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I've been mulling on this topic for a bit now, and finally decided to garner some opinions of others.
I'm going back to graduate school at the U this fall, and am seeking a place to live. My current program is just a M.S., with an option to continue for a Ph.D. So, I could be in school between 2-5 years, roughly. I'll be receiving a living stipend (roughly $900/month), and my tuition is completely covered by my research assistantship as well. I graduated with my Bachelors in 2010, and have been working a decent, but unfulfilling, job (government) ever since. I'm 26, and not really looking to 'party', and would love the solitude of my own place without the hassle of a large apartment complex.
With that said, what are some thoughts/feedback/experiences with purchasing a house for graduate school? I have a friend, and he and his wife just bought a decent, albeit older, home in south Minneapolis and are paying around $900/month. I would be living with my girlfriend, who is in nearly the same situation as myself. We have saved up a decent amount over the past few years. Would the return in even 3 years be worth a home purchase, if I was offered a job elsewhere after graduation? The reason I bring this up, is that rent for a decent apartment is nearly the same as a mortgage for a small home, and don't even try to rent a house. Any thoughtful opinions are welcomed!
Will you "make" money on a house in 3 years, probably not. Will you break even, probably. You will certainly be "out" money renting. It just depends on what you would like. If it were me I would buy before renting. Houses are bargain priced right now, your house payment with taxes and insurance will be less than you can rent an apartment for anywhere---unless you are ok living in a dumb in a not nice area. Down the road, if you stay, you have housing, no issues. It might be a good rental property for other grad/PhD students so could be a smart investment even.
$900/month is $32,400 over the next 3 years. That will put a dent your mortgage over those 3 years. If you buy a house for say $200,000, you will have paid that down some. If you need a quick sale, listing it again for $200,000 will probably get your place sold in a day and you pocket some cash as you walk away. With the housing market on the upswing, good chance that you will make money on the deal. Now, the market could crash again and selling not easy, but you have the back up of renting the place out too.
If I was going to put $32,400 into something, I would at least like a CHANCE to make money on that, with renting you have no chance at all to do that.
3 years would be the minimum I'd want to plan on having a place before I'd consider buying, so your situation with being in the 2-5 year range is tricky. At 5 years, I'd say absolutely buy. At 2 years, I wouldn't unless you would interested in renting it out afterward.
Is the $900/mo what you have specifically for rent/mortage, or is that your total compensation that you have to live on for the month?
At the end of the day, it all comes down to your specific financials. I like this rent vs. buy calculator:
Punch in your numbers and see how it comes out. Of course, you have to be honest with yourself. Yes, you could buy a place for $80,000 that would be much cheaper than an apartment at $800/mo, but if you wouldn't actually be happy with that $80k house, that's kind of a pointless comparison.
Also, keep in mind that a very high percentage of your payment for those first few years goes to taxes, insurance, and interest. For the hypothetical $200,000 mortgage, three years of $900/mo payments will take about $8,000 off your principle balance, not the full $32,000+. Add in an unexpected repair or two (roof, furnace, whatever), and potentially having having to sell at a loss, and you can see why renting can end up being a better investment for just a few years for some people.
Also, keep in mind that a very high percentage of your payment for those first few years goes to taxes, insurance, and interest. For the hypothetical $200,000 mortgage, three years of $900/mo payments will take about $8,000 off your principle balance, not the full $32,000+. Add in an unexpected repair or two (roof, furnace, whatever), and potentially having having to sell at a loss, and you can see why renting can end up being a better investment for just a few years for some people.
So, say you need to put in a new furnace, at $5000--which is a top of the line one--even if you walk away selling for what you paid for it, you come out $3000 ahead. All of your rent goes to someone else....Renting isn't an investment at all. You get no return on the money you spend. If you run an amortization schedule on a $200,000 mortgage, you will actually pay down your mortgage to $187,000 after 36 months (3 years) allowing you to walk away with $16,000 in your pocket if you just sell it for what you paid for the house. In our 25 years of homeownership, we haven't put $16,000 into repairs into all of the houses we have owned combined. We have made improvements by choice, but not repairs (furnaces, etc.)-not counting the roofs we replaced due to hail damage-but insurance covered those. If you rent, you put $32,400 into someone elses pocket and walk away with nothing.
So, say you need to put in a new furnace, at $5000--which is a top of the line one--even if you walk away selling for what you paid for it, you come out $3000 ahead. All of your rent goes to someone else....Renting isn't an investment at all. You get no return on the money you spend. If you run an amortization schedule on a $200,000 mortgage, you will actually pay down your mortgage to $187,000 after 36 months (3 years) allowing you to walk away with $16,000 in your pocket if you just sell it for what you paid for the house. In our 25 years of homeownership, we haven't put $16,000 into repairs into all of the houses we have owned combined. We have made improvements by choice, but not repairs (furnaces, etc.)-not counting the roofs we replaced due to hail damage-but insurance covered those. If you rent, you put $32,400 into someone elses pocket and walk away with nothing.
Yes, I did look at the amortization table wrong and its more on the order of $11,000-13,000 that would be paid off in 3 years. Don't forget sellers commission though either.
My main point still stands: You need to look at your own financial situation and see how it works out. I owned a home for 3 years and it came out as a financial wash compared to if I had rented for that timeframe. It worked out well for my family as a "practice home", but we had the cash on hand to handle repairs and we could have handled loosing some of the downpayment if we had to when it came time to sell.
I think the calculator I linked to above takes most of the important things into account (including appreciating, inflaction, sales comission, and taxes), and it lets you take an objective look at things, rather than relying on personal anecdotes from GG or I.
If you rent, you put $32,400 into someone elses pocket and walk away with nothing.
Well...you walk away with nothing, but you had a roof over your head and no worries about doing any repairs that might come up in two years.
My roommate is in a similar situation to the OP: He's a Ph.D. student earning a stipend. He gets about $1200 a month for his work (plus free tuition and health insurance) and with all the work he has to do (class time, GA hours, studying, etc.), I can't imagine he'd want to worry about house maintenance/renovations/etc.
While it's ultimately up to the OP, they're hardly throwing money away if they rent for two years. You can always rent a cheaper place for a few years, keep your current savings, and throw the difference you save with cheaper rent into those savings. Then, if you stay, you can purchase an even nicer house without having to worry about selling your current one. And if you need to move? Your lease it up and you can pack and go. Renting isn't a waste. It's a different lifestyle.
I can't imagine why you would want to buy unless you're planning on staying around here longer, or unless you want to hold onto your property and become a landlord long-term. Assuming in, say, three years you're going to leave the area, it makes far more financial sense to just rent. And keep in mind that a lot of your "owning" costs aren't actually going into your equity -- you'll be paying a lot for taxes and insurance. You pay that indirectly in your renting costs, of course, but it's all built in. Now if you think you're in MN long-term or are willing to hold onto as a long-distance landlord (which comes with additional costs, too), that's a different story. But do you really want to be doing a national job search in a few years AND worrying about selling a house? And if you're buying a cheap house it's likely going to come with at least some maintenance needs; when I was in grad school my schedule was so incredibly packed that it would have been a major hassle just to have to stay home to let in a plumber, let alone potentially take on larger obligations. Save your money, save your down payment, and buy yourself a place once you graduate. Or, if you move here, decide you want to stick around, then at least if you rent for a year you'll know the area and know where you WANT to live. Neighborhood can make ALL the difference between loving and hating a place, and it takes some time to get to know a new city.
Can you even get approved to buy a place? Assuming you don't have the cash to buy a place (and I certainly wouldn't raid retirement accounts or the like for the purchase) it seems like it would be difficult to find a lender with such a small income. I'm assuming you must be looking at REALLY cheap houses (again, unless you're putting a huge amount down), as with your stipend you certainly can't afford a $900/month mortgage, even if your girlfriend is also bringing home a similar stipend.
I understand the lure of of buying a home. But I think it would be a mistake in your position. Grad school is not a time to take on lots of extra expenses. You'll have enough just regular living expenses, as well as often expenses related to travel for conferences (stipends only go so far), research, etc.
ETA: it looks like you might already be local, in which case you know the neighborhoods. That helps, but still, it won't hurt to wait. You have a lot of years ahead of you in which to buy, especially given that you're considering moving so soon.
Last edited by uptown_urbanist; 04-01-2013 at 06:26 PM..
Your taxes and insurance are not affecting your equity in any way, shape or form. Those are separate payments although most people choose to escrow those costs. You still have insurance payments with renting too. It makes more financial sense to buy than rent any day of the week, any financial planner will tell you that...
Your taxes and insurance are not affecting your equity in any way, shape or form. Those are separate payments although most people choose to escrow those costs. You still have insurance payments with renting too. It makes more financial sense to buy than rent any day of the week, any financial planner will tell you that...
You find me a financial planner who will tell a graduate student making $900 a month and contemplating selling in as little as two or three years that it makes sense to buy.
It makes sense to buy in many situations. In others it makes sense to rent. For the OP, it seems a no-brainer that he'd be better off just waiting a few years until his situation is more stable. Seriously, two or three years will go by in no time, especially when busy with school! Why the rush? Let's say he can get a place with a payment of $500/month (I think it would be hard to go much lower, at least not without running into properties that have significant and potentially costly issues). Even that is a big chunk out of his pay! Let's say the girlfriend is kicking in rent, too - still, even between the two of them they don't make much, and they're taking on a lot of risk for such little payout.
Insurance costs as a renter are minimal. Certainly nowhere near as one pays for insurance on a house. My point was mostly that there are a lot of costs in owning that are just "thrown away" if one is going to say that renting is "throwing away" money.
Last edited by uptown_urbanist; 04-01-2013 at 08:56 PM..
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