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May 31, 2011

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If you are likely to move in 4 years why bother buying? Playing long distance landlord is no fun... trust me. Continue renting until you're ready to commit to a city for 10+ years at least. Bank the cash difference between buying and renting, earn interest on the $1,200/m, then send me my commission ;-).

I am not sure why you would want to buy a depreciating asset at this time, regardless of the rentals.
I would say that you should follow the housing market in your area closely, paying particular attention to very recent sales, but keep your powder dry until you see them starting to appreciate again. Maybe a "Short Sale" might be a good deal or a desperate homeowner that needs to get out ASAP.

I agree with justin - it doesn't make sense to spend $60k AND triple your monthly housing cost AND take on maintenance issues that a landlord currently takes care of AND do this just to combat 4 years worth of potential rent increases.

However, you've noted that your city is growing rapidly. If you feel confident about this, see if you can find a way to capitalize on it. For example, that house in the suburbs that you're not interested in for yourself could find itself right on the outskirts of the new downtown and worth much more in a few years' time if the growth keeps up. If you're up to the responsibility of management, willing to take the risk, and can find a great property, why not look into buying a suburban house and renting the whole thing out? If you can find a deal that will pay for itself (i.e., mortgage, taxes, and insurance are all covered by the rent, plus 10% or so for maintenance and vacancy contingencies) then it could well be a very smart move. Lots of millionaires are made in real estate. Just something to consider!

When I first bought my house, apartment rent was $350 a month and my mortgage was $550. Granted that was 25 years ago but that should tell you something.

3 times the living cost is too high. This means real estate is too high. I am a firm believer in buying but in your situation I agree with the other posts.

"I plan to stay in the area for the foreseeable future, at least until I'm 30 years old. After that, I'd like to keep my options open."

Buying now is the opposite of keeping your options open in 4 years.

"I'm ready to have a place that I can call my own"

"Ideally, though, I would be renting out the other two bedrooms in the house in order to help me pay the mortgage."

Renting an apartment by yourself is a "place of your own". Buying a house to share it with 2 strangers is not a "place of your own." It's a headache and a source of frustration.

"If I do decide to move, my goal would be to retain the house as a rental property, assuming I have the available cash flow to make it possible."

As it currently stands it does not appear that there is much if any cash flow for this property as a rental and if you do it remotely with a management company there is probably negative cash flow.

... You are doing everything right financially so far. Do not buy into the financial lie that renting is wasting money and buying is the only smart thing financially. You are renting for 620 right now which is pretty dang cheap compared to what you are proposing. You will need to tie up 60K in cash to get your 20% down payment. That money will get you no return. And what will you get in return for this investment? A payment that is nearly 3 times your current rent and that payment is nearly all wasted just like rent as very little of it will be to principle. The only way to get back to the same costs as your current rent is to share the space with two strangers. And that doesn't count upkeep and maintenance which many potential homeowners conveniently forget.

From what I can gather, making this choice would make your situation worse if every way imaginable. Worse financially, worse living wise (sharing with strangers), worse for flexibility, worse for headaches.

Can you describe the big juicy advantage that makes you want to take on all those negatives? I am pretty sure it's the lie that the smart thing to do is to have "a place of your own." As I said above, you already have that, the only advantage a home gives you is you can rip out walls, dig up the front yard and plant a bunch of bushes, or paint the walls all pink. You itchin' to do any of those?

If you had seen my profile then you know that I buy a lot of houses and rent them out. Houses make sense when they cash flow nicely. Otherwise they really don't make much sense at all. I don't see much about this deal that makes much sense for you.

First off, I think the reader is doing great thus far. That's an impressive place to be a few years out of undergrad studies - no debt and a very good start on savings.

That being said, I think that it makes sense to continue racking up the savings and avoiding debt - including mortgage debt. Might as well keep options open considering that you're looking at 4 years as the "foreseeable future". Really, that's not a long time.

If I was in that position, I'd keep doing what got me to that point (save and avoid debt) and not take on a mortgage until I was ready to settle down and stay put for a while. Even then, make it one that in no way stretches you financially.

No advice, just a comment - I make about the same income, and the very thought of a PITI of $1800 makes be somewhat nauseous. Yes, even with the potential lower cost with room mates (which I would not want but others are fine with it).

I'm about your age, I'm in a somewhat similar career and financial position, and I also face the possibility of moving in a few years. I considered buying a condo a couple of years ago. My mortgage payment would have been about 50% higher than my rent at the time. I decided that was excessive, especially given the loss of flexibility. You're talking about a 300% higher payment. That's truly alarming.

Sure, you can offset some of that payment by taking a second job (namely, landlord), but you'd probably do better in $/hr by focusing on advancement in your current job, starting a side venture that uses your valuable engineering skills, or putting in the time to find a better job at a different firm. I've done all three recently, to varying degrees of profit.

The only way I can rationalize the purchase is if you're actually enthusiastic about landlording for its own sake. Maybe you've always enjoyed DIY home maintenance? Maybe you're lonely and bored in the evenings, and hope to socialize with your tenants?

I'm in a similar position to you, but a few years younger - I graduated in 2009. I also like the idea of owning a house and I am saving towards buying a house, but not now. I prefer living in an apartment building while I am single, as I feel much safer (as a woman), and then I don't have to do any heavy-duty maintenance myself.

If you were planning on staying in the city you're in forever, I would consider buying now with your parents' help. Otherwise, I would wait at least until you can afford a down payment and the monthly mortgage payment on your own, without your parents' help.

@FMF: It would be awesome if you followed up on "Help a Reader" questions a few months later. I'd be interested to know what this guy ultimately decides to do, and how it works out for him. Just a thought!

The reader is doing well financially.

But 4 years is not really long enough time frame to make a house purchase a good deal. You could easily lose money in the deal in that period. Closing costs on a mortgage will cost you 2% of the purchase price then if you sell it thats another 6% so you're looking at 8% of the cost to make up for transaction costs. In the next year or two prices could easily drop 10-20%. Even if they grow 5% a year after that you could be down 10% in 4 years. You could be spending $24k in transactions to buy a $300k house and end up losing $30k in value pretty easy.. ALtogether you could quite feasibly lose $50k or more in just 4 years.

If you keep it as a rental then you're dealing with potential negative cashflow and the work of tenants. Do you really want to be a landlord and invest in rental properties? Will you stay in that city after 4 years? If you plan to move out of the city I would not recommend being a long distance landlord. Justin is right: long distance landlord is no fun, trust us.

I wouldn't do it.

There's nothing wrong with buying a house and there's nothing wrong with renting for a few more years, personal preference is as much a part of your decision as economics. It's clear from the numbers you've given owning a home by yourself would be significantly more expensive than renting. No matter what you do with the numbers, tax deductions, price appreciation, home improvements etc your current rental is going to be a lot cheaper than owning a house. Don't forget to include the time and effort needed for maintenance.

Living in a single family home usually gives more comfort, space, and independence than renting. Are those things worth the extra expense to you at this time in your life? The answer could be "yes" but from your question it certainly seems like a "no". You want to be centrally located which makes me think you'd rather spend time out in social situations than at home. You are single so you probably wouldn't benefit that much from extra space. You've also managed to save a lot of money in the past few years so you probably don't find value in luxuries the way others might, so the added comfort probably isn't that important to you.

You could negate a great deal of the cost of owning a home by renting out rooms, but with two other people living in the home you are sacrificing a lot of the independence, space, and comfort you bought the home for. Taking on boarders negates much of the benefit of owning a home. You end up with a similar standard of living, a lot more responsibility, and exposure to an highly illiquid not that great investment. Probably a "no" here also.

In the end it's a simple cost benefit analysis, not just dollars and cents but quality of life. For the majority of people the majority of the time owning a home boils down to paying a premium to live in their own place on their own property. For a single guy planning to move in a few years I don't see that being a good tradeoff.

I generally agree with all the advice above. I'll add one additional point to ponder.

Consider that when you are renting out rooms, as opposed to an entire house/apartment, you are probably going to attract students, young professions just out of school, or other people in a "transitional" stage in their life. Not that there is anything wrong with renters like that, except for that fact they probably aren't going stay with you long term.

One of the biggest costs of being a landlord is tenant turnover. When somebody moves out, you have to clean the place, paint it, get it ready to rent. You have to advertise your rental. You have to interview people, run credit checks. You may even have to let the place go vacant for a month or two while you are searching for a new tenant. They key to making money as a landlord is to attract a good, long term tenant. That way, you don't have to pay the costs associated with acquiring a new tenant.

If you really want to be a landlord, I would recommend either buying a place and renting the entire place out, or renting a place that has multiple, separate units. Good long term tenants are looking for their own space, not just a single room with a shared kitchen.

Looks like the "Nays" have it.

The perception I get from the information provided is that the reader wants to buy because it's the next step.

Don't fall into the financial trap of thinking there is a logical progression to your finances.

Home ownership is no longer the "American Dream". It's no longer the appreciating asset it once was, regardless if the area is growing.

Keep renting for a few more years.

Wow! I think the responses here were particularly excellent and I'd also fall down on the side of waiting. Those rent payments are such a small portion of your income! Even if your rent doubled tomorrow (not likely), it would still be affordable for you. Enjoy the hassle free life of renting a few more years until you decide to really stay put somehwere and/or you really have the whole 20% down payment on your own.

What if your home goes down in value by 15% to 25% in the coming 4 years?
Rent and take 50% of your assets now and buy gold and silver coins.
Their value will increase enough in 4 years to put you on "easy street" for life. Listen to an old man. Do not buy any home right now, even if you had the total cash available. We are in very uncertain times right now.

I'll be the lone voice of opposition here. While I agree that it doesn't make sense to blindly follow the "American Dream" of buying a home just because it's the next step, there has NEVER been a better time to invest in single family housing. Interest rates continue to be below 5%, and housing prices are at the same level they were over a decade ago. Furthermore, as shown by the posts so far, purchasing single family homes as an investment would seem to be a fairly contrarian strategy.

In 2012, there will be more 22 year olds than at any other point in American history (Gen Y/Echo Boom); in four years, those 22 year olds will be 26 and starting to look to purchase housing. Housing economists predict that we will need to add 1.2-1.6 million homes/year over the next 10 years to satisfy demand for newly formed households; last year we added 300,000, the lowest number since 1963. The idea of purchasing a well-located, attractively priced home, financing it conservatively with cheap debt, and carrying the costs using additional rental income seems like an intelligent choice to me.

It would seem that the poster has a fairly good grasp of his financial situation and capabilities (he's certainly in better financial condition that I was at that age), and if he went about it in a disciplined manner, he could probably make some decent money purchasing a home and renting a portion of it out. It would certainly be additional time and labor, but it would be a good introduction to being a landlord. If it's something he likes, he can keep the home after he moves on and manage it as a rental; otherwise he can sell it.

I particularly like the comment about buying gold and silver coins. It makes perfect sense to avoid assets that are cheaper now than they've been in a decade to purchase assets that are at some of their highest levels in history. There's a far greater chance that those gold and silver coins you buy are worth 15-25% less in 4 years, especially given that they don't actually generate any income. Buy high, sell low; now THAT's the American Dream.

Oh, and one other thing. In the first four years of ownership, your interest costs will constitute the bulk of your monthly mortgage payments and are tax deductible. Depending on your income level, that could reduce the cost of ownership by $250-$600/month, assuming tax rates of 15-35% and a monthly payment of $1800.

The only thing I have to add here is that yes the rent -> own cost he has outlined above is approximately 3x higher, but I'd imagine he is not renting a 3br/2ba apartment right now.
However, considering he wants to rent out the extra bedrooms anyway, why not look for a 1 or 2br place for your first? Perhaps even a condo as a transitional place from tenant to owner, at least all of the maintenance burden will not be on you.
If you are currently paying $650/mo for a place to yourself, I find it hard to believe you could rent a stand alone room for $1100.

Compare the apartment size you are in now to homes and condos of the same size, and what those mortgage payments would be in comparison to your apartment. That should be a little better indicator of where the housing market is than comparing your apartment to a SFH that is bigger.

I was in a very similar situation as you just a few years ago. However, the difference was I purchased a smaller home (2 bed, 1.5 bath, 1 car attached garage) that gave me much more privacy and room than an apartment, but my PITI was about $800 versus renting of $650.
In the end, I came out way ahead, even though I ended up selling the place for about what I paid for it after commision. I came out ahead as my cost of owning (Interest, Taxes, Insurance, Maitenace) was less than the cost of renting. After adding my rental income to the mix, my cost of owning was about $100 per month. Over the 4 years I lived there, my net cost was about $10,000 versus renting at $31,000.
After I moved onto my next place (larger home after I got married), I rented the house out for a couple years. Again, it was a profitable move for me and I was lucky in the fact that I didn't have any major damages or repairs. Even though it was profitable, I would not want to be a landlord for just one property, especially if I were not located in the same city.

The house you want to buy is too expensive for your salary.

And...

JP wins for best comment.

@RS...I might agree with you if the original poster said he was planning to stay put for the long haul...but he's not. 4 years is too short a time frame. And given today's unstable economy, it's really tough to commit to a 30 year (or even 15 year) mortgage with the job market being so unstable (even in good times).

Young man, you're doing a great job and you're in an enviable position. I must agree with other posters that since you may move within four or five years, it's not a wise move to purchase a home. Make absolutely sure that you have an emergency fund, that you're contributing all that you can to a retirement plan, THEN think about homeownership. AND don't buy a house bigger then what you need. You would be amazed at how expenses property can be; there are always hidden and/or unexpected expenses. You might want to go to graduate school, and you may move several more times before you find an area where you might want to live. Don't be in such a rush to be a homeowner...you're on the right track--it will happen...

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