Should I buy it? House edition
July 14, 2015 4:58 PM Subscribe
I have been wanting to buy a house in my city for several years and am finally in a position of stability (financial and otherwise) to do so. This is exciting! I want to make sure pursuit of this particular goal does not foolishly jeopardize other long-term goals, and need some help sussing out genuine rational concern from irrational fear of commitment.
Background:
- Reasons for wanting to buy are both sentimental (have always wanted to own a house, particularly here) and financial (market is strong, with homes of unique historical value likely to hold value)
- Finances are in order and I have cash to put 20% down on any property that I could comfortably make payments on.
- The catch: I am interested in pursuing a full-time MBA within the next 1.5-2 years. My goal is to expand skillset towards areas of interest, network, possibly change careers. NOTE: This MBA is not an "investment" and is unlikely to pay out in salary gain.
I know conventional wisdom is not to buy unless planning to live in a place for > 3-5 years (and I can do the math on this.) I want to buy for the long term. The rental market is good here, so that I could likely cover my note and property management costs if I move. (I am also aware the market can change any time. Real estate prices have risen sharply in the last 3-4 years, with lots of cash investors, so I will be among the more exposed if the rental market does falter.)
Questions:
1. Does it make sense in any universe to buy a house (major life goal!) at present rates (+/- 4%) and risk having to take on unsubsidized student loans (6-8%) to finance an MBA later?
2. Does it make more sense to put less than 20% down and take the hit on PMI in order to hang onto the cash for grad school? Would it be possible to pay a lump sum in, say, 4-5 years, bringing my equity up to 20% to eliminate the PMI?
3. Is it foolish to even consider paying cash for an MBA? I know many employers do fund MBA's--will any do this retroactively? (i.e. assist in paying off loans)
Sorry for the laundry list of considerations. Maybe I am just not ready to commit--but part of me thinks I am squandering the opportunity of a house I would love to live in (short term) and invest in (long term). Ultimately I need to find compromise on these competing priorities. I appreciate all perspectives.
Background:
- Reasons for wanting to buy are both sentimental (have always wanted to own a house, particularly here) and financial (market is strong, with homes of unique historical value likely to hold value)
- Finances are in order and I have cash to put 20% down on any property that I could comfortably make payments on.
- The catch: I am interested in pursuing a full-time MBA within the next 1.5-2 years. My goal is to expand skillset towards areas of interest, network, possibly change careers. NOTE: This MBA is not an "investment" and is unlikely to pay out in salary gain.
I know conventional wisdom is not to buy unless planning to live in a place for > 3-5 years (and I can do the math on this.) I want to buy for the long term. The rental market is good here, so that I could likely cover my note and property management costs if I move. (I am also aware the market can change any time. Real estate prices have risen sharply in the last 3-4 years, with lots of cash investors, so I will be among the more exposed if the rental market does falter.)
Questions:
1. Does it make sense in any universe to buy a house (major life goal!) at present rates (+/- 4%) and risk having to take on unsubsidized student loans (6-8%) to finance an MBA later?
2. Does it make more sense to put less than 20% down and take the hit on PMI in order to hang onto the cash for grad school? Would it be possible to pay a lump sum in, say, 4-5 years, bringing my equity up to 20% to eliminate the PMI?
3. Is it foolish to even consider paying cash for an MBA? I know many employers do fund MBA's--will any do this retroactively? (i.e. assist in paying off loans)
Sorry for the laundry list of considerations. Maybe I am just not ready to commit--but part of me thinks I am squandering the opportunity of a house I would love to live in (short term) and invest in (long term). Ultimately I need to find compromise on these competing priorities. I appreciate all perspectives.
If you rent the house, keep in mind that a) the value may drop and b) you will need to spend a lot of money between tenants (even with a good tenant, for example, you're often looking at repainting a good chunk of the interior and possibly carpeting/refinishing the floors).
posted by thomas j wise at 5:08 PM on July 14, 2015 [2 favorites]
posted by thomas j wise at 5:08 PM on July 14, 2015 [2 favorites]
Best answer: Buying a house to live in is very different from buying a house to rent out. But you can certainly buy a house with an eye to both. This means nice but not too nice finishes, that are hopefully easy to maintain. You'll probably want somewhere between the 2- and 3- bedroom range, depending on your neighborhood and what commonly rents out. There should be a lawn, ideally fenced, but no garden or a very plain garden.
Ideally, you'll want to be able to rent it out for an amount that is cashflow positive, without doing any additional work. This means the rent you collect should cover mortgage payments, taxes, insurance, utilities (if you pay for them), maintenance, repair, and other things you might have to pay for as a landlord (such as yard maintenance). Make sure you include vacancy, i.e., the time it takes to turn around a unit and rent it out to the next. You may need to repaint or replace the carpet in between tenants, and that's considered normal wear and tear, even if you wouldn't have needed it if you were living in it yourself. If you will be renting it out from afar, you may also pay a property management company to take care of it. (Where I am, they charge about 10% monthly rent and 1 month's rent for signing or renewing a lease. This is on top of maintenance that they organize for you.)
If your house qualifies as a good investment opportunity, then go ahead, buy it and live in it. And if you move, then you can rent it out. But these properties are not very common, as investors tend to like to buy them up.
As far as whether you want to pay a mortgage or student loans: I would personally take the PMI hit and not take student loans. The reasons are:
One, the student loan interest rate is higher.
Two, it's good to have cash on hand if you are going through a transition in life. Going to school and moving (and renting out your house) are all fairly major transitions.
Three, student loans are near impossible to discharge. However, mortgages can be discharged (though you lose your house). In the worst case scenario with a mortgage, you lose your house and you have to wait 10 years to rebuild your credit. In the worst case scenario of a student loan, you're just stuck with it, while you still ruin your credit.
But at the end of the day, it's about what risks you can tolerate. If you're confident that you would never have to choose between which bills to pay, then locking in the low mortgage rate might be the right decision.
posted by ethidda at 5:13 PM on July 14, 2015 [3 favorites]
Ideally, you'll want to be able to rent it out for an amount that is cashflow positive, without doing any additional work. This means the rent you collect should cover mortgage payments, taxes, insurance, utilities (if you pay for them), maintenance, repair, and other things you might have to pay for as a landlord (such as yard maintenance). Make sure you include vacancy, i.e., the time it takes to turn around a unit and rent it out to the next. You may need to repaint or replace the carpet in between tenants, and that's considered normal wear and tear, even if you wouldn't have needed it if you were living in it yourself. If you will be renting it out from afar, you may also pay a property management company to take care of it. (Where I am, they charge about 10% monthly rent and 1 month's rent for signing or renewing a lease. This is on top of maintenance that they organize for you.)
If your house qualifies as a good investment opportunity, then go ahead, buy it and live in it. And if you move, then you can rent it out. But these properties are not very common, as investors tend to like to buy them up.
As far as whether you want to pay a mortgage or student loans: I would personally take the PMI hit and not take student loans. The reasons are:
One, the student loan interest rate is higher.
Two, it's good to have cash on hand if you are going through a transition in life. Going to school and moving (and renting out your house) are all fairly major transitions.
Three, student loans are near impossible to discharge. However, mortgages can be discharged (though you lose your house). In the worst case scenario with a mortgage, you lose your house and you have to wait 10 years to rebuild your credit. In the worst case scenario of a student loan, you're just stuck with it, while you still ruin your credit.
But at the end of the day, it's about what risks you can tolerate. If you're confident that you would never have to choose between which bills to pay, then locking in the low mortgage rate might be the right decision.
posted by ethidda at 5:13 PM on July 14, 2015 [3 favorites]
Seriously consider the amount of time and attention that an older home can require, especially if it's your first place. It might actually be a fantastic financial decision but become the sort of time/worry sink that eats up family time and stunts career growth. If you're going to school, I'd concentrate on that.
posted by bonobothegreat at 5:29 PM on July 14, 2015 [2 favorites]
posted by bonobothegreat at 5:29 PM on July 14, 2015 [2 favorites]
Best answer: Without knowing the details of your finances, where you live, etc:
1. I would probably advise somebody in your situation to only buy a house if it was a lifestyle choice, not a financial one. You might save money by buying and you might not; if that was your only concern the risk and the headache of owning property would come down in favor of continuing to rent. However, you say that it's a long-term dream and it seems as though you've thought through the logistics and you can handle the financial committment. If you're able to put down 20% and you know you can realistically and comfortably cover the monthly cost (both mortgage and other associated costs), I'd say go for it.
2. PMI is typically 0.5%-1% of the home's value per year. If 0.5-1% of the home value (the excess you'd be paying in PMI) is less than 2-4% of the student loan value (the extra interest you'd be paying in student loans vs mortgage) then you should put down a smaller down payment and save that money for the MBA. The best option, of course, would be to put 20% down and continue to save, possibly putting off the MBA for a bit, until you have enough to pay cash for that too. You can, in the future, pay a lump sum so that you have at least 20% equity in the home and stop paying PMI; however, this plan can be made complicated if the house is reassessed at a much higher value. For example, you buy a house for $100,000 with 10% down, and a couple years in you want to get to 20% equity. However, if the house is then appraised at $200,000, you'll need to put in a total of $40,000, not the $20,000 you would have needed if you put down 20% in the original down payment.
3. Sure, some employers have student loan repayment assistance, though I don't think it's terribly common. My employer does this for certain employees willing to take hard-to-fill/dangerous jobs. I believe there are tax consequences.
I have two pieces of unsolicited advice: first, if you are fairly certain that you'll be moving in a couple years, then this isn't worth the headache. If moving is only a possibility, well, we can never know what the future holds and we always run a risk that our plans will change in the future. You'd also be taking a risk by not buying a house, that ten years from now you'll still be living in the same place and kicking yourself for not doing this now.
Second, think long and hard about the sentimental aspects that appeal to you about home ownership. Some things (space, location, ability to paint walls and hang pictures, ability to put down roots in a community) don't absolutely require owning a home. Even bigger projects can be negotiated with a flexible landlord and your willingness to invest your own time/money. Other things are inherent to owning property - while it comes with its own risks, you'll always have a certain kind of stability and autonomy that is impossible with renting. Figure out what you're hoping to gain by buying a home and then pursue that.
posted by exutima at 6:29 PM on July 14, 2015
1. I would probably advise somebody in your situation to only buy a house if it was a lifestyle choice, not a financial one. You might save money by buying and you might not; if that was your only concern the risk and the headache of owning property would come down in favor of continuing to rent. However, you say that it's a long-term dream and it seems as though you've thought through the logistics and you can handle the financial committment. If you're able to put down 20% and you know you can realistically and comfortably cover the monthly cost (both mortgage and other associated costs), I'd say go for it.
2. PMI is typically 0.5%-1% of the home's value per year. If 0.5-1% of the home value (the excess you'd be paying in PMI) is less than 2-4% of the student loan value (the extra interest you'd be paying in student loans vs mortgage) then you should put down a smaller down payment and save that money for the MBA. The best option, of course, would be to put 20% down and continue to save, possibly putting off the MBA for a bit, until you have enough to pay cash for that too. You can, in the future, pay a lump sum so that you have at least 20% equity in the home and stop paying PMI; however, this plan can be made complicated if the house is reassessed at a much higher value. For example, you buy a house for $100,000 with 10% down, and a couple years in you want to get to 20% equity. However, if the house is then appraised at $200,000, you'll need to put in a total of $40,000, not the $20,000 you would have needed if you put down 20% in the original down payment.
3. Sure, some employers have student loan repayment assistance, though I don't think it's terribly common. My employer does this for certain employees willing to take hard-to-fill/dangerous jobs. I believe there are tax consequences.
I have two pieces of unsolicited advice: first, if you are fairly certain that you'll be moving in a couple years, then this isn't worth the headache. If moving is only a possibility, well, we can never know what the future holds and we always run a risk that our plans will change in the future. You'd also be taking a risk by not buying a house, that ten years from now you'll still be living in the same place and kicking yourself for not doing this now.
Second, think long and hard about the sentimental aspects that appeal to you about home ownership. Some things (space, location, ability to paint walls and hang pictures, ability to put down roots in a community) don't absolutely require owning a home. Even bigger projects can be negotiated with a flexible landlord and your willingness to invest your own time/money. Other things are inherent to owning property - while it comes with its own risks, you'll always have a certain kind of stability and autonomy that is impossible with renting. Figure out what you're hoping to gain by buying a home and then pursue that.
posted by exutima at 6:29 PM on July 14, 2015
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posted by three_red_balloons at 5:02 PM on July 14, 2015