To buy, or to rent?

June 24, 2009 1:04 AM

How do you find a good accountant, or other professional, to help you decide when it's right to buy a house?

I have a friend who just graduated law school and is trying to work out whether she wants to buy or rent next year.

She's in an... interesting situation. She has education loans from law school and already has a job lined up in NY at a good firm. She wants to go back to grad school, so she only wants to work for a couple of years, and she also doesn't know if she'll want to stay in NY or not.

So, she needs to know her options. Is it better to pay off the loan, or just make the minimum payments since she can get loan forgiveness when her income drops when she goes back to school? How long should she stay in NY if she's buying? What should she do about taxes? Stuff like that.

She's asked me to help, but I have no idea where to begin. I guess the right thing to do is to get an accountant, but we're not even sure who to look for or what to ask. How do you make decisions like this?

posted by heathkit to work & money (9 comments total)

Just blindly? Look around for personal recommendations. Ask people who they use for their taxes--if nothing else, a trusted tax person can usually point you to an accountant who can advise, if they don't want to themselves.

Have those people walk you through things and explain their rationale. You are not dumb people, so ask them to be detailed. Compare and contrast and see who amongst your candidates seemed to really make sense to you. Explain that you're just looking for some preliminary expertise and discussion, and expect to pay for a few hours of their time. But pick the person who made you feel the most comfortable, both with their grasp of your (friend's) problem, and their grasp of the system.

Look also to financial advisers or planners for help in this area; many will want to help to get their foot in the door for when you require actual advisement with heaps of NY firm money and no time to spend it. Again, expect that past a very initial consultation, you'll be paying for some of their time, so ensure that you understand what it would take to get some questions answered. If her situation is relatively straightforward, even with loans, such that they can get them out of the way for you outright, take down their name and use them the next time you need a good accountant. Good people like that give a nickel's worth of free advice quite regularly.
posted by disillusioned at 2:14 AM on June 24

I'm in a similar situation--just graduated from law school--and though I don't have a job with a NY firm lined up, I asked myself similar questions. I came to a conclusion too:

I'd be absolutely crazy to buy this year.

The biggest difference between owning and renting is basically deciding who bears the risks involved with property ownership. Granted, the person who bears the risks also bears the possibility of reward/profit, but for homeownership, "risk" usually just means "cost." Owning property is expensive, above and beyond the cost of actually owning the place.

As a renter, here is a list of things I will never have to pay for:
- Major appliances
- Maintenance
- Repairs
- Insurance deductibles
- Grounds and landscaping
- Property taxes

"But," you object, "You really are paying for all of those things! They're included in rent!"

Well of course. But the difference is that I know exactly, to the dollar, what my costs are going to be for renting an apartment for twelve months. I'm going to sign a contract spelling out exactly what that's going to be. But if a hail storm damages the roof, or the place burns down, or deer eat all the azaleas, I don't have any extra expenses to deal with. If the city decides to raise property taxes, hey, that sucks, but the landlord can't come looking to me for contribution. Interest rate on the mortgage resets up a few points? Don't want to hear about it. Dishwasher breaks? That's $1000 that the landlord pays, not me.

The reason this is important is because I'm not currently in a position to build up a large enough pool of liquidity with which to weather those financial shocks without significant hardship. Your friend really isn't either. She's getting out of law school, so unless she's already got a huge nest egg from before she started, she's probably worth no more than $10-20k. This really isn't enough even for a downpayment anywhere in the city, and she's likely to have moving expenses in addition to the lifestyle expenses that go along with transitioning from law student to lawyer, e.g. sprucing up the wardrobe. In addition, she's likely to owe the bank at least $12k this coming year. Which really sucks, let me tell you, even if her income is north of six figures. That's at least 10% right off the top. So it's going to take her at least a year to deal with any current expenses plus get enough ahead of her ongoing living costs to have anything like a security blanket.

The money isn't the only thing though. Not bearing the risk of owning property also means I don't have to think about potential losses, or the property decreasing in value, even a little bit. I just won't have to care. Which is nice, and something I'm willing to spend a little extra money for every month.

I'd say her best bet would be to rent for the coming year, save some money--which she can do if she wants to, believe me--and see where things stand. If she plays her cards right she could wind up with $40k in the bank, which is a much more comfortable position from which to consider purchasing property, especially in a place as expensive as New York. Even if she has the income to deal with owning property, at this point I highly doubt that she has the capital. Granted, I don't know more than a general outline of her finances, but unless she's got $50k knocking about that I don't, she really isn't in any better position to buy a house at this point than I am. Give it a year.

There's also one really, really compelling reason not to buy right now which applies specifically to her: law firms, particularly those in the big cities, have been laying people off in droves for about nine months. Even those who stay are facing pay and benefit freezes/cuts, and new hires have had their start dates pushed off until as late as the fall of 2010. Now is not the time for someone in her position to consider getting a mortgage. Walking away from a lease isn't nearly as bad as foreclosure.

On the issue of whether or not to pay back her loans right away, the answer is "Only some of them." Stafford loans, of which most law students take out about $20k a year, have a fixed 6.8% interest rate. Which isn't terrible, but these days its difficult to make that much in any reasonably safe investment vehicle, so it'd be in her best interest to start paying those down as quickly as possible. But most bank loans are linked to prime in some way and are likely to be much cheaper. Some of mine are as low as 2.25% and likely to be lower once interest rates reset next week. I'm going to take as long as humanly possible to pay those off. So it really depends on the specifics of her loans.

Finally, don't plan your life around going to grad school in a few years. That may or may not happen, and people talk about the "golden handcuffs" for a reason. Your friend may find that she likes earning a decent salary (assuming she keeps it) and that grad school is less appealing after a few years in the Real World(tm).

Long story short: she's graduating from law school. She should take a deep breath and get her legs under her, both professionally and financially, before making any decisions about buying property.
posted by valkyryn at 5:33 AM on June 24 [2 favorites]

She has loans outstanding, wants to go back to grad school, and doesn't know if she wants to stay in NY for more than a couple of years?

And she wonders whether she should buy or rent? Seriously?

Remind me never to solicit financial advice from a lawyer.

In all seriousness, the best thing she could do is to go to Streeteasy.com, compare mortgage prices + maintenance fees to rental prices in Manhattan (which I am assuming is what is meant by "New York" here) and see that, in most cases, renting is still cheaper than owning.

Leaving aside the implication that this implies that Manhattan real estate prices will trend downward over the next several years, given that she has loans outstanding and presumably wants to take on more loans by getting more education, buying looks none too bright an idea.
posted by dfriedman at 6:26 AM on June 24

Forget professional advice, look at the facts:
1. She only wants to work for a couple of years now. Where is she getting the money to pay the mortgage and thousands of dollars in taxes a year when she stops working?
2. She's not sure if she wants to stay in NY. Buying a place and then selling it less than 3 years later is almost sure to result in losing money. She can leave NY and rent it out, I guess, but it's a hassle not living in the same city that you're renting out in. Also, does she really want to pay NY mortgage prices and property taxes when she leaves NY, especially if she moves to an area where the income is smaller because the cost of living is less? Even if she rents it out, the rent won't cover all the expenses on the place she would own, and she would end up making payments for the place while also living in and paying for a place outside of NY.

If I were her I'd work for a year or two and see if she wants to stay in NY. And then if she wants to stay AND she wants to buy, going to school without working probably isn't an option.
posted by KateHasQuestions at 6:51 AM on June 24 [1 favorite]

Rent. I agree with KateHasQuestions that this is a common-sense decision, not one you need a financial advisor for.

From a living/comfort standpoint, people who move to NYC have no sense of where a good place for them to live is- there are a ton of different neighborhoods here, and finding the right balance of cost+vibe will require a few moves.

Is it better to pay off the loan, or just make the minimum payments since she can get loan forgiveness when her income drops when she goes back to school?

This decision will look like small potatoes against her mortgage, which will receive no "forgiveness" when your income drops. Actually, being up-front that you intend to go back to school in a couple years will probably be reason enough to be disqualified from any kind of mortgage in this climate. Assuming she's not sitting on a large pile of reserve cash, there's no getting around that problem.

How long should she stay in NY if she's buying?

Broad rule of thumb is that you don't buy a place in NYC unless you're planning on living there 5 years- circumstances change that move that number a little in either direction, but if her plan coming in is to buy and then sell in a couple years, she's missed that financial gravy train by about a decade.
posted by mkultra at 7:31 AM on June 24

Unless she is sitting on a lot of cash, she probably doesn't have enough money to make the down payment necessary to get a good interest rate. IMO, the "low down payment" loans are a giant ripoff scheme. They might have served a purpose when the market was increasing 25% per year, so that it really did make sense (for a time, anyway) to buy even at exorbitant rates rather than rent, but I don't think that's the case right now.

It makes sense to buy now if you have a lot of cash that is just going to get hammered by inflation anyway, and you need a place to live, and you can get a long-term fixed-rate loan at a very good interest rate. If all of those things don't line up, there's a lot less risk involved in renting.

Of course, your friend shouldn't take advice from random people on the internet; a better way to go would be a fee-based financial planner. (That's what every financial thread ends up at, doesn't it?) I don't have any real suggestions for finding one besides using one's personal network, but that's where you'll probably get the most objective, personalized advice.
posted by Kadin2048 at 9:41 AM on June 24

Just one more caveat about buying in NYC (and I agree with others that it doesn't sound like a great idea for your friend anyway): If you buy an apartment in Manhattan, it's likely to be a coop apartment. Coops often (from what I understand, quite often) have rules against renting out your apartment to others if you should move out, so that's not really an option. (I've also heard of coop boards charging a "flip" fee if you sell your apartment too soon after buying.) A condo apartment may be more flexible, but it's also likely to be substantially more expensive for an equivalent place.

Also, for more fun, monthly "common" charges (on which you of course don't gain equity) are often VERY high in Manhattan. So you get to be in the situation in which you have the responsibilities of ownership but also have to, in a sense, pay rent.

And yeah, the real estate market in NYC's not exactly on an upswing at the moment.
posted by supercoollady at 9:49 AM on June 24

I love this little calculator.
posted by iiniisfree at 9:58 AM on June 24 [1 favorite]

I agree with everyone else that you don't need a pro to choose renting over buying in the situation as you've outlined it. But, if you do want a pro for this or similar questions, a financial advisor is what you'd seek. One good way to find one is through the site I always find myself recommending around here: NAPFA. It's an organization of fee-only advisors. Other advisors make money from commissions on money you invest with their advice, or through a percentage of that invested money or of gains. These modes of payment all assume you're investing, and even if you did, they lend themselves more to bias than fee-only payment does. All NAPFA members also sign a strict code of ethics. You need to register to do a search for member advisors near you, but I did, it's free, and I haven't gotten any spam.
posted by daisyace at 10:02 AM on June 24 [1 favorite]