Who said millennials aren’t interested in home ownership? Data from the National Association of Realtors shows that millennials (age 25-40) make up the largest percentage of home buyers (37%) on the market, with 86% of millennial buyers making the jump as first-time home buyers.
Purchasing a home can be an intimidating process for anyone, but co-op units come with a much lower price tag than condos and are a savvy investment. Our King St. project, located in the West Denver neighborhood, is a perfect example of this.
We estimate one-bedroom units for this property to sell for $165,000 and two-bedroom units to sell for $225,000. The purchase will require a 10% down payment, but we offer down payment assistance of up to $10,000 because we recognize that the down payment is often the biggest hurdle to home ownership.
The historic appreciation rate for West Denver over the past five years is 4.935%. This means that selling your share after five years should result in a sale price of $205,620 for a one-bedroom and $274,160 for two-bedrooms. The final result? Your down payment of $16,500-22,500 is projected to yield a payout of $56,779 for a one-bedroom unit and $75,704 for a two-bedroom unit.
Types Of Co-ops
There are two main types of co-ops: Ownership and non-equity. Ownership co-ops give shareholders occupancy rights to a specific unit through a title transfer. Non-equity co-ops do this through a proprietary lease or occupancy agreement.
From a pricing perspective, co-ops can be divided into three different categories:
Market rate: Shares in market rate co-ops are bought or sold in line with current market conditions. Partners put shares up for sale at the price of their choosing and there are no limits on how much profit they can earn. It’s similar to buying or selling a condo, but the purchase price on co-ops is far lower than condos and usually comes with a higher monthly maintenance fee.
Limited equity: These co-ops are geared towards low and moderate-income households. Although LEC’s have property taxes well below the market rate and some units can sell for as little as $10,000, there are usually income restrictions that would exclude most applicants in the middle income tier. These units also typically have restricted resale values in order to keep the housing affordable.
Leasing: Also known as zero-equity, these co-ops are comparable to renting in some ways. Leasing co-ops lease the property from an outside investor, so they don’t build any equity since they don’t actually own any real estate. Although buying into one can cost as little as a few thousand dollars, shareholders usually only receive the buy-in price they paid when they sell their stake and a small price appreciation that the association allows.
Financing Co-Op Purchases
The process for taking out a loan to purchase co-op shares is different to that of a condo or single-family home. Buyers take out share loans, which are similar to a mortgage, because banks don’t issue mortgage loans to finance co-op purchases.
The most important factor to determine your financial eligibility for a co-op is a comprehensive board review of your finances. Boards typically decide whether you’re an eligible buyer off two key pieces of criteria:
Debt-to-income ratio: Co-op boards determine this ratio through dividing your monthly income by the sum of your monthly liability payments (share loan and maintenance fees), along with any other fixed liabilities such as a student loan or car payment. Most boards want to see a debt-to-income ratio of no more than 25-30%.
If you make $5,000 per month and have no other debts, a healthy debt-to-income ratio would be $1,250-1,500 per month on combined share loan and maintenance fee payments. Income from investments can be factored into the ratio, but boards usually won’t factor in bonuses because these aren’t guaranteed.
Post-Closing Liquidity: This is also known as your financial reserves. Boards prefer prospective buyers to have at least two years worth of maintenance and share loan payments in cash, investments or marketable securities (stocks and bonds) after the sale is closed.
If your monthly share loan and maintenance payments are $1,500 and $500 per month, respectively, you should ideally have another $48,000 in cash, stocks or bonds post-close. However, some boards are less stringent about this if the applicant is a high earner.
It’s important to note that some boards not only consider how much money you make, but how you make it. Freelancers and self-employed individuals often need to present additional paperwork because their income might fluctuate more than someone who receives a weekly paycheck. However, having a couple of years of solid business financials will remove any potential board concerns.
What To Factor Into Your Purchase
First-time buyers often just focus on the price of the unit. However, there are several other costs that need to be considered.
Down Payment: Although 10% of the asking price is a common down payment for a co-op, there are some co-op organizations that require down payments of 20-30%.
Closing Costs: You should expect to pay 1-2% of the purchase price in closing costs. These include attorney fees, mortgage and application fees, appraisals, surveys and recording expenses. However, these are still cheaper than closing costs for a condo (typically 2-4% of the purchase price) since co-ops have a lower purchase price and don’t include title insurance or a mortgage recording tax.
Maintenance Fees: These monthly fees cover the cost for basic upkeep of the building and applicable pro-rata property taxes, in addition to allotting for future repairs. Expect small (3-4%) increases each year.
Financial Benefits Of Co-Ops
In addition to low turnover rates, there are several other financial advantages to owning shares in a co-op.
Financing: Home loans carry favorable lending terms, including lower down payments and closing costs compared to condos or single-family homes. In a co-op building that carries its own mortgage on the property, buyers must obtain less financing than a condo buyer would need.
Limited liability: While you’re responsible for paying your personal loan, you have no personal liability for the co-op’s mortgage as a shareholder.
Surplus revenues: Unspent funds are returned to shareholders in some instances. Think of this like the dividends you would receive from your stock in a company. Although these unspent funds will often need to be reported on your income taxes, it will still result in a welcome financial windfall.
Tax benefits: The interest that you pay on your share loan is tax deductible as it would be for any other home loan. Share loans are also subject to the same capital gains tax rules as a mortgage when you sell, meaning that the first $250,000 in profit is excluded from any federal income tax payments.