Condo Buying Guide: What Should You Spend
The amount you spend on a condo is a function of what you can comfortably afford. As the recent real estate crisis taught us, buyers have to be careful not to overextend themselves on a real estate purchase. Stricter lending practices now limit banks' risks and help buyers avoid getting in over their heads. Tighter restrictions for mortgage qualification, along with increased down payments, may limit your price range.
Deciding What's Affordable
The 28/36 Rule is a good rule of thumb for determining how much debt you can take on. The rules states that you should spend a maximum of 28% of gross (pre-tax) income on housing costs. Take into consideration all monthly income – before taxes and other deductions – and multiply that figure by 28% (0.28). This is the most you should spend on housing costs, including mortgage, property taxes, insurance and condominium fees. Spending even less will give you a bit more flexibility in the event of a lifestyle change or increased cost in another area of your life.
Taking that a step further: You should spend no more than 36% of your income on total monthly debt payments. In other words, the more non-mortgage debt you have (student loans, credit cards, car loans, child support, etc.), the less you can afford to spend on a mortgage. To calculate this, add up your total monthly income and multiply it by 36%. Deduct your total debt payments and the remainder is what you can reasonably afford to spend on housing. (For more, see Mortgages: How Much Can You Afford?)
If It's Income Property
If you plan on using the condo as an income-producing investment, you’ll have to approach purchase decisions from a business perspective. Since certain expenses associated with income-producing properties may be tax deductible, you may want to consult with a qualified real estate attorney and/or a tax specialist before making any decisions. (See 10 Tips for Buying Your First Rental Property.)