and sold it for half of its purchase price, then you almost certainly lost money. 

 

It's okay to lose money on your primary home if it's really where you want to live and you have a secure financial situation otherwise.  But that does not describe most of the people who bought condos back in the 80s.