To Keep Renting or Buy First Home?

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Moranall
Posts: 16
Joined: Mon Jul 22, 2013 2:31 am

To Keep Renting or Buy First Home?

Post by Moranall » Thu Jan 23, 2014 6:42 pm

I'm not necessarily looking for people to tell me to go one way or the other (but I'll certainly hear what you have to say); rather, I'm looking for advice on the situation I'm proposing because I'm certain there are a lot of things that I am missing due to inexperience.

Summary:
I have recently been approved for a (up to) $240k mortgage and I am personally torn if I should keep renting or buy my first house.

About me:
- I am 24 (girlfriend lives out of state for her career)
- Currently live in Phoenix
- 2nd year out of college, very stable career
- Mid $60k salary, due for both raise and position jump this year
- ~$50k student loans (9.5 years left of repayment), $290/month car payment (0% interest), no other debt (including CC)
- ~$12k in savings, including $6k in a taxable account ($3k 401k, $3k IRAs), all invested in low ER, diversified MFs
- No other cash available for down payment at the moment (My emergency fund is my dad and my taxable account to pay him back)
- I would like to get out of Phoenix if my job takes me there
- Approved for both traditional (4.8%) and FHA mortgages (4.25%)

My situation:
I currently rent with my two best friends in a house. We've been there for 1.5 years and we get along extremely well. My rent is $400 and we split utilities evenly, so about $550/month in the winter months and about $700/month in the summer (Phoenix electric bills are horrible). The house we live in is on the older side and in a less than ideal location, but it's in generally decent condition. My landlord has mentioned he would 'consider' selling the house, but that's not a guarantee. I'm well aware of the rent vs. buy page on this site and that buying isn't necessarily that much more cost effective than renting. However, I personally would prefer to own if I could. Below are the options that I see for myself.

Keep renting:
We're on a year lease (we extended a year after the first year), but our landlord likes us and said we can realistically stay as long as we want. This option is cost-effective for me, as I get plenty of surplus money to throw at my loans like I have for the past year. It's my least desirable outcome, since I'd rather own my house and one that is in better shape and in a better location.

Buy the house I'm in:
Not an absolute guarantee, but the landlord might be convinced to sell. The houses in this neighborhood are in the $160k-180k range and I would be able to receive ~$825 rent/month from my roomies. This would probably be nearly the same monthly payment for me (closing costs aside) as the rent we currently pay ($1225) would be very close to my mortgage payment (including PMI and taxes). However, there are probably tax things that I don't know that could hurt me from collecting rent in my house (taxable income?). The same caveats from above apply; I would prefer a house in better shape and in a better location.

Buy another house:
My most desirable outcome but the one with the most questions. Being pre-approved for the mortgage, I know what houses I can afford. In this case, I'm capable of buying newer, high-quality homes in a much more desirable part of town (Tempe/Ahwatukee/Chandler/Gilbert) in the $200k-$240k range. And if I bought a house, my brother (currently a student at ASU) would live with me through at least the end of 2015 and contribute $600/month in rent. He has a job offer (and internship) at the same company I work for, so chances are he'd be capable of living with me for a few more years, if that's what I wanted. Under this situation, I'm looking at paying about $800-$950/month in mortgage if you factor in my brother's rent, and I know my mortgage is tax deductible (~$1k/month at my 25% tax bracket = $2,500 refund or $200/month) so my real payment could be justified as around $600-$750 month (although, the same methodology applies to the second scenario, making it more cost efficient than currently stated). Again, the same questions apply in that I don't understand the tax consequences of receiving rent from my brother and I might be missing out on other tax benefits/consequences that make this a better or worse situation.

The last thing, regarding buying the houses: I see myself living in Phoenix for 3-5 years, but uncertain after that. I really want to move to Seattle or on the east coast where other major companies in my industry are, once I gain experience. If I was to move, my goal would be to hire a property manager and rent the house, as I would like to acquire property over time. The area I'm looking to move to is flush with college students and many of them rent houses, so there is a good rental market. However, I do not know how feasible this plan is and gladly will take any advice on the situation.

Sorry for the long-winded post, but I would greatly appreciate any advice, insight, or knowledge anyone might have to spare. I'm in the information-gathering phase and I know I'm missing out on things. I'm not necessarily looking for which option is best, but I would certainly read and listen if someone leaned specifically one way.

Thank you for reading!

natureexplorer
Posts: 4191
Joined: Thu Sep 03, 2009 10:52 am
Location: Houston

Re: To Keep Renting or Buy First Home?

Post by natureexplorer » Fri Jan 24, 2014 2:55 pm

Moranall wrote:I'm not necessarily looking for people to tell me to go one way or the other (but I'll certainly hear what you have to say); rather, I'm looking for advice on the situation I'm proposing because I'm certain there are a lot of things that I am missing due to inexperience.

Summary:
I have recently been approved for a (up to) $240k mortgage and I am personally torn if I should keep renting or buy my first house.

About me:
- I am 24 (girlfriend lives out of state for her career)
- Currently live in Phoenix
- 2nd year out of college, very stable career
- Mid $60k salary, due for both raise and position jump this year
- ~$50k student loans (9.5 years left of repayment), $290/month car payment (0% interest), no other debt (including CC)
- ~$12k in savings, including $6k in a taxable account ($3k 401k, $3k IRAs), all invested in low ER, diversified MFs
- No other cash available for down payment at the moment (My emergency fund is my dad and my taxable account to pay him back)
- I would like to get out of Phoenix if my job takes me there
- Approved for both traditional (4.8%) and FHA mortgages (4.25%)

My situation:
I currently rent with my two best friends in a house. We've been there for 1.5 years and we get along extremely well. My rent is $400 and we split utilities evenly, so about $550/month in the winter months and about $700/month in the summer (Phoenix electric bills are horrible). The house we live in is on the older side and in a less than ideal location, but it's in generally decent condition. My landlord has mentioned he would 'consider' selling the house, but that's not a guarantee. I'm well aware of the rent vs. buy page on this site and that buying isn't necessarily that much more cost effective than renting. However, I personally would prefer to own if I could. Below are the options that I see for myself.

Keep renting:
We're on a year lease (we extended a year after the first year), but our landlord likes us and said we can realistically stay as long as we want. This option is cost-effective for me, as I get plenty of surplus money to throw at my loans like I have for the past year. It's my least desirable outcome, since I'd rather own my house and one that is in better shape and in a better location.

Buy the house I'm in:
Not an absolute guarantee, but the landlord might be convinced to sell. The houses in this neighborhood are in the $160k-180k range and I would be able to receive ~$825 rent/month from my roomies. This would probably be nearly the same monthly payment for me (closing costs aside) as the rent we currently pay ($1225) would be very close to my mortgage payment (including PMI and taxes). However, there are probably tax things that I don't know that could hurt me from collecting rent in my house (taxable income?). The same caveats from above apply; I would prefer a house in better shape and in a better location.

Buy another house:
My most desirable outcome but the one with the most questions. Being pre-approved for the mortgage, I know what houses I can afford. In this case, I'm capable of buying newer, high-quality homes in a much more desirable part of town (Tempe/Ahwatukee/Chandler/Gilbert) in the $200k-$240k range. And if I bought a house, my brother (currently a student at ASU) would live with me through at least the end of 2015 and contribute $600/month in rent. He has a job offer (and internship) at the same company I work for, so chances are he'd be capable of living with me for a few more years, if that's what I wanted. Under this situation, I'm looking at paying about $800-$950/month in mortgage if you factor in my brother's rent, and I know my mortgage is tax deductible (~$1k/month at my 25% tax bracket = $2,500 refund or $200/month) so my real payment could be justified as around $600-$750 month (although, the same methodology applies to the second scenario, making it more cost efficient than currently stated). Again, the same questions apply in that I don't understand the tax consequences of receiving rent from my brother and I might be missing out on other tax benefits/consequences that make this a better or worse situation.

The last thing, regarding buying the houses: I see myself living in Phoenix for 3-5 years, but uncertain after that. I really want to move to Seattle or on the east coast where other major companies in my industry are, once I gain experience. If I was to move, my goal would be to hire a property manager and rent the house, as I would like to acquire property over time. The area I'm looking to move to is flush with college students and many of them rent houses, so there is a good rental market. However, I do not know how feasible this plan is and gladly will take any advice on the situation.

Sorry for the long-winded post, but I would greatly appreciate any advice, insight, or knowledge anyone might have to spare. I'm in the information-gathering phase and I know I'm missing out on things. I'm not necessarily looking for which option is best, but I would certainly read and listen if someone leaned specifically one way.

Thank you for reading!
This is an easy one: keep renting! I bolded some reasons above.

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Meg77
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Location: Dallas, TX
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Re: To Keep Renting or Buy First Home?

Post by Meg77 » Fri Jan 24, 2014 4:30 pm

KEEP RENTING for sure.

First of all, you can't trust those letters a bank gives you saying how much you can afford. Trust me, I work at a bank and originate loans for a living. What you can get approved for and what you can actually afford are NOT the same thing, believe it or not. Banks know that you will pay your mortgage first no matter what strains your budget is under. Regulations allow us to issue mortgages for borrowers with up to 44% Debt to Income ratios. That means your total debt payments can equal up to 44% of your GROSS income - which means probably close to 65% or so of your actual take home pay, give or take depending on whether you invest in a 401k and what your benefits cost. Do you want to be throwing more than half your paycheck to debt every month? Remember that home maintenance is above and beyond that (and is a huge time suck).

Second of all; you don't have anywhere close to enough savings to even think about buying a home. You don't even have an emergency fund. You say your dad is your safety net, and that's fine for now while you get established, but it's not OK to overextend yourself when you aren't even yet fully supporting yourself. Don't get me wrong; I'm not saying you have to have 20% saved for a down payment. I believe 5%-10% is fine for a first home buyer as long as that doesn't saddle you with too high of a rate. But you should have 3-6 months of expenses in an emergency fund PLUS closing costs PLUS that 5-10% saved before you start thinking about buying.

Finally, I think you should keep renting mainly because of your relationship/city/job uncertainty. You might want to stay with this girl and she gets an awesome job in another city; you might get a promotion opportunity in another city; you say you don't even want to stay in Phoenix forever. Therefore, rent. Flexibility is your friend at this stage of life where anything can happen.

For the record, if you were contributing more to retirement and had a bigger cash cushion, I MIGHT recommend buying a home that could easily double as a rental property, so that you can rent it out when you ultimately decide to move (and finance said rental at low current rates and with little down, due to first time homebuyer mortgage options). That is what I did the year I graduated from college. I made less than you do, but I had a much bigger safety net than you do due to leftover money in my college fund. The key here would be to buy something fairly new (since you're young and would want to hold it long term) that you know you can rent out (i.e. not your dream house but somebody else's rental dream).

My two cents. :)
"An investment in knowledge pays the best interest." - Benjamin Franklin

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Meaty
Posts: 584
Joined: Mon Jul 22, 2013 7:35 pm
Location: Texas

Re: To Keep Renting or Buy First Home?

Post by Meaty » Fri Jan 24, 2014 9:25 pm

Have you thought about renting a house? It's the experience/lifestyle of owning without the baggage (unexpected repairs, inability to move quickly, no down payment, etc)
"Discipline equals Freedom" - Jocko Willink

davebarnes
Posts: 542
Joined: Wed Jan 02, 2008 7:06 pm
Location: Berkeley, Denver, Colorado USA

Rent

Post by davebarnes » Fri Jan 24, 2014 10:41 pm

You cannot commit to 7 years of owning a house.
Rent.
A nerd living in Denver

MikeinNJ
Posts: 22
Joined: Thu Jan 16, 2014 8:54 am

Re: To Keep Renting or Buy First Home?

Post by MikeinNJ » Sat Jan 25, 2014 2:15 pm

If you can get that house at a good discount due to not having to use a realtor, it may be a decent option and you might be able to walk into some equity.

Not to thread hijack, but I am in a somewhat similar situation. Currently renting a room at my brother's house at $600/month. I'm 25, 2.5 years out of college, making $70k/yr + %12 bonus, so around $78k/year. Job is very stable and I plan on staying in the area for the next 3-5 years. I'm happy renting and paying off my $12k fed student loan. I have about $15k in my 401k, company matched at up to 6% of gross. I have about $7k in CC (6k of which is on a 0% balance transfer I did to get out of a high interest private student loan). 0% car loan at $509/month for 48 months.

My brother is planning on relocating this fall to Alabama. We work for the same company, same team, making similar income though he has six-figure student loans. Currently, I am planning on assuming his mortgage. House was appraised at $225k this past year, brother paid for kitchen reno, finished basement with added bedroom and bathroom. Comps in the area actually sell for $230k+. I would be assuming his mortgage of $195k. I will be paying $3800 in transfer fees to the bank to assume his 30yr fixed rate mortgage with no PMI at 3.85%. I have a roommate lined up who can't wait to come into the house and will be paying $600/month + split utils. So my monthly housing cost will essentially go from $600/month to $750/month (Mortgage/insurance/tax = $1350/month - 600 rental).

My thought is with about $19k out of pocket, I can get into this house and have about $30-35k in equity. I have had two coworkers make serious offers to my brother for $225k and $227k in the event I choose not to assume the mortgage. Through my job I am able to transfer at anytime to Birmingham, Chicago, DC, Atlanta, Dallas or San Antonio and keep my same income/position. Transferring to Dallas would be my first choice since career opportunities in software are much better than here; options in my location are rather limited unless I want to go NYC (No thanks!).

I have a LOT of close family/lifelong friends where I live and they aren't going anywhere any time soon. Most are not college/career oriented and don't make much. If they do, they are in a trade/own their own business, so they're not going anywhere. No gf, so no potential tie down or reason to move there.. yet.

So anyway, my big temptation is, with that 19k I will have accumulated in savings by August, instead of buying the house, I can use that money to completely knock out my student loan, CC and have the rest of my monthly income to invest/save/etc. At that point though, I will have to find a 1BR apartment to rent, cheapest in my area go for about $900/month. It makes total financial sense (I think) to assume this low rate mortgage on a great house (Hot tub, gym, movie theater/man cave) in the same neighborhood with all my friends. My only cold feet, is that I'm a first time buyer with NO tie downs and then there's the opportunity cost of buying a house. I'm uncertain how I would even go about selling the house short notice if I were to get a really good job offer out of state. If I wanted to up and leave to Dallas, I could do it this week.

It also helps that I am bypassing realtor/lawyer fees in this situation and getting more house for the money. Also, the rent I have paid over the last 2 years of renting here, is pretty much coming back to me in equity.

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Meg77
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Re: To Keep Renting or Buy First Home?

Post by Meg77 » Mon Jan 27, 2014 4:00 pm

MikeinNJ wrote:If you can get that house at a good discount due to not having to use a realtor, it may be a decent option and you might be able to walk into some equity.

Not to thread hijack, but I am in a somewhat similar situation. Currently renting a room at my brother's house at $600/month. I'm 25, 2.5 years out of college, making $70k/yr + %12 bonus, so around $78k/year. Job is very stable and I plan on staying in the area for the next 3-5 years. I'm happy renting and paying off my $12k fed student loan. I have about $15k in my 401k, company matched at up to 6% of gross. I have about $7k in CC (6k of which is on a 0% balance transfer I did to get out of a high interest private student loan). 0% car loan at $509/month for 48 months.

My brother is planning on relocating this fall to Alabama. We work for the same company, same team, making similar income though he has six-figure student loans. Currently, I am planning on assuming his mortgage. House was appraised at $225k this past year, brother paid for kitchen reno, finished basement with added bedroom and bathroom. Comps in the area actually sell for $230k+. I would be assuming his mortgage of $195k. I will be paying $3800 in transfer fees to the bank to assume his 30yr fixed rate mortgage with no PMI at 3.85%. I have a roommate lined up who can't wait to come into the house and will be paying $600/month + split utils. So my monthly housing cost will essentially go from $600/month to $750/month (Mortgage/insurance/tax = $1350/month - 600 rental).

My thought is with about $19k out of pocket, I can get into this house and have about $30-35k in equity. I have had two coworkers make serious offers to my brother for $225k and $227k in the event I choose not to assume the mortgage. Through my job I am able to transfer at anytime to Birmingham, Chicago, DC, Atlanta, Dallas or San Antonio and keep my same income/position. Transferring to Dallas would be my first choice since career opportunities in software are much better than here; options in my location are rather limited unless I want to go NYC (No thanks!).

I have a LOT of close family/lifelong friends where I live and they aren't going anywhere any time soon. Most are not college/career oriented and don't make much. If they do, they are in a trade/own their own business, so they're not going anywhere. No gf, so no potential tie down or reason to move there.. yet.

So anyway, my big temptation is, with that 19k I will have accumulated in savings by August, instead of buying the house, I can use that money to completely knock out my student loan, CC and have the rest of my monthly income to invest/save/etc. At that point though, I will have to find a 1BR apartment to rent, cheapest in my area go for about $900/month. It makes total financial sense (I think) to assume this low rate mortgage on a great house (Hot tub, gym, movie theater/man cave) in the same neighborhood with all my friends. My only cold feet, is that I'm a first time buyer with NO tie downs and then there's the opportunity cost of buying a house. I'm uncertain how I would even go about selling the house short notice if I were to get a really good job offer out of state. If I wanted to up and leave to Dallas, I could do it this week.

It also helps that I am bypassing realtor/lawyer fees in this situation and getting more house for the money. Also, the rent I have paid over the last 2 years of renting here, is pretty much coming back to me in equity.
In your case, if you are actually dealing with a bank that will let you assume the mortgage, I'd take the plunge and buy the house. You're saving 2-3% on closing costs and getting an awesome interest rate that will likely not be seen again in your lifetime. That's assuming you do plan to stay put for a few years though. When/if you move for work just turn it into a rental, or at that point if you're uncomfortable with that you can probably sell and get out what you put in (breaking even on cash flow but getting tax breaks in the meantime).

However you aren't getting any more house for the money if you are assuming a sales/transfer price of $225K. You could go buy any $225K home on your own with 3-5% down and pay a few grand in fees which would be right around $19K out of pocket; the only difference would be the interest rate being higher. You're not saving realtor fees either - your brother is. The seller pays for all commissions plus the buyer's title policy usually. Just keep that in mind when figuring how how much to give him for this "gift." You're buying a home at fair market value and paying him for his equity while saving him the time and energy and money he'd face trying to fix it up and sell it.
"An investment in knowledge pays the best interest." - Benjamin Franklin

goaties
Posts: 244
Joined: Fri Jan 29, 2010 4:15 pm

Re: To Keep Renting or Buy First Home?

Post by goaties » Mon Jan 27, 2014 4:17 pm

Here's a concrete suggestion for our young man: take a look at an amortization schedule. Most people simply don't understand the mechanics of amortization. Once you do, you'll realize why you should not take on a 30-year mortgage for anything less than seven or eight years. You simply won't build up much, if any, equity.

Secondly, that wonderful relationship you have with your housemates now? Say goodbye when you become the landlord. Currently you are all on an equal footing: three guys renting from someone else. The minute the house is your responsibility, the relationship changes. Suddenly that burn in the kitchen vinyl is not so funny...because *you'll* be the one paying for it. Speaking from experience here.

sunnyday
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Re: To Keep Renting or Buy First Home?

Post by sunnyday » Mon Jan 27, 2014 4:22 pm

Keep renting and enjoy the flexibility of not being tied down. Too many variables and things that could make buying a poor financial choice.

Take a look at the NYT rent vs buy calculator if you haven't seen it already.

yosef
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Re: To Keep Renting or Buy First Home?

Post by yosef » Mon Jan 27, 2014 4:31 pm

I agree with everyone else; you simply don't have anywhere close to enough savings to consider buying a home. You can't really afford a $240k house. You have practically no downpayment so you'd be stuck doing nearly 100% financing, PMI....yuck. Even if you had the cash with your uncertain time horizon I would avoid buying. Wait until you're on more solid financial footing and you know you're going to want to stay put for at least 7-8 years.

MoonOrb
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Re: To Keep Renting or Buy First Home?

Post by MoonOrb » Mon Jan 27, 2014 4:39 pm

This is just about a no brainer. You don't want to live in Phoenix. You pay a cheap amount in rent. Your living situation is pretty good. You can't commit to living where you live for even the next decade.

On the other hand, you like the idea of owning a home.

Owning a home is super expensive. If it's where you want to live for a long time it is usually money well spent over the long term, and for the lifestyle choice value it brings. It can be either extremely lucrative or financially ruinous in the short term, depending on how lucky or unlucky you are. But the most likely outcome is it will be just be very expensive hassle and you won't come out very far ahead, if you even come out ahead, and you'll probably come out behind.

If you were to take the emotional component out of this you would see that buying a home just doesn't make financial sense given everything else you've said. If the feeling of home ownership is something you just can't put off until you live in a city where you really want to live, then you can go ahead with it I guess, but that "yeah I own a home!" feeling will wear off pretty quickly when you're spending way more money than you ever did on housing stuff.

MikeinNJ
Posts: 22
Joined: Thu Jan 16, 2014 8:54 am

Re: To Keep Renting or Buy First Home?

Post by MikeinNJ » Mon Jan 27, 2014 4:55 pm

Meg77 wrote: In your case, if you are actually dealing with a bank that will let you assume the mortgage, I'd take the plunge and buy the house. You're saving 2-3% on closing costs and getting an awesome interest rate that will likely not be seen again in your lifetime. That's assuming you do plan to stay put for a few years though. When/if you move for work just turn it into a rental, or at that point if you're uncomfortable with that you can probably sell and get out what you put in (breaking even on cash flow but getting tax breaks in the meantime).

However you aren't getting any more house for the money if you are assuming a sales/transfer price of $225K. You could go buy any $225K home on your own with 3-5% down and pay a few grand in fees which would be right around $19K out of pocket; the only difference would be the interest rate being higher. You're not saving realtor fees either - your brother is. The seller pays for all commissions plus the buyer's title policy usually. Just keep that in mind when figuring how how much to give him for this "gift." You're buying a home at fair market value and paying him for his equity while saving him the time and energy and money he'd face trying to fix it up and sell it.
Yea, I'm still going back and forth. US Bank does allow for mortgage assumption by family. If I were to get my own mortgage with 5% down, we would do a sale price of $219k with 3% concession for closing costs, I would pay 11k down, leaving me with a mortgage with PMI at $130+ plus a higher 4.6ish interest rate. Total monthly payment will be about $270 a month higher on top of having a higher loan balance of $208k vs $195ish. With a reliable roommate to share this with it's cheaper than renting in my area. 1br in a crappy area is around $950/month. Renting it out is currently very lucrative in my area thanks to Hurricane Sandy displacing many. I could easily get around $2000/month rent for it.

DVMResident
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Re: To Keep Renting or Buy First Home?

Post by DVMResident » Mon Jan 27, 2014 6:30 pm

24 years old with no kids and significant other lives in another state.

No brainier: RENT!

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