In less than two weeks, I'm buying a condo. I was talking with a friend over the weekend about my concerns, and how I worked through them. But one piece still nagged at me.
“I keep thinking about what a terrible investment it was to buy a townhouse in 2006,” I told my friend. “Is it any better now?”
He said something then that hadn't made sense up until that point.
Asking The Wrong Questions
Real estate isn't an investment, really. Especially not your first condo. That's a place to live. If you want to invest in real estate, then buy something that will cost you less than you can earn in rental income. Or invest in real estate index funds.
Buying (and moving int0) a condo is different. It's a place to eat, sleep and entertain. It's a place for living, a place for nesting. A place to stay for several years.
The question isn't, “is this a good investment?”
I remembered my favorite tool, the New York Times Buy Vs. Rent Interactive Graphic. The last time I tried it, I used arbitrary numbers. I mean, I live in a basement apartment, so using my current rent + utilities dollar amount as a comparison against buying just about anything was comparing apples to donkeys.
Because, really, a basement apartment is a rental-only option. No one ever actually buys a basement apartment, silly! That always belongs to the person who owns the house. Here's some better questions you should ask if you think real estate is a good investment:
How Long Will You Live There?
I'm going to live in my condo until it stops making sense. What does that mean? Only time will tell. It will suit me plus one other person for a long time. It's small, sure, but I am a minimalist, and have few needs. It has two bedrooms, two bathrooms so if my future includes another person, then they can live with me, and if my future includes kids, this condo will be plenty big until there's a second child (but holy cow I can't visualize that in my future).
What's the Rental Market Like?
In Portland, the rental market is absurd. Tiny two-bedroom apartments are renting for $4-500 more per month than they were the last time I was looking for something with two bedrooms. My sister and I are going to live together, so we'll need a two-bedroom place for at least the next six months. Further, if I'm going to buy something, I'm surely going to want a second bedroom. One-bedroom places are fine to rent, but not buy. I'd like to have a guest room/office after my sister moves out.
I love this article about whether it's better to buy or rent a house when you're out of college.
When Is The Break-Even Point?
That's the question that the New York Times graph helps answer. And that was the thing that eased my mind during the end of this purchase process. After four years, it is better to buy than rent my condo than it is to rent a $1450/month apartment. I know I'll be there at least four years! I honestly think it'll be closer to a decade, but if I'm saving money on owning after four years, then I am a happy camper.
Am I Making A “Good” Investment?
Honestly, I don't know. There's no way to tell. But because I'm able to put 20% down (thanks, Mom and Dad!) the “mortgage” part of my new monthly payment is equivalent to my current rent. And a girl has to live somewhere.
If the value of my property decreases, is that any worse than paying an inflated rent?
I don't think so. And that, ladies and gentlemen, is how I intend to get over the discomfort of shelling out my hard earned (and hard saved!) money this month.
Can I Invest In Crowd-Funded Real Estate
A new emerging trend in real estate investment is real estate crowd funding. There are several real estate crowd funding platforms that allow investors to invest as little as $1,000 in a real estate. It works by pooling together a group of investors to purchase a property.
Let's say a property needs a downpayment of $50,000. These sites will pool together investments to reach that, and then share the profits (or loses) accordingly.
Our two favorite sites in this space are RealtyShares and FundRise. RealtyShares is actually offering our readers a bonus of $25 to start to off. Simply reply to the “Congratulations on Linking Your Bank Account” email with the referral code TCI25. It takes up to 30 days to process the referral code and make the payment, but it’s free money.
Do you think real estate is a good investment? Better yet, when making big financial decisions, do you ask yourself better questions, or the status-quo questions?