There are many ways to build wealth with real estate investing. Having a good relationship with your landlord could put you first in line when the time comes to sell their property. We may think of the maintenance guy, property manager, and occasionally the owner; but rarely do we think of how we could own something of that magnitude.

Can you own your own apartment? Yes, buying your own apartment unit is possible, the loan underwriting structure is similar to that of purchasing a home. However, apartment units/condos fall under an HOA(Home Owners Association) which is an organization that makes and enforces rules for the properties and its residents.

There are times in your life when renting would be a more viable option. Or maybe your thinking bigger, like buying an entire apartment complex. Continue reading to find out what category you fall in when it comes to owning property.

Is it Better to Buy Or Rent Your Apartment

In most cases it’s better to rent and here’s why. From an investor’s point of view, I’ve always felt homes were not considered an asset because they don’t produce consistent cash flow. Many people make the argument that if the rent is the same amount as the mortgage then it’s a win-win. But there’s a little more that goes into calculating the monthly cost of homeownership such as:

• Home insurance
• Property taxes
• Maintenance
• Landscaping
• Home warranty programs
• Upgrades

Granite, some of the items mentioned above may not apply to you if you choose to buy your apartment, because HOA covers exterior maintenance. However, you can see how the cost can quickly begin to add up.

Remember, when purchasing real estate you must buy with a purpose and a plan, homeownership for the sake of saying that your a homeowner is useless. Verses buying for a reason ie: intend to rent the property, intent to build an ADU, intent to send your children to better schools, THAT IS BUYING WITH A PURPOSE.

1/3 of the U.S population currently rent, and that number is growing fast; it’s no wonder why people want to own a home and have a piece of the pie.

Renting Statistics

As the economy begins to change America is becoming more of a renter nation, and the dream of owning a home is becoming less and less attainable.

Often times having a relationship with the landlord will help you the buyer negotiate a better deal when the property is under contract. I’m not going to say to NEVER buy a condo/apartment; but if the opportunity presents itself go for it and use it as a stepping stone for your next deal.

Buying An Apartment vs a House

Although the process of underwriting a loan is the same, there are a few differences between buying an apartment and a house that could possibly be a deal-breaker. Purchasing an apartment falls under a residential loan, but there are also other different categories of homes that use the same guidelines.

One of the most powerful elements of residential real estate is the ability to buy up to 4 units with a residential loan. Condos, Apartments, townhomes, homes, and small multifamily all fall into that category. So, you have the ability to buy up to 4 houses on one lot, under the same loan guidelines as one apartment. Buying multifamily is one way to develop multiple streams of income and build wealth twice as fast.

Similarities

Buying a home and buying an apartment has one aspect that is nearly identical, and that is the loan process. There are several different types of mortgage loans, apartments and homes use the same loan approval guidelines. Below is a list of the most commonly used home loans:

Adjustable-Rate Mortgage

ARM loans offer a flexible interest rate to the borrower which initially upon purchasing a home causes very low mortgage payments. After a set period of time be it 5 to 10 years the interest rate will begin to increase along with the monthly payment year over year based on market conditions.

Fixed-Rate Mortgage

Fixed-rate mortgage rates are generally higher interest rates in comparison to an ARM, but they hold the same interest rate for the life of the loan which is 15 or 30 years. When this type of loan is used, mortgage insurance is needed which is about 1% of your total loan amount. Another type of Fixed-rate mortgage is the jumbo loan.

FHA

Typically home loans require 10 to 20 % down, one of the major advantages of the Federal Housing Administration (FHA) loan. Is the ability to get your foot in the door with as little as 3.5% down; granite the requirements are a bit more strict and the purchasing power is much lower ($417,000). Using this very loan is what paved the way for the start of my real estate journey, allowing me to buy a duplex in one of LA’s hot markets for as little as $12,000 down.

VA Loan

The Veterans Affairs (VA loan) only applies to those who have served in the military. If your eligible for this type of loan it comes with a few perks, like buying a home with no money down, and you don’t have to pay any mortgage insurance.

Property taxes

Although owning a home and owning a single unit have their differences, the city has the same practices when it comes to collecting its yearly property tax fees. The factors to calculate the price are the same across all property types; property value size, and locations among many other factors.

Differences

1. Now we arrive at possible deal breakers renting out your property, Airbnb, and subletting rooms may be banned in your apartment. All because of one reason; the homeowners association HOA. If you’re going in with intentions to rent or sublease your property. Carefully read through your HOA governing guidelines and double-check with your realtor if this practice is even allowed with the property. Some homes have HOA’s also that prevent the owner from renting, but those that do not give the owner the freedom to do as he pleases with their property, within reason of course.

2. Apartments are reasonably cheaper than that of a home in comparison, due to the fact of the owner not actually owning the land, but instead paying for shared space i.e.; pool, exercise room, entertainment area, and other amenities alike. Since the owner doesn’t own the land, it comes as an advantage by creating a lower barrier to entry.

3. Recently we’ve seen a rise in home prices across the U.S, according to yahoo finance in upwards of 20%. Being that apartments are typically cheaper than homes, if you find a place for 90k, it may come as a challenge to get approved for the loan. That’s because the amount of work that goes into qualifying someone for a $90,000 loan is the same amount of work that goes into qualifying someone for a $900,000 loan.

So, banks would rather focus on the larger deals to reap higher interest payments than focus on the smaller deals with more risk. Now it doesn’t mean that there are no banks out there that will close on a $90k loan or less, it just means the buyer has to work a little harder to find a bank that will.

Smaller banks and credit unions are much more lenient than your traditional bank and there may be a higher mortgage interest rate also.

4. Let’s say my wife and I decide to remodel the kitchen in one of our units; we do not have to seek permission to do so because the property is not part of an HOA. Had we owned an apartment, that would have to be the first step because certain interior renovations have to be compliant with their HOA’s convents, restrictions, and restrictions.

Although owning an apartment comes with less responsibility because all of the exterior maintenance is taken care of, it comes with limited decision-making power as well.

How Much Should I Save Before Buying?

In today’s market buying a home could be an exhausting process. One of the most common questions asked is “how much money do I need to buy a home?”.

When I was looking for a home, my only focus was to save enough for the down payment; but there are a lot more costs to consider when buying a home; like closing cost, mortgage cost, and relocation cost.

After it was all said and done, how much did I spend on the loan? Here’s how to figure it out.

Financing

According to the National Association of Realtors, the average US home price reached an all-time high of, Get This! $350,300. So, since the average first-time homebuyer downpayment is 6%, this scenario were looking at $21,018 as the down.

Closing Cost

Closing costs range between 2 to 5%, using our average home price of $350,300 as an example, the closing cost would be $7,026. Prior to closing the loan, a home inspection and home appraisal are needed. Although the lender doesn’t require a home inspection, and nor does it affect the value of your home. The home inspection is completely optional for the buyer but highly recommended. It allows the buyer to be completely knowledgeable about the ins and outs of the property.

Unlike home inspections, appraisals are a must for the lender to help determine the value of the home. There are other metrics involved as well such as improvements made to the home, land value, and how much the home has sold for in the past. Everything ties together to determine the true value of your home.

Emergency Fund

There have been countless times my friends have told me about what went wrong after buying a house, the A/C unit going bad, leaking roofs, and so on. For that reason and more is why having an emergency fund is a must to have, not just when you’re buying a house; but at all times.

According to Vanguard investment firm “you should have between 3 to 6 months of money saved to cover your expenses”.

In order to purchase a $350,000 home, your yearly income would have to be $52,225, which means your emergency fund must have at least $13,000.

Reserves

The lender wants to feel secure if worst-case scenario you fall into hard times, that’s where the reserves would kick in. This gives the buyer some wiggle room if something unexpected arises; such as a pricey home repair, sudden loss of income, etc. Below are the reserve amounts lenders will require depending on the reason your buying the property.

• Owner Occupied: Homes: Lenders typically require 2 months of reserves, but they can ask for 6 months depending on how strong of a borrower you are.
• Vacation Homes: Lenders typically require 2 to 4 months,
• Investment Properties: Buying properties as investments require the highest amount of reserves (6 months) due to the risk.

A quick tip: Since your 401k is a personal investment you can actually use it at reserves when buying a home.

Using 2 months as a ballpark the reserve amount would be $2,954, if you were to buy a home at $350,000, with a 30-year mortgage and 6% down, the mortgage payment would be a whopping $1477.

Moving Expense

This expense never came to mind whenever I was moving to a new place, but the cost can quickly sneak up on you. And it should be added to the total amount needed to save when purchasing a home. Moving in-state is a lot cheaper, the average amount coming in at $1,250 and $4890 for an interstate move, according to moving.com.

This particular scenario will go with the lesser of the two.

Total Savings

When it’s all said and done, the total amount you’ll need to save and be comfortable with is $45,248. Granite this is a perfect scenario: you find a home at the average U.S price and all of your finances are in order, etc.

In the perfect world, this scenario is ideal, but if the market is ripe and your in a position to buy, then take advantage of the opportunity.

Is Renting Really a Waste of Money

I know you’ve heard the saying “if your rent is the same amount as a mortgage then your throwing your money away”. YES, if your renting then the total amount your paying monthly isn’t being invested. Instead, you are being provided a service, something similar to a taxi ride. In which you do not own the entire vehicle, they’re simply giving you a ride to your desired location; and everything is solely transactional.

Although my wife and I own several properties, I am not in the anti- renting club; however, what many people don’t consider is all the other cost associated with owning a home:

• Property taxes
• Insurance
• Maintenance
• HOA(If applicable)
• Renovations
• Utilities

All of the variable costs will stay with you for the entire time you own the property. According to LA curbed.com the average home in Los Angeles is $650,000, the question is how do you determine if renting or owning is the better choice? When you look at the approach from an economic standpoint we arrive at Opportunity Cost, it’s what you’re giving up when choosing to purchase a home.

Let’s look at the scenario figuratively, if you’re renting a house for $2,000 and choose to buy a house with an exact mortgage amount. The downpayment used to purchase the house could have been used for an investment vehicle of some kind, and the gain you make on the investment would be what you’re giving up in exchange for homeownership IE, opportunity cost.

For example, I find a stunning home beautiful view, a pool, all of the bells and whistles for $500k. I’m putting down 20% as my downpayment plus closing cost. We arrive at $110,000 as the downpayment, now instead of investing that amount we could have invested it into a rental property which according to mashvisor.com produces an average return of 10.6% on your money. In a five-year period that’s $65,000, not bad for passive income.

All in all renting is not a waste of money if your financially savvy and invest in income-producing properties can be a better alternative to buying a home for personal use. It all boils down to where you are in life and what scenario best fits your needs.

In Summary

Whether you buy an apartment, townhome, house, the vehicle is all the same what matters most is the WHY. Maybe you’re buying the apartment as a way to get started in real estate, build some equity, and eventually buy your dream home. Or maybe the townhome you’ve purchased is in a great school district and the area is a great place to raise your family.

Whatever the reason may be, have a plan set in place before your purchase, and don’t BUY BLIND! Remember everyone’s situation is different there’s no cookie-cutter model for people to follow. If you are able to get started in real estate by purchasing an apartment by all means do it.

Once you buy your first home it becomes easier to buy the next, and the next, and so on.