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Question for the Money Doctors

Question submitted on Nov 29, 2013.

Question

I have $6.5k 403B and $2k 401A retirement accounts. I have $9k in my checking account. I have $17.5k in loans remaining and my company pays the minimum.

What I would like to know is should I invest in a condo/apt. because I would like to live on my own. This will be about $1.1k a month with expenses included and I make $2k a month net with an additional $500 towards my retirement.

Should I invest my retirement towards the down payment for the condo/apt.? I am not collecting any interest on my $9k savings and don''t plan on touching $5k of the total $9k wirhin the next year.

Thanks very much.

Answer

I need to make a few assumptions based on your facts. First, I'm assuming that the condo/apartment you are considering purchasing would be your residence, so not a "pure" investment. Also, I''m assuming you are currently not living on your own, which is a big part of considering whether to move out of your current situation by either buying or renting a condo/apartment. I'm going to also assume that you are not asking about investing your retirement account funds in real estate (which is possible, but opens a big can of worms).

Many considerations go into the decision to rent or buy, many of which you have already considered. In my opinion the major considerations are as follows:

- The potential for appreciation of the place you would purchase.

- The potential to earn additional income from renting a portion of the place you buy (taking on a roommate?)

- Make sure you understand all of the costs of owning the new place, including property taxes (which tend to rise over time), insurance (which also tends to rise over time), maintenance, etc.

- The amount of time you expect to live in the new place, and the likelihood of your circumstances changing. If you ever want/need to relocate to a different city, it may be much easier (financially) if you are renting versus if you own a condo. If real estate values rise and you're in a seller''s market, it may not be a problem, but that is not always be the case.

- If the expected monthly costs (plus some reserves for unexpected expenses) are comfortable relative to your income, buying may be appropriate. From the information you provided the projected costs of the new place are a bit more than half of your net income...I suggest you really look at those numbers to make sure you won't be fixing your living costs at too high of a level. Again, remember that getting out of a lease is usually much easier than selling a condo, if your circumstances change and you need to reduce living costs (or relocate).

-I would make it a priority to continue contributing to your retirement account (and investing that money wisely), even if you decide to purchase a condo. Although I don''t know how old you are, I'm guessing you have many years until retirement even relatively small amounts invested now will add up over time to help fund your retirement.

- The last comment relates to the $17.5 in loans. What interest rate are you paying on that debt? I can't tell if your company is making payments on that loan for you (you indicate the company "pays the minimum."). It may make sense to take some of your $9k of savings and pay down that debt depending on the interest rate on the loan.

I hope that helps


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