Question: We are thinking of buying a condo for our son to live in while he goes to school. We have no liabilities but we don’t have enough for a down payment. We have been saving the maximum in our retirement accounts and have enough cash in case of emergencies. We are thinking of stopping contributing to retirement and saving that money to use for a down payment on the condo. We plan to sell the condo in 3-4 years. We are 57 and 56 y.o. What do you think? Gene, Kettle River, MN
Answer: It’s an extremely risky strategy to me. Your son will do just fine living in a dorm and your finances will be more secure if you don’t do it. It’s a speculative bet on the condo appreciating quickly. What happens to your finances if the condo isn’t worth more or even falls in value over the next 3 to 4 years? The risk is that you’d be worse off.
Now, I have met over the years a number of parents who did do well buying a small home or a condo for their college age children near a university. But in every case they were flush. The down payment didn’t really affect their wallets. They were also willing to act as a landlord for years to get a return on their investment. (Quite a few owned apartment buildings, so the investment was an expansion of their existing business.)
However, 3 to 4 years is a very short period of time to get a decent rate of return on a condo after taking into account the down payment, mortgage, maintenance, insurance, monthly condo fees, the cost of the move, and so on. That’s why I would recommend that you continue to fund your retirement savings plans to the max and build up your savings as the age of retirement gets closer.
Of course, this is a far more conservative approach (so it isn’t surprsing that I favor it). Yet the odds of having more money in the bank 3 to 4 years from now is better than the probabilities of making money on the condo within 3-4 years.