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I am 25 and I am looking to buy a very small new apartment in the next few years. I have been getting the prices of different properties and this one is relatively cheap because it's not in the best part of the city. I don't know how long I will live there but it won't be forever.

I have heard that if you buy a property and you don't stay there for at least 7 years then you are losing money. Is that true? If so, what should I consider to take that into account?

Can give me an indication of what numbers to look at to see if investing in a home is a good idea and the what progress the property's value might have?

I am not from the US. I have 5.5k in my savings account and the apartments that I am looking at are in the 70-80k range. I want to have 15k before purchasing so it will take me a few more years. I just need to know if it's a good idea to buy and then sell without knowing the time you'll stay there, or if it's just best to suck it up and rent until I can afford a house.

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  • The 7-or-whatever-year rule factors in the costs not reflected in the comparison between rent and mortgage payment. You need to stay long enough for what you save on mortgage payments vs rent to offset costs like taxes, insurance, repair, commissions, etc. – chepner Mar 11 '19 at 14:25
  • Don't forget the whole "location location location" thing. "not in the best part of the city" sounds like a problem you will realize the gravity of when it comes time to sell. – Kai Qing Mar 11 '19 at 18:54
  • "Buying an Apartment" - this is a bit of a nitpick, but usually if you're buying a space inside a building that is considered your property, and not rented space, then it's called a "Condominium", and not an Apartment. And if you're looking to buy one, you should keep your search terms in mind - "Condo for sale" will probably land you more results that you want than "Apartment for sale". – Zibbobz Mar 11 '19 at 19:46
  • @Zibbobz That's a regional distinction, in NY apartment is commonly used to mean both both condos and co-ops. Buying an apartment in a co-op typically means buying a share of the company that owns the apartment building which in turn grants you a perpetual lease. In my area it is as you describe, we rent apartments, and buy condos/townhouses/houses. – Hart CO Mar 11 '19 at 20:04
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Typically you'll pay 6-8% to sell a house. It can vary by region, but in many areas the convention is for the seller to pay both buyer's and seller's realtor fees (commission) and there are other costs associated with buying/selling. This factor drives a lot of the conventional wisdom about needing to stay in a house for at least 'x' years. If you sell immediately, you'll lose money because of the costs of buying/selling.

The other factors are that more of your early mortgage payments go to interest than to principal, and that home prices vary over time.

7 years is a bit longer than I typically hear, let's say you put $10,000 down on an $80,000 apartment at 4% interest and 30-year term, you can use an amortization/mortgage calculator to see how this shakes out:

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So after 3 years (36 payments) your $70,000 balance has been reduced to $66,149. If you sell for $80,000 after 3 years and it costs you 8% to sell, then you'll get $7,451 after the mortgage is paid off: (80,000 * 0.92)-66,149. Since you put down $10,000 you've lost money on the sale. After 7 years (84 payments) selling at $80,000 and paying 8% to sell you'd end up with $13,359, putting you a bit ahead of your down payment.

However, that approach is a bit too simplistic because you'd have been renting if you hadn't owned, so a more comprehensive analysis would compare the total cost of shelter over the time period which can be hard to estimate. Also, if didn't buy you could invest your down payment, so would want to factor in expected return on that. The apartment likely has some sort of monthly fee (HOA or otherwise) and there's maintenance/repairs to consider. Also, the price of the apartment will likely change over the years, if it's not in a good area it could lose value, hard to predict.

I suggest researching rent vs buy calculators to help assess the area you're looking at as well as market projections. I've heard 3-5 years used more frequently than 7 as minimum time before moving, but those rules are too simple to be very effective.

Also, if buying an apartment/condo/townhouse, find out what is covered by your building's/association's monthly fee and what is not, and find out what their reserves are. If the reserves are too low, they will need extra money (special assessments) from all owners in the complex to cover major repairs.

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This is not a straightforward question to answer but the simple fact is that you could buy somewhere tomorrow and then next month sell it for twice the price or alternatively you could buy somewhere tomorrow, live in it for 20 years, spend money repairing/modernising and then sell it at the end for less than you paid for it in the first place.

One thing I would think about is the following:

I have a mortgage of approx 70K which I am paying 300 per month on. If I was to rent anything similar to my current home it would be costing me at least 700 per month. (both figures are before utilities/insurance etc) - So immediately I am actually saving money due to having lower outgoings. [The caveat to this is that as the homeowner I am responsible for all repairs so the rest of this answer assumes no major problems with the home]

Additionally if after 5 years I end up moving to a different city and so need to sell my home then (assuming the housing market doesn't crash) I will be able to sell it and hopefully end up with 'something' back after the mortgage is paid. However if I was renting then whilst I have greater freedom to move it is guaranteed that none of the rent I have paid will be returned to me (apart from the security deposit etc) -

So not only have I paid less out over the course of 5 years (18K instead of 42K) I can reasonably expect to get at least some of that 18K back upon selling.

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  • Depending on the years the mortgage is on, it's either less or the same than renting in the same neighborhood. So, in that case, would it be best to just get a long higher interest mortgage to pay less than renting? How smart would it be to pay the bit extra than renting to later when I move out to hopefully rent that apartment and have an extra income with it? – M.O. Mar 11 '19 at 13:17
  • Also, do you know if it's true than the more I have paid of, it the more I would get back if I sell the property? Or does that also depend on if the market crashed or anything like that? – M.O. Mar 11 '19 at 13:27
  • I would suggest you at least read through the answers on this question: [money.stackexchange.com/questions/71445/… as they give more detail than I can on other things to think about – EdHunter Mar 11 '19 at 13:37

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