Case Study: Should I Purchase a House or Continue Renting

[Nerdly]

Thank you in advance if you read the entire situation!

I had never thought of purchasing a house until yesterday. In fact, I have always been against being a homeowner at my age and my financial situation, but now I am questioning my thought process and want some input. My girlfriend and I have been looking for apartments for the past 3-4 months. I live on my own, she lives at home (went to private college and is focusing on paying off loans, parents are supportive but are essentially letting her know it’s time for her to live on her own). The issue we are having is finding a place that allows pets. I have two cats, she has a large boxer (I know, pet roles appear to be flipped). Most apartments in our area do not allow dogs over 25lbs, and we have only found one or two places (dumps far away from our jobs) that allow large dogs. These places are typically $900 per month after taking into consideration utilities. On top of that, there is usually a $25 per pet, per month expense and an additional security deposit equal to the rent. So overall, let’s say if we COULD find a place, it will be about $975 per month after pet expenses and assuming we somehow get all of our security deposits back at the end of it.

At the same time, my girlfriend’s parents have been looking to buy an investment property in the area and the idea came up that they will buy a house and we will rent it out for essentially cost + $100 per month. With a $100,000 house, we estimated $700 would be a fair price in case anything needed to be fixed. With estimated utilities of ~$200, we are at about $900. Note that you can actually get a decent house for $100,000 in this area. Another additional detail is that they would be taking out a 20 year mortgage or paying it with cash depending on the situation.

Here is my current situation: I am 25 year old CPA and have been steadily employed since I graduated college. My girlfriend is 24 and also a CPA and has been steadily employed since graduating. If I bought a house she would be living with me. She would be paying all utilities of the house and furnish it. The mortgage would be in my name.

Below are my expenses taking into consideration the last 6 months of data:

Income
Yearly pay: $57,500 excluding bonus (girlfriend is at ~$50K, but double my student loans and you can get a picture of where she is at)
401(k) contribution: 6% traditional to get the 3% employer match.
H S A: $200 per paycheck (just started at this employer a month ago, trying to max it out before year-end). Next year it will be ~$130 per paycheck to max it out.
After tax, 401(k), H SA, take home pay: $1,340 per pay check.

Monthly Expenses
Rent: 1 bedroom 1 bath $625. Would be $675 if they find out I have two cats…. This is about as cheap as you can get in the area if you want a garage and washer and dryer in unit (garage I feel is necessary for Wisconsin winters). Base rent in the area excluding garage and W&D would be ~$550.
Renters insurance: $7
Heat: Included
Electric: $55 (I just got my bill today and it was $43; however, I have had a few $65 that mess with my average)
Water: $35
Total Rent: $722 (note this excludes my girlfriend and her dog as he isn’t allowed at my current apartment)

Internet: $43
Gym: $25 (could get rid of and workout at my new employer’s facility, but still enjoy using the YMCA for basketball, indoor track, etc)
Groceries: $100 (Lots of turkey sandwiches, chicken & broccoli, and cereal)
Household Items: $20 (I live simple, for example until I met my girlfriend and used her college furniture, I did not have any living room furniture because I didn’t want to spend money on it)
Gas: $120 (I currently commute 10-15min to work. Nearest grocery store is about the same distance. Girlfriend also lives about 15min away... suburban Wisconsin living). Additionally, my family lives about 2 hours away so this includes the average with those occasional drives).
Pets: $40
Dining: $30 (girlfriend and I rarely dine out, maybe once every few months, but occasionally get ice cream or something)
Entertainment: $30 (usually ends up being work happy hours)
Alcohol at home: $40 (gf enjoys wine, I enjoy my beer)
Clothes: $15 (average for the year)
Audible.com: $15 (I enjoy listening to business books while ironing, doing dishes, working out, etc)
Car Insurance: $53
Car Expenses: $20 (average of oil changes, license renewals. The car, 2007 Ford Fusion, has 45,000 miles and no major repairs appear to be necessary in the near future based on my last inspection)
Misc: $100…. I have a couple websites, wedding/birthday/family gifts.
Minimum student loan payments: $508… however, I am typically paying $1,100 on average.

So if I pay my minimum loan payments, my current take home pay after 401(k), taxes, H SA, and expenses based on two paychecks is ~$800. I’ve been splitting this between extra loan payments and putting in my emergency fund.


Balance Sheet (end of May)
Assets
Total Cash (checking and emergency fund): $5,800
Investments account: $5,700
401(k): $10,300
Health Savings Account: $400

Liabilities (yes I deserve a punch in the face for the student loans)
Student Loan 1: $48,000 at 5.49% variable. I refinanced 3 variable loans between 8.75% and 9.75% into this last year. Interest only for 4 years (I am about 8 months in) which is ~$225, and then $500 per month after that for 12 years I believe. I am averaging payments of $800 on it for the past 4 months. My plan is to attack this one as fast as I can while still maintaining a safety fund.
Student Loan 2: $4,800 @ 3.15% fixed, est 9 years remaining with minimum payments of $54. Paying minimum right now.
Student Loan 3: $10,600 @ 3.25% variable, est 13 years remaining with minimum payment of $83. Only paying minimum.
Car Loan: $7,480 @ 3.09% fixed. Could have paid off, but focused on higher rate student loans. Minimum of $146. KBB of the car is ~$8,500. Originally cost $12K, put a $4K down payment on it. 4.5 years remaining.

Net Worth
Total assets $22,200 less total liabilities $70,880 = ($48,680) est net worth.
Yes it looks bad, but considering my net worth at 1/1/14 was (~$62,500), and it is now (~$48,680), I feel good about the progress I’ve made (for those of you doing the math, during this time frame I received a bonus, a tax refund, and a PTO payout).


About the potential house
My credit score is in the 720-740 range.  Assumed a 4.5%, 30 yr fixed mortgage.
Sale price: $100,000 (assuming any reduction in negotiations will be eaten by closing costs)
Down payment: $10,000
Loan: $90,000 loan @4.5% (also note, the gf’s parents may be willing to loan me a portion or the entire amount for below market rates which could also help get get out of PMI).

Cost of monthly ownership excluding any repairs and replacements:
Mortgage: $456 based on mortgage calculator
Taxes: $181 based on 2013 property taxes
Gas & Electric: $150 (12 month average given from utility provider)
Water: $50 est.
Insurance: $40 est.
PMI: $40 est.
Total: $917

Rent (see above for details): $722
My portion of house: $717

House Condition: New kitchen appliances, new windows, no major repairs. Girlfriend bringing washer and dryer. Water heater and furnace in decent condition.

The question?
So what should I do? Stay apartment renting? Let girlfriend’s parents purchase and then rent and bring in some maybe awkward conversations about fixing/payment of certain items, etc (sounds like a mess to me)? Or purchase this house? What can I cut back on? Any options I didn’t think of? Overall, it is depressing over the years to see how much I have spent on rent and have nothing to show for it, but at the same time, I’m not super excited about having more debt and potential large expenditures due to being a home owner.

We plan in staying in the area for a few years, we both like our jobs, but also would eventually like to make this a rental home (if possible) and move somewhere warmer :)

Another idea, if I purchase this particular house, I would be walking distance to work. Getting rid of the car could be a reduction in monthly expenses of ~$320 (although I would need to participate in gas for the girlfriend’s car). It would also leave me more vulnerable if something happened with our relationship, although I am 99% sure we will get married.

Thank you in advance!

[Another Reader]

In your shoes, I would not involve the gf or her family in buying a house in any way.  That's fine AFTER you get married, but could become a huge problem if you break up.  If any houses are bought, you should do the buying, on your own. 

Buying might make sense, as long as you plan on getting a room mate if the relationship ends.  Buying the house and selling the car is a decent plan.  However, as CPA's, is there any way of boosting you incomes?  You have around $63k in student loans and the gf has twice that, for around $190k total.  The interest rate on the $48k is a wild card, and that loan could turn into an alligator fairly quickly.  I would be extremely concerned about these loans and would treat them as a hair on fire emergency.  You also need to ramp up your 401k's and add IRA's to the plan ASAP.  So my plan in your shoes would be to increase the income.

[Nerdly]

I will be having the house in my name, and the only thing I may use the gf's family, or my family, for is a small loan, less than $10,000, to get out of PMI if I do purchase the house.

I talked with my gf today and I mispoke, I thought she had double my loans, but she is at about $80K. She has paid off $20K in the past year while living with her parents.

Increasing our income is harder said than done. I was making $50K and recently changed jobs to be at $57.5 with a potential of ~$5K annual bonus. It is nice that we are both in a profession known for decent annual raises and spot bonuses. And yes, the $48K loan scares me, but I have actively been throwing money at it and refinanced it from 9%+. When I was refinancing my student loans, my old roommate jokingly said he would give me a $20K loan at a lower, fixed, percentage, but I didn't like the idea of owing my roommate. It has been about a year since this conversation, but are these options you would consider? Getting $20K at say 4% fixed for 15 years or something to get rid of the variable portion?

The situation sucks, but I am trying my best to be creative and find solutions. For example, I began donating plasma last month, and until a mishap where I bruised horribly and had arm pain, I made $100 in less than 3 weeks. I know it's not a lot, but something I am trying to do to make everything work. If there is any silver lining, it is my situation has taught me to be fairly frugal and to find this forum and learn even more. Additionally, my girlfriend does one on one teaching a few days a week for ~$30 per hour which is another way we are attempting to pay off loans faster.

[Another Reader]

You are not going to reduce your expenses that much, as you are already fairly frugal.  Getting rid of the car would be around $250-$275, depending on how much more in gas goes into the gf's car.  That's a help, but some side income (not selling plasma) would be the best way to hit the loans.  Any ideas on how to generate another $500 or more net a month between the two of you?

Also, coming up with that $10k down payment and having the reserves a lender would require might be stretching a bit right now.  Have you sat down with a loan broker or a bank yet to get pre-qualified?

[rmendpara]

Nerdly:

I think the house makes sense if you have a reasonable chance of staying 5+ years. You mentioned moving to someplace warmer, which would make you a long-distance landlord. Figure a property manager, plus all the normal costs of owning (assuming it's not paid off yet), would the property still be cash flow positive? If yes, then I'm okay with purchasing a $100k property. If not, then it may not be worth it. Right now, cost of rent and mortgage is close, so the only way you benefit by owning is if you live there for a while or are able to rent it out and stay cash flow positive.

Your budget seems reasonable. A few items could potentially be cut and you could save a few thousand per yr, but it's not going to make or break anything.

I'd just make sure that as the raises come in, just be sure your lifestyle costs don't inflate. I'm a CPA as well, and you both have great earning potential, so I'd focus more on increasing income than decreasing expenses.

Hopefully within 5 years, assuming 5% raises, your combined income could go from $107k today to $136k, which would be potentially enough to work toward paying down your $48 loan and gf's $80 loan.

Just be sure to keep the big expenses in line (housing and transportation) and keep chipping away at the debt.

Good luck!

[Cpa Cat]

I don't really see a problem with renting from your girlfriend's parents. Maybe I'm just naive and optimistic - but if the rents are comparable and the property is in an ideal location for you, why not?

Worst case scenarios:

1) They are bad landlords. So you bite the bullet and make a few emergency repairs - nothing you wouldn't be doing if you bought your own house. And then you give them notice and move out.

2) You are bad tenants. The dog chews up the wall and stains everything with its Boxer drool, the cats pee everywhere. You punch holes in the walls. As long as you pay your rent and accept responsibility for fixing any damage that you cause to their house, then this is basically under your control. If you know you're a horrible tenant, then don't rent from them.

3) You and the girlfriend break up. They're happy to see the back of you and you move out. -You- would be the one to move out.

It doesn't sound like the right time for you to buy. You're not married, you've never lived with you girlfriend (I'm assuming), you're still working on your debt. You and your girlfriend are both highly mobile and should probably preserve that mobility early in your careers by not buying a home. AND rentals in your area suck due to your pet situation. Renting from the parents is a happy medium - best case scenario is that it works out great; worst case scenario is highly manageable.

[ampersand]

Nerdly,

I think overall you're in a decent position. Here is my advice take what interests you and discard the rest.
-You said girlfriend, not fiancee or wife, which means you should leave her completely out of this financial decision. If she moves in and helps, great, but if not you need to be able to cover it. This puts less pressure on her, and covers you should the worst happen.
-You are looking at a Rent vs. Own question. Renting from her parents just happens to be an option if you do decide to rent.
-As a long term choice, Owning generally supersedes renting because of equity. Look at this in terms of Networth, not just monthly payments.

Would the bank finance to you at 4.5% for 90k? If so I think its the right move using the following assumptions.
Your income/employment is secure.
You don't plan on moving for at least 5 years.
Something screwy doesn't come down the pipe.

The down side to owning is higher default risk due to high debt if something were to go wrong/if you moved. 

Also, I'd seriously think about borrowing the 20k from your roommate at a lower fixed cost then your current variable rate. This could also be your down payment money. Purchasing a house is a great hedge on inflation, and an opportunity to invest in real estate.

My last thoughts: If you felt like pushing the envelope of normal... Your inlaws spoke about purchasing rental property. Have they thought about multi-unit or duplex? If they purchased multi-unit you could become the live in Mx guy. This gives them security to purchase rental property, and you the chance to have lower cost housing by pushing the mortgage payment requirements to other tenants. Zillow has a multi-family filter if you wanted to check your area.

Best of luck!

[Thegoblinchief]

I would stick with the $600 apartment if and until you actually get married.

Not sure which part of WI you are in, but housing values are definitely still depressed, with very little recovery since the bubble. Yes, you build equity, but transaction costs and maintenance eat up a ton of this "advantage". I'm a homeowner and love having a yard, but it definitely wasn't a financially brilliant decision.

How far are you from your work? Year round biking in WI is not only possible, but quite enjoyable. I did 20 miles round trip all through last winter, which was about the worst winter in recent memory.

[darkadams00]

1) Not married but planning to make a housing decision/obligation based on her inputs (utilities/furniture/appliances/his and her pets--her pet is the costly one/possible in-law loan)
2) 25 year old professional with reasonable income and mobility to other locales (you indicate warmer locales are preferable to your current location)

I've tried to advise my college-age kids never to make major life decisions based on an unattached GF. People change their minds quickly, and any major choice that sits on such a questionable footing has a high risk of collapsing. In the event of a breakup, you would have to assume utilities, buy your own furniture/appliances on a short notice, and repay a loan to folks who you don't even really care to do business with any longer (unless the breakup is very amicable). A breakup might even make you decide to move to a warmer climate that much sooner. (...and do you really want to be a landlord from 1000+ miles away?)

Ultimate GF test--offer to buy the house without the loan from her parents as well as all of the furniture and appliances, i.e. set up housekeeping in your new home out of your own pocket. Then ask her if she would give you cash monthly for all of the things she would have bought. If she leaves you later, she loses the cash and has no claim to the items since she only gave you a cash gift, i.e. rent, on the use of those items. If you two marry, then it's a moot point assuming shared expenses anyway. Sounds tough, but I would either man up for my own expenses and let her move in/move out at will, or I would tie the knot. You would also find out quickly if she had the funds to buy all of that new furniture and those new appliances, or if she just planned to put them on credit---additional bad news that should be considered for the marrying question as well as the housing question.