Reader Profile: Buying at Top of Market with No Regrets
Occupation: Writer/Columnist, Vacation Rental Owner
Location of property: SOMA (South of Market) in San Francisco
Size: 600 sq ft, 1 bdrm/1 bath
Years Owned: 3
What motivated you to buy? I had just divorced and needed to find my own home. My ex husband and I had been living in a suburb of San Francisco, but I decided that since I’d be living alone, it made more sense to move into San Francisco where there would be more resources and places I could walk. I didn’t need a big place, since my two daughters are grown. I ended up on the penthouse level of a luxury condo building with views of the city. The location is great–right in the middle of everything, near restaurants, grocery stores, and theaters, as well as lots of transportation (both the 280 and 101 freeways, Caltrain, and BART).
How did you finance your home? What sold me on this particular condo was the developer’s amazing financing offer. I got a 5-year interest-only loan at a low rate; the developer paid 4% of my interest in the first year, 3% the second year, 2% for the third, fourth, and fifth years.
I used a portion of my divorce settlement as a down payment of 25% on the $575k purchase price. The mentality in San Francisco at the time was oriented towards “flipping” condos, so the mortgage company and real estate agent thought I was crazy to put down so much. But I followed my instincts–it seemed crazy to own a property for five years and depend on appreciation to build equity. Plus, I wanted low monthly payments, and with the developer’s financing offer, I figured this would buy me time with low monthly costs to see where my life would go, post-divorce.
How was your timing? As it turned out, I bought at the top of the market, and soon after I bought, the market crashed. My condo’s value is probably much lower than what I paid, but that’s ok because I’m in it for the long-term.
Things ended up working out well. Eventually, I met someone special, married, and moved in with him. Because it was so nicely decorated and centrally-located, I was able to turn it into a furnished corporate rental, where professionals stay for 3-6 months while in town on business. Even though the rental market is down, the rent I receive more than covers my costs.
My monthly payment is $800/month ($1,600/month including tax, insurance, parking, utilities and HOA), and I’m bringing in $2500/month in rent. Since the rental market is down now, I expect to be able to increase the rent to over $3,000 in the future. Meanwhile, whenever I have extra money I put it towards my mortgage. In a few years I’ll have a paid off home.
What I’m proud of is that I used common sense when I made this purchase. It didn’t make sense to me to put nothing down and have no equity in my home for 5 years (as people had been urging me to do). My goal was to own this place long-term, to own an asset that was all mine, that I could use for the security of a home. The fact that I have to wait a few years until the condo value rises to what I paid for it again is ok with me, because in the meantime my asset is making me money.
Your favorite thing about owning a home: To be honest, it’s probably pride of ownership. That’s not tangible, but it means a lot to me personally and emotionally. It anchors me emotionally. I own a luxury apartment in downtown San Francisco decorated exactly how I want it to be, with a beautiful view, and it’s mine. I’m proud of that.
Your biggest headache: My biggest worry is that there could be an earthquake in San Francisco that would wipe out my biggest asset. Construction in San Francisco is all about earthquake preparedness, so I’m not too worried. Other than that, I have few concerns. The condo is managed by a company that specializes in corporate rentals, so they find tenants, do thorough screenings, and collect the rent. They take care of everything in exchange for 50% of the first month’s rent as a fee. Because it’s a corporate rental, rent is often paid for by a corporation; they are incredibly regular in payment and very reliable.
Biggest surprise: How headache-free it all has been.
Scariest moment: I was going through a tremendous change in my life, as a woman in her mid-50s getting divorced. Just getting up in the morning was very scary. Buying the place was scary, too, but it was just part of that time in my life.
Your real estate goal: To pay off the condo before the 5-year loan is due. Now, when I think about buying a new dress, I think to myself “wouldn’t I rather put this towards my goal of paying off my condo?” and I send the money off to Wells Fargo, even if it’s just a couple hundred dollars. It gives me a specific reason not to buy unnecessary things. Ultimately, paying off this mortgage is an important aspect of my retirement planning. This mortgage will be paid off by the time I’m 60 so that I can count on the rental income in my retirement.
At the end of the day, is it worth it? Absolutely. I have an asset that over the longhaul will increase in value, and is also very nice for living and works well as a corporate rental. No matter how I use this place, it works.
What is your advice to someone like you who is considering buying a home? If buying a home you’re considering renting out, don’t scrimp on furnishings. The market has gone way down for rentals, but because I furnished my place so beautifully it has never sat empty.
Another piece of advice: don’t try to play some real estate game. Take this asset seriously. Put a lot down if you can, and treat it with respect in terms of financing. Don’t try to get rich quick, and don’t be “house poor.” Invest for the long term, buy something you love, and that works on a number of different levels so that no matter how you use it, it works for you.
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[Ed. note: What's great about Jane's story is how she uses home ownership to guide other aspects of her financial life. It focuses her on a specific goal of owning her condo outright. Readers should be aware that Jane's story is unusual in that she was able to build fast equity with her 25% down payment. The fact that her non-rental income comes in "chunks" enables her to pay down her mortgage rapidly. For many (particularly younger) people, another financing option would be to refinance the 5-year interest-only loan, locking in a 15- or 30-year loan at a today's low mortgage rates.]