Which is the best buy?

February 24, 2009 1:20 PM

Should I buy a 1 bedroom or 2 bedroom condo? Specifics after the break...

Option 1
Asking 149k, down from 239k 8 months ago. 1 Bedroom condo. Great floor plan, brand new renovation. So So area. Nothing really on the horizon to make it jump up. I can afford the payment by myself. Semi Close to a metro

Option 2
Asking 219k, down from 305 a year ago. 2 Bedroom condo. Brand new renovation. So so floor plan (small 2nd bedroom, small living / dinning combo) Great set up for roommates (2 seperate entrances (front and back door) 2 full baths. Just not a ton of living "space". Very close to current job (hopefully be gone soon though!) and closer to the metro. Area is ok, but has more up swing potential. Need a roommate to make the payment comfortable.

Goal - Live in until I either A) can afford somethign better, B) move to a different city. I'd own / rent it for at least 3 years to get the 8k from the gov and possibly hold onto it to start building my property portfolio...


Thoughts? Both of these are in DC. Option 1 is in Brentwood, Option 2 is off consitution over by RFK / Armory Stadium.

posted by crewshell to work & money (24 comments total)

Generally, 2-bedroom condos sell more quickly, as do condos with at least 1.5 baths.
posted by answergrape at 1:36 PM on February 24

In more subruban or semi urban areas that is often true, however it places like NYC, DC where there is a large influx of younger upcoming urbanites 1 bedrooms are in high demand.
posted by crewshell at 1:42 PM on February 24

Do you really NEED your own condo? Seems to me you're taking a big risk given that your only motivations seems to be, "Live in until I either A) can afford somethign better, B) move to a different city."

I mean, when do you see yourself affording something better? 2 years? 10? That's a very vague goal... ditto for moving to another city. When would that happen?

I'm betting you don't have firm answers to either of those which wouldn't change on a whim.

So why futz with buying a condo, that may or may not go up in price, when you're not sure how long you're going to want to live in it, with a job that it sounds like you're leaving, and a town you're not that tied to, only to turn around and hope to sell it in a few years?

Lots of people have had their ass handed to them via similar machinations.

Of course, if you absolutely have to buy one of these, go with the one you can afford, not the one you'll need a roommate to make the payments with. Then again, if you decide you want to stay and grow old, it's hard to start a family in a one bedroom condo... Keep looking.
posted by wfrgms at 1:47 PM on February 24 [1 favorite has favorites]

What would happen if you bought the two bedroom but couldn't keep a roommate? Or for some reason the roommate suddenly couldn't pay? It would make me nervous, in this economy, to buy something that wasn't a "comfortable" payment. So I'd do the one bedroom.

But, if you're only thinking about staying around 3 years, I think you need to be prepared for the possibility that the house will go down in value more than the $8K you are going to recoup. (Also, you don't mention if you have a down payment, etc.)
posted by dpx.mfx at 1:53 PM on February 24

In your case, I wouldn't buy.

But if you're set on it, I'd go with 1 bedroom (but not necessarily that one bedroom). But I'd be SURE I could rent it if I wanted to leave the city/upgrade. I mean, I'd be sure I could cover the mortgage/taxes/homeowner's insurance with the rent I'd be taking in, and STILL have enough money to put down a downpayment on a bigger/different property. 3 years is not a lot of time in this economic climate; it's actually not a long time to own a home in any circumstance. I'd avoid the 2 bedroom because you'll be stuck with roommates; what if you wanted to sell and they wouldn't vacate? DC is very friendly to tenants - I have no idea about the law, but could you be stuck trying to evict him/her? (Just came off a horrible craigslist roommate situation that seemed fine for the first 8 months.) Check out rentometer to gage what rents are going for these days in the areas you're considering.

Are you sure you can get the rent to cover the place in Stadium Armory? It's not exactly a happenin' location, and it's a bit sketchy still.

Any idea what's driving down the price near Stadium Armory? In general I haven't seen prices falling that fast in that area. (Although I haven't looked at 1 or 2 bedrooms.)

(By the way, check out redfin, which works in DC - they give a good refund on their commission.)
posted by semacd at 1:57 PM on February 24

Don't buy. The market is still headed down and you will be able to buy these places for 50% to 75% of their current value (if not less) once it's all over.
posted by unixrat at 2:04 PM on February 24

I bought a 2 bedroom condo in September. Here's my reasoning:

1) 2 bedroom condos sell better. At least in my area.
2) 2 bedroom condos rent better. At least in my area.
3) I can afford a 2 bedroom condo without a roommate. If economic conditions start to affect me, I can rent out the spare room.
4) your down payment figures out to $30K (1 bdr) vs $44K (2 bdr). If the market increases 5% then the value increased $7.5K (1 bdr) vs $11K (2 bdr) ($3.5K difference). You've got more leverage on the 2 bdr condo. If you can sell it, you'll get your 20% back ($44K) plus the increase in value ($11K) and you'll be $3.5K ahead of where you would have been if you had the 2 bdr. You're increasing your risk, but if you do it right, you should be increasing your returns as well.
posted by kookywon at 2:07 PM on February 24

I really dont think anything is going to happen out by RFK for a while yet, and that area is pretty desolate. I would choose Brentwood over it myself, just based on location.
posted by BobbyDigital at 2:18 PM on February 24

Don't buy. The market is still headed down and you will be able to buy these places for 50% to 75% of their current value (if not less) once it's all over.
posted by unixrat at 5:04 PM on February 24 [+] [!]

As a counter point - That may be true, but real estate is still local, and the prediction for DC is that prices won't fall terribly far. With government expanding, and DC improving, and all that. Here's some redfin data on real estate trends in 20003.
posted by semacd at 2:21 PM on February 24 [1 favorite has favorites]

I agree that you should think long and hard about the possibility of property values falling further--much further than the $8K that you'd gain in tax relief from buying now.

In particular, I'd be concerned that the neighborhoods you're looking at aren't ones that are in high-demand, affluent areas. (If you were looking for neighborhood to fall in love with and live in for 15-20 years, the following calculus would be different, but what you seem to be talking about is flipping the condo or at least using it as an investment.) I know it's a bit of conventional wisdom that the recession/depression isn't going to affect the D.C. area because of the high number of government jobs, but that's probably more of a factor in cushioning real estate prices in areas where those government workers & contractors are likely to live: Dupont, Bethesda, NoVa, and other more yuppified areas. There's a lot of people living in D.C. who don't have government jobs, who are likely to be hit hard by the recession, and that's inevitably going to take a toll on housing prices as people lose their jobs and foreclosure rates go up. This will have the added effect of driving down rents, making an investment property in the area pull in less income.

I think going into this by looking at neighborhoods you can afford, versus neighborhoods where it maybe makes sense to buy investment properties to hold long-term, is clouding your vision--one-bedrooms may be in demand in Clarendon and other places full of young 20-year-olds, but in Brentwood? Really? That neighborhood has always seemed to skew much more to families. In terms of the second property--in a year or so RFK isn't going to even be hosting D.C. United, and I wouldn't be surprised if the city hits a fiscal crisis and figures it's too expensive to demolish, instead choosing to let it just get more and more decrepit as it sits unused. What's that going to do to the property values in the area? Using this mortgage calculator, you're facing something like a $1,250 mortgage payment for the 2-bedroom. It looks like some single bedrooms in a 2-bedroom condo in the Stadium/Armory area are going for around $600. If rents fall any further at all, which I think is not unlikely, you're looking at being stuck in that property because you won't be able to rent out both rooms for more than the cost of the mortgage alone, nevermind the property taxes and upkeep.

If you were in love with the D.C. area, and knew you wanted to stay here, I'd encourage you to find a great neighborhood you liked where you could swing the payment on a 30-year-fixed, even if I personally think property prices have a bit more to fall. But going into this with the idea that you're not going to be sticking around, and then choosing properties in more low- to low-middle-income areas that may get hit particularly hard in this economy? This sounds like a recipe for getting stuck in a city you hate, upside-down on a mortgage.
posted by iminurmefi at 2:26 PM on February 24

Alot of great points have been brought up.

But I think I might not have been clear that I am open to holding this home for quite sometime... and to use it as a first location in a rental property portfolio when I move up and out.

Why I want to buy now at all is because 1) I am tired of throwing my money away on rent. 2) Home prices have decreased dramatically in the last 8 months and while I can't pin point the bottom, I dont think we are too far off, especially in places like DC.

I wont be putting any money down as I have a VA loan option.

In General I like DC very much, but I can't say I wouldn't accept a job and or move to another city within a few years.

Also, this development seems to have had the horrid timing of finishing their renovations as the market was on a major down turn... these prices represented the best "deals" I've found while looking. With a balance of location / ammenities / price / condition.

a year ago I could not get my foot into the real estate door anywhere other than the ghetto... I see this as somewhat of an oppourtunity to get my start in building real estate wealth.

I'm not sure how if any of this changes the picture but thank you all for your input!

P.S I work for the gov now (GS scale) and if i WANT it, I've got a job till retirement (with the National Guard)
posted by crewshell at 2:42 PM on February 24

I agree with iminurmefi. This is a long term proposition. You want to diversify your entire portfolio, from 401K to taxable stocks to savings and property fits in there as well. I can't help you with the location and they say property investment is all about location. However, if you're looking at this for a 3 year investment window, there's probably something better out there. Property (in my opinion) is in the 5-30 year investment window. The whole mentality of holding onto it for 2-3 years while you still get the most tax relief and then turning it around and upgrading is what got a lot of people into trouble the first go around. A couple of my friends lost their equity/down payment when they could only sell their houses for the amount of the mortgage. The worst part is they were glad to be able to get out. If you're not serious about holding onto this property for the long haul, I would take your down payment money and put it into something safe for the short term and wait. Believe me, there are going to be other properties and they are probably going to be better than these two.
posted by kookywon at 2:43 PM on February 24

Just another data point: for your first option in Brentwood, it looks like you'd have a monthly payment of around $850 a month, before taxes (which will run you $1,275 per year, assuming the city isn't forced to raise its taxes because of fiscal issues related to the recession). So we're at around $950/month minimum just to own the place. If you end up moving away, and need to hire a company or even a friend to manage the property when you rent it out--I'm not sure how much that costs, but it's not free.

Depending on where in Brentwood you are, you're looking at maybe renting it out for $700-750. (Maybe more if you're in a better area, but that's right on the Gallaudet campus and not too far from the metro; is your location several hundred dollars a month better?) Assuming, of course, that rents don't fall; they've been falling in New York City and California, so I'd tend to take a conservative approach and build in at least a 20% cushion if I knew I was going to *need* to rent my condo out after a couple of years.

The math on that, frankly, just doesn't add up. If you do a bit of research on the current housing bubble, one of the main indicators that people who called the bubble early pointed to was that rent-to-buy ratios were out-of-whack--people were paying more for property than they could hope to get back by renting the place out. Even if the properties you're looking at have dropped in price a lot, that doesn't mean they're not still overpriced; you need to take the most pessimistic view you can muster and figure out whether you'd still clear money if the worst came to pass. I can't even figure how you'd make money renting out either property if things stay the same (which I think is honestly the best-case scenario anyone would propose for the D.C. area).
posted by iminurmefi at 2:44 PM on February 24

my post came in at the same time as yours. much of what you said negates any points I was trying to make.
posted by kookywon at 2:46 PM on February 24

The two rent options that have been posted here are definitely on the bottom end of the spectrum.

I live near the 2 bedroom condo now (I have a 2 bedroom apartment) that I rent out the 2nd bedroom in and I can tell you that rental prices for that quality of home are much higher....
posted by crewshell at 3:06 PM on February 24

Here is something clsoer to the condition and around the corner from the Brentwood location.

I dunno if I could get 1400, but 1200 puts me closer to my total cost...

http://washingtondc.craigslist.org/doc/apa/1045245097.html

Again I intend to live there for awhile and own it for even longer...
posted by crewshell at 3:10 PM on February 24

Ah, I missed your follow-up. Look, I think you're conflating a bunch of things here. There's three things you seem to be talking about:

1. A condo as a place to live - you're tired of wasting money on rent, you want to buy. If this is the case, you need to make sure that you're pretty ready to put down roots--and it sounds like you're not very settled in DC. Plus, you're not really evaluating these neighborhoods as places you'd be wanting to live long-term: are the school systems good? What about other amenities, like libraries and a police force (you don't want to live in a high-crime area long term) and a good fire department? Exactly how close to the metro is it--are you going to be cursing your decision after 5 years when all of sudden a 20-minute walk in the glorious August heat doesn't seem that close anymore? It's great that you have a stable job, but it would really suck to be forced to pass up great opportunities just because you have a house you can't sell. You may think that you're "wasting" money on rent, but you're not; what you're buying is a roof over your head plus the flexibility to walk away from a specific property, as well as the (seriously nonzero) chance that you'll benefit if rent prices fall because you're not locked into a 30-year mortgage. Don't underestimate the value of flexibility, *especially* in a bad economic climate.

2. A condo as an investment, part 1 - you think you can buy in now and maybe make money by selling again after the market rebounds, because you think we must be "near bottom." But this seems most likely in neighborhoods that have a reasonable chance of gentrification; neither of the neighborhoods you're looking at seem to fit this criteria. Historically, housing prices just don't appreciate that much (unless we're in a bubble, which is dangerous itself)--you're way better off putting that money into other investments in terms of appreciating value. Unless you're very good at valuing property, or you have some REALLY good insider knowledge (like there's going to be an announcement in a year that they're building a new government agency headquarters right next to your property), this has not historically been a great way to make money, the past 10 years being the very anomalous exception.

3. A condo as an investment, part 2 - you think you'll buy now and then rent out the property, so that it becomes a cash-generating piece of your portfolio, not unlike a stock that pays a nice dividend. If this is your investment strategy, then whether we're truly "at bottom" in terms of prices doesn't really matter, because you're not planning on selling the property--all that matters is whether you can achieve positive cash flow (rent it out for more than it's costing you). I've laid out above why I think this probably doesn't make sense for the particular price points you're looking at. Yes, I picked rents on the low end of the spectrum, on purpose: you should be considering worst-case scenarios, not best-case ones, when making your investment decisions. Anything else risks letting your hope get the better of your common sense.

Really, you should have very different considerations when evaluating whether to buy a specific property, depending on whether you're after #1, #2, or #3. The fact that you seem not entirely sure about which one it is--maybe #1 for now, but #2 for later and #3 as backup--means that you're likely to get something that's not really ideal for any of those purposes. I've watched the real estate market in DC for five years, and I totally sympathize with how it feels to suddenly have a chance to get in when you were convinced you'd never be able to afford anything in the area--but you need to be thinking about this in really cold, dollar-and-cents terms, not getting seduced by price drops. Right now it looks like you're in serious danger of trying to catch a falling knife.
posted by iminurmefi at 3:11 PM on February 24 [1 favorite has favorites]

If you lived in a city where the real estate market wasn't collapsing, yes, buy something. But buying something in DC right now without an intent to hold it long, long, longterm seems to be a nearly unexplainable move.
posted by talldean at 3:47 PM on February 24

Iminurmefi,

Great points, the senario I see as goals I should be basing my decision on would be (1) for 2-4 years and then (3)...
posted by crewshell at 3:55 PM on February 24

Another thing to consider regarding the renting it out scenario- maybe rents are low now, but they'll go higher later. While your mortgage will be (mostly) the same for the duration of the loan. This might not happen in 3 years, but is a pretty good bet for 10.

My limited knowledge of DC is that proximity to the Metro increases housing prices, so the location nearer the metro might be a better choice for future selling or renting out scenarios.
posted by gjc at 4:07 PM on February 24

If you're just looking for a cheap place to live, buying is not always the best way to go. Putting the issue of rising/falling home prices aside, it can take up to five years to break even on buying a house compared with renting. Why? A lot of it has to do with closing costs. You're going to spend 5-6% commission on the realtor, you're going to have to pay title transfer fees and taxes, you're going to have to pay points/origination fees for your mortgage... all in all, moving in to your new place could cost you upwards of $15-20k completely apart from the cost of your residence. That's money you aren't going to get back, and it's something you need to consider in making a buy/rent decision, as even when housing prices were going up, it usually took about five years for the average home to increase in value enough to cover closing costs alone.

Let me break it down for you. Every rent payment you make is money you're never going to see again, so you can think of that as pure loss. But you're never going to see the interest you pay on your mortgage, the money you spend on property taxes, or the move-in costs associated with buying a home again either. Those are pure losses too. Say you get a $175k mortgage for the bigger place. The first year, you're going to pay about $13.5k in commissions, almost $10k in interest, $3500 in mortgage origination fees/points, $2200 in transfer taxes, and $2000 in property taxes, for a total of $31.2k, none of which you'll ever see again. Granted, a lot of these are one-time expenses that are front-loaded, and if you average out the cost over two years the annual cost goes down to $21.6k. After three years, it's only $18.4k. At the end of three years, you'll have spent over $60k on your condo, but only $7200 of that is equity. That's about $53k in expenses.

If you rented an apartment during that time, that $53k would allow you to spend $1500/month on rent. Yet you'd only be spending $1000/month on your mortgage, meaning that you can afford a better place to live if you rent instead of buy. Ignoring potential appreciation or loss on the property, if you sold it after three years you'd just about break even. And that's assuming you don't incur any maintenance costs like replacing your refrigerator/water heater/roof, etc. You may or may not be responsible for the exterior of a condo unit--depends on the condo--but the internal fixtures and major appliances are completely your responsibility. If they go, you're looking at another few grand in expenses which means you have to live there even longer to break even.

Thus, unless you're willing to live in once place for quite some time, allowing the up-front costs to average themselves out--or, as iminurmefi suggests, turn your home into an actual source of income rather than a pure cost--renting may well be your best bet.

Why does anyone buy then? Well excluding the people who simply don't do the math (I'd bet that percentage is pretty high) it turns out that there are kinds of properties for which there isn't much of a rental market. Multi-family housing is easy to manage as a property. Dozens of detached, single-family homes are far harder. So if you want something like that, you're probably going to have to buy it, because it isn't cost-efficient for a landlord to deal with.

I recognize that this is more directed towards the question of whether you should buy at all, but 1) I think that's a question worth asking and it doesn't sound to me like you've adequately considered the expenses that do go into purchasing property, and 2) these considerations would cut significantly towards getting the two-bedroom and a roommate, which would drastically alter the math. Even $500/month--which is ridiculously cheap for DC as I'm sure you know--would reduce your cost on the big place to $35k over three years, meaning that you'd actually come out significantly ahead of renting an equivalent property. Bump that up to the $800-1000 that you could realistically charge and the numbers look a lot better.
posted by valkyryn at 4:47 PM on February 24 [1 favorite has favorites]

Val,

You make some good points but in this case I'd have very little to any out of pocket expense as I am putting closing costs into my purchase offer as well as using a military credit union which picks up a large amount of my closing costs. Right now I am looking at about 5k ish in closing that the seller would be paying for either of these two properties. Also they are completely renovated with home warranties so i am covered for a bit on wear and tear.
posted by crewshell at 8:34 PM on February 24

What are the homeowner's dues on each unit?

What is the likelihood of a special assessment in either one during the time you own it?
posted by kristi at 9:22 AM on February 26

130, and 140. With them both being new renovations, probably close to zero....
posted by crewshell at 10:40 AM on February 26