Author Topic: Keep Renting, Buy, Tackle Student Loan?  (Read 7726 times)

Mike Key

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Keep Renting, Buy, Tackle Student Loan?
« on: February 14, 2012, 12:27:57 PM »
My wonderful wife completed her Masters last May and by seer grace managed to score an excellent position as an intel analyst. But she while doing this she racked up 174K worth of student loan debt.


Scoring her job was a last minute deal for us, and we moved from Va Beach to Saint Petersburg, FL. And while the area seems too flat and is missing mountains for my taste, the housing market here is prime. I've looked at so many houses that seem for the first time in my life realistically own-able. The problem is, rents are going up here. To purchase would significantly reduce our cost of living compared to continuing to rent.


And that's my biggest dilemma. We have no debts outside of that student loan. It's sitting at 6% interest. And the math just gives me a headache every time I run numbers. If we acted antimustachian, we'd have it paid off by the time she is 51 years of age. Oh and we would have made Sally Mae over 200K richer. No thanks.


Currently, our month to month is $2,400 in expenses and there isn't much left to shave off. I was debt free when we got married and I spent the first two years helping bring my wife onboard with my concept of minimalism and the debt free lifestyle. We worked together to pay off 8K of her credit card debts and now this is the last debt we are facing.


My wife earns 80K and we automatically save 15% of every paycheck she makes. My income isn't as steady. In 2010 I made 60K but last year was a disaster for my business. I'm hoping to turn that around this year, so far off to a good start, and hoping I can hit my business goal of 5K every month.


I feel like a lot is riding on me right now. If I can hit my goals and stay on it then I feel more confident in our ability to just throw everything at her student loan.


But I guess my question is, should we keep leasing, or would it be in our best interest to take $20,000 and put it down on an 80K home if we can get a rate under 5%?


Right now our rent is $1200, and unless we want to live to far away from her commute or in a one bedroom apartment we can't really find cheaper in this area that meets our needs. But owning could reduce this cost significally.


Allowing us to focus on her student loan.


We're comfortable with our lifestyle, we're pretty frugal. And thanks to this blog, I am will be selling my Audi to a young man this Friday. I just bought a bike to start riding (I work from home) and we're going to sell my wife's TB and roll ourselves into a more fuel efficient smaller car. And just have one car.


Advice? Thoughts?


Keep renting or buy?

StaceStache

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Re: Keep Renting, Buy, Tackle Student Loan?
« Reply #1 on: February 14, 2012, 12:42:18 PM »
I'm a young Stache myself and don't have many years of wisdom like many Mustachians, but in my opinion it seems like you'd be better off buying. It sounds like you could find a reasonable place (small, well maintained house or condo) for a great price right now. Payments on a 15 year mortgage for 60k (assuming you put 20k on an 80k property) even factoring in property taxes and insurance, would be a couple hundred less a month than the cost to rent. I know that doesn't factor in maintenance costs that you'd have to cover if you owned instead of rented, but hopefully you would be able to pick a good enough property that the risk of major repair/maintenance expenses is low.

Where I live (in a low cost area in the south), it just seems to make much more sense to buy right now than rent. My monthly payment for the nice, new townhouse I own (including taxes, insurance, and homeowner dues) is $635. The townhouse nextdoor is renting for 700. I realize I'm responsible for my own maintenance, but the risk that I'm going to be out of pocket for something is very low. All the while, I'm building my equity in the property, which I hope to pay off ahead of time and eventually make it my own rental.

Seems like it's a good time to buy in Florida with properties at such a low price but rent so high!

Ramses

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Re: Keep Renting, Buy, Tackle Student Loan?
« Reply #2 on: February 14, 2012, 12:42:40 PM »
I would say keep renting.. after all (and I am generalizing here, but based on the harsh reality all around us), most 'home owners' do not own the home, and is very unlikely they'll ever will. Of course there are exceptions, but most people I meet have a never ending mortgage that never goes down because of re-financing, liquidity loans, reverse mortgages, inverse backwards reversed double mortgages and who knows what else. It's a WIN situation for the banks.

But I am getting ahead of myself. My partner and I will embark into an experiment and you could perhaps try it to get your wife's loans paid off in a few years. The plan is we will live in one person's income (the one making the least) and will save every paycheck from the other person's income.
Unless my math is wrong, do this for a little bit over 2 years and her loans will be paid off. The burden of all expenses will fall on you, but this won't lats forever.
The added responsibility of having to be the provider will make you find a more stable and increasing income. That's very similar to what happens when a person has a child and has to provide for him/her.

Just an idea.

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Re: Keep Renting, Buy, Tackle Student Loan?
« Reply #3 on: February 14, 2012, 12:53:35 PM »
Scoring her job was a last minute deal for us, and we moved from Va Beach to Saint Petersburg, FL. And while the area seems too flat and is missing mountains for my taste, the housing market here is prime.

Are you planing to stay in Florida for a long time?  If you don't like where you are living due to flatness, maybe buying is not such a good option.  Remember you'll have to pay closing costs, which can add a few grand onto the house purchase.

Mike Key

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Re: Keep Renting, Buy, Tackle Student Loan?
« Reply #4 on: February 14, 2012, 01:21:35 PM »
Are you planing to stay in Florida for a long time?  If you don't like where you are living due to flatness, maybe buying is not such a good option.  Remember you'll have to pay closing costs, which can add a few grand onto the house purchase.

For my wife's career, yes. At least the next 5 years. We have family and many new friends here. We could be here longer. Although one day I'd like to live some place out west. My wife enjoys her career and her job. Job's aren't my thing, but she's happy.

We where offered a chance at both Colorado Springs and Hawaii. Colorado is more my pace in lifestyle, but the cost of living is nothing compared to here.

Heck, I wouldn't mind if we're hear for the next 10 years. And I'm not opposed to owning out of state properties. As a long term goal is to also own outside the US. But that's another topic and not on the upcoming agenda of what to do with out life this year.

Come the August we will have had to have made a decision about what to do.

But I am getting ahead of myself. My partner and I will embark into an experiment and you could perhaps try it to get your wife's loans paid off in a few years. The plan is we will live in one person's income (the one making the least) and will save every paycheck from the other person's income.

Unless my math is wrong, do this for a little bit over 2 years and her loans will be paid off. The burden of all expenses will fall on you, but this won't lats forever.

The added responsibility of having to be the provider will make you find a more stable and increasing income. That's very similar to what happens when a person has a child and has to provide for him/her.


After making some blunders last year, we actually already do this. We've been budgeting since our move to live primarily off what her income since we know the exact amount she's getting paid every month.

When my income gets factored in, our ability to pay things off quickly becomes more feasible.

Adding kids into the mix in the next two years will be an interesting challenge.

Erin

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Re: Keep Renting, Buy, Tackle Student Loan?
« Reply #5 on: February 14, 2012, 01:27:53 PM »
I think there are benefits to both:

Renting Pros:
Allows you the freedom to move if she (or you) gets a better job, since you don't seem to be attached to the area.
No maintenance or upkeep on a house - landlord takes care of that for you.

Renting Cons:
Spending $$ without a return on investment.
At the mercy of landlord if you are renting a house - landlord could decide to move back in or sell with little notice to you.

Buying Pros:
With many housing markets fully or almost fully bottomed out, buying can be a great investment.
No worrying about landlord paying mortgage on home/selling/moving back/etc.

Buying Cons:
Financial upkeep on home.
High homeowner's insurance/hurricane/flood insurance in Florida.
Not sure if that's where you ultimately want to settle so you may not make $$ back or only break even at sale of home.
Risk of losing equity if housing market isn't at rock bottom.

I don't know what the best choice for you is, I just wanted to list out some of the pros/cons. I bought for the first time 2.5 years ago and am really enjoying it, although I have an uber-handy husband which keeps maintenance costs extremely low.

chrissyo

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Re: Keep Renting, Buy, Tackle Student Loan?
« Reply #6 on: February 14, 2012, 02:32:44 PM »
Considering you seem to have had a pretty dicey couple of years and have a gigantic chunk of debt looming over your head, I'd be very, very reluctant to commit to homeownership. I'd definitely want a couple of years of financial stability under my stache, because ownership isn't quite the same as renting - there are miscellaneous variable expenses that can arise that you need to be confident you can cover without resorting to some sort of rip off variable rate debt. Not to mention you are locked in monetarily and morally to the upkeep of that house and its payments.

I would employ as many of the core Mustachian principles as possible to minimise your outgoings, pay off the student loans as quickly as possible, and then save for and consider buying a home. The Florida housing market has taken such a beating in the last few years, it's unlikely to be on the rise anytime soon, and even if it starts improving, it's not going to bounce back to previous costs immediately.

You may also want to read this recent article, which discusses a different, but somewhat similar dilemma (http://www.mrmoneymustache.com/2012/01/25/reader-case-study-student-loans-or-saving-for-a-home/)

Mike Key

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Re: Keep Renting, Buy, Tackle Student Loan?
« Reply #7 on: February 14, 2012, 02:58:17 PM »
Yeah and it's a struggle for me, as I've already owned a home and sold it prior to moving. And like I stated, I was previously debt free myself. But I married my wife anyways. And we're in this together. Just thought amount is practically a house in and of itself.

Wolf_Stache

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Re: Keep Renting, Buy, Tackle Student Loan?
« Reply #8 on: February 14, 2012, 03:34:01 PM »
Yeah and it's a struggle for me, as I've already owned a home and sold it prior to moving. And like I stated, I was previously debt free myself. But I married my wife anyways. And we're in this together. Just thought amount is practically a house in and of itself.

AH! BUT ! You are forgetting the little house expenses that are COVERED for you if you are renting. 

Example - your water heater EXPLODES.  Do you have enough money to repair the damage yourself? (the washer in the house we were renting did this, and since we were renting they paid for all the repairs and damage)

OR, a pipe starts a small leak in the wall.  You don't catch it until a year later - you have replace all the drywall in that section AND the subfloor and carpet/hardwood.  (this recently happened to my parents who own their house - its costing them $50K to repair it).

I would wait to buy until you 1) have enough of any emergency fund to cover house-owning expenses
2) paid down the student loans to a more managable level.
« Last Edit: February 14, 2012, 03:35:52 PM by GamerGirl »

Mike Key

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Re: Keep Renting, Buy, Tackle Student Loan?
« Reply #9 on: February 14, 2012, 04:26:59 PM »
AH! BUT ! You are forgetting the little house expenses that are COVERED for you if you are renting. 

Example - your water heater EXPLODES.  Do you have enough money to repair the damage yourself? (the washer in the house we were renting did this, and since we were renting they paid for all the repairs and damage)

OR, a pipe starts a small leak in the wall.  You don't catch it until a year later - you have replace all the drywall in that section AND the subfloor and carpet/hardwood.  (this recently happened to my parents who own their house - its costing them $50K to repair it).

I would wait to buy until you 1) have enough of any emergency fund to cover house-owning expenses
2) paid down the student loans to a more managable level.

Thanks, I have a sizable emergency and savings now to cover most of those things. And enough technical how-to/know-how to install a water heater myself, along with repairing dry wall. My old home had PEX piping which cracked and I had to replace a sub-floor and dry wall my kitchen also.

But, I'd rather not be doing those things also.

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Re: Keep Renting, Buy, Tackle Student Loan?
« Reply #10 on: February 14, 2012, 08:04:03 PM »
The housing market has a few years left of good prices, you don't have to worry about rushing to buy now at low prices.  You won't miss it.

We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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chrissyo

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Re: Keep Renting, Buy, Tackle Student Loan?
« Reply #11 on: February 15, 2012, 03:33:18 AM »

Thanks, I have a sizable emergency and savings now to cover most of those things. And enough technical how-to/know-how to install a water heater myself, along with repairing dry wall. My old home had PEX piping which cracked and I had to replace a sub-floor and dry wall my kitchen also.


If you have a sizeable emergency fund and are renting, you can probably decrease the size of your e-fund and re-purpose the excess toward debt repayment.

Mike Key

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Re: Keep Renting, Buy, Tackle Student Loan?
« Reply #12 on: February 15, 2012, 06:51:01 AM »
If you have a sizeable emergency fund and are renting, you can probably decrease the size of your e-fund and re-purpose the excess toward debt repayment.

I may do that, especially since we have always been saving 15% of every dollar that we earn, and since we continue to do that, the need to maintain to the emergency stash seems more like extra cash.

SpendyMcSpend

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Re: Keep Renting, Buy, Tackle Student Loan?
« Reply #13 on: February 15, 2012, 08:34:32 AM »
My opinion is that you should save up a six month emergency fund of your expenses due to the irregular nature of your income.  Also, you two are young.  I would only buy if you plan to stay in the area for awhile because it will limit your options on jobs in the future.  After the emergency fund is in place and you have set up funds for house repairs and a few furnishings, then I would buy. 

Mike Key

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Re: Keep Renting, Buy, Tackle Student Loan?
« Reply #14 on: February 15, 2012, 08:53:01 AM »
My opinion is that you should save up a six month emergency fund of your expenses due to the irregular nature of your income.  Also, you two are young.  I would only buy if you plan to stay in the area for awhile because it will limit your options on jobs in the future.  After the emergency fund is in place and you have set up funds for house repairs and a few furnishings, then I would buy. 

Sorry, did you read the thread before posting?

lecodecivil

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Re: Keep Renting, Buy, Tackle Student Loan?
« Reply #15 on: February 15, 2012, 10:22:06 AM »
Seems to me that this is a perfect time to consider what you're paying for each loan. I'm jealous of that student loan interest rate, my student loans run from 6.8% to 7.9% interest.

If you take out a mortgage at 4% (hopefully), you then have regular payments on student loans at 6% interest and a mortgage at ~4% interest. Because you will be splitting your payments between two loans, it will take longer to pay both of them off and you will end up paying more total interest.

On the other hand, if you continue to lease you're not building equity in a house, but at the same time you can pay down the student loans, which are at a higher rate, so you would be (in Mustachian terms) earning a 6% return on every surplus payment you make on student loans. At the same time you're not paying a mortgage, so you can knock the student loans out much faster - saving a lot by avoiding the higher interest in the long run. Then when the loans are gone ASAP, you can go for a house and because you won't have to pay loans at the same time, you can knock the mortgaged amount out faster as well - saving yourself from paying a substantial amount of total interest in the long run.

You mentioned that the cost of rent is rising right now, so with this approach I'm sort of assuming that the cost of increased rent will still be lesser than the long-term interest. Plus, I think if you really focus on those loans with the system you've worked out - which seems really efficient - then they'll disappear relatively quickly and the rising rent won't be an issue for long.

This is my first post here and I'm pretty new to Mustachianism, so hopefully this makes sense and I'm not giving bad advice. Either way, good luck!

alex

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Re: Keep Renting, Buy, Tackle Student Loan?
« Reply #16 on: February 15, 2012, 10:50:55 AM »
I'll be moving to Florida (West Palm Beach) in the next few months and face the same question.

My wife also has a lot of debt but we'll be in a pretty high income bracket and I think that the mortgage interest deduction, on top of the low home prices really makes buying a house worth it.

Does anyone have any thoughts on how the tax deductions should impact the decision?

MEJG

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Re: Keep Renting, Buy, Tackle Student Loan?
« Reply #17 on: February 15, 2012, 03:25:40 PM »
If you can really find a house for $80,000 and can put 20% down (or even 100,000 with 20,000 down) and you are confident in staying for 5+ years and your own handyman ability (which it sounds like you are) I say buy.

I might wait for 6 months - 12 months so you really know you can stand living there / know what neighborhoods you want to look in.   Then I'd look for a 3 bed 1/2 bath and once I was in it I'd rent one of the rooms out.    If renting is that much more expensive your cash flow will change significantly once you've bought - and that will allow you to shovel more money into the loans.

Mr. MEJG and I are planning on waiting it out one year before going this route (at least) and will more likely wait until the student loans are down to $50,000 because of our situation.

Mike Key

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Re: Keep Renting, Buy, Tackle Student Loan?
« Reply #18 on: February 15, 2012, 03:32:21 PM »
If you can really find a house for $80,000 and can put 20% down (or even 100,000 with 20,000 down) and you are confident in staying for 5+ years and your own handyman ability (which it sounds like you are) I say buy.

I might wait for 6 months - 12 months so you really know you can stand living there / know what neighborhoods you want to look in.   Then I'd look for a 3 bed 1/2 bath and once I was in it I'd rent one of the rooms out.    If renting is that much more expensive your cash flow will change significantly once you've bought - and that will allow you to shovel more money into the loans.

Mr. MEJG and I are planning on waiting it out one year before going this route (at least) and will more likely wait until the student loans are down to $50,000 because of our situation.

We actually love where we are renting now. The location is so far perfect.

There are homes, and one that is one street over listed for 72K that is a 3 bedroom 1/2 bath, that's been renovated. The housing market here is so tempting because everything is mind-boggling affordable. I suppose the downside is that a lot of people are out of work, and many more can't even get a loan. Rates are at an all time low.

I think we are going to sit and think this over and make a final decision come June 1st. But tackling that loan is very important to us as well. And we don't want to jump into anything foolishly.

MEJG

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Re: Keep Renting, Buy, Tackle Student Loan?
« Reply #19 on: February 15, 2012, 04:26:43 PM »
The location is so far perfect.

There are homes, and one that is one street over listed for 72K that is a 3 bedroom 1/2 bath, that's been renovated. The housing market here is so tempting because everything is mind-boggling affordable. I suppose the downside is that a lot of people are out of work, and many more can't even get a loan. Rates are at an all time low.

In this case I would have a really hard time passing it up.  Especially if you're ok with renting a room.  72K with 20% down, 15 year 5/1ARM at 3ish% you're looking at about $400 a month.  Rent a room for $400-450 a month....  Pay $600-700 into the loan a month to build some equity and still be able to pay more into the student loans.  I don't know, thats a tough one to pass up.

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Re: Keep Renting, Buy, Tackle Student Loan?
« Reply #20 on: February 15, 2012, 05:53:13 PM »
taking on an additional loan to buy a house may seem contrarian to MMM's style, but when the discrepancy between rent ($1200) vs mortgage ($400) is so wide, i think even the most frugal of mustaches could see the benefit of an extra $800/mo, despite the increased dept. 

also, considering the dismal florida real estate market, it's possible those 80k houses could be had for less.  if it was me, i would find several suitable homes and put low offers in on all of them and see if one stuck (altho i've never bought a house myself so i could be wrong).

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Re: Keep Renting, Buy, Tackle Student Loan?
« Reply #21 on: February 15, 2012, 06:23:55 PM »
Have you run the numbers with taxes in mind? May not hurt to run this through TurboTax-type software (if you've all ready paid for it to file this year) to see what numbers you come up with based upon the variations of deduction available to you based on the decisions you make.

If she's a new analyst w/ DoD/govt then she's likely a GS-9ish? Point being, the interest is tax deductive if she's making less than 75k (not sure what the number is for married and filing together). Also given Florida and the Tampa/St Pete area's foreclosure rate is it possible to get a dirt cheap foreclosure? If so, the low cost (with mortgage interest deduction) plus the tax deduction on interest in student loan may work in your advantage, then start knocking down the student loan. Five years from now if you decide to move, you can rent it out for income unless/until you decide to sell.

Also, has your wife confirmed/denied tuition reimbursement is an option with her employer?

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Re: Keep Renting, Buy, Tackle Student Loan?
« Reply #22 on: February 15, 2012, 08:23:06 PM »
Have you run the numbers with taxes in mind? May not hurt to run this through TurboTax-type software (if you've all ready paid for it to file this year) to see what numbers you come up with based upon the variations of deduction available to you based on the decisions you make.

If she's a new analyst w/ DoD/govt then she's likely a GS-9ish? Point being, the interest is tax deductive if she's making less than 75k (not sure what the number is for married and filing together). Also given Florida and the Tampa/St Pete area's foreclosure rate is it possible to get a dirt cheap foreclosure? If so, the low cost (with mortgage interest deduction) plus the tax deduction on interest in student loan may work in your advantage, then start knocking down the student loan. Five years from now if you decide to move, you can rent it out for income unless/until you decide to sell.

Also, has your wife confirmed/denied tuition reimbursement is an option with her employer?

Reimbursement is only an option if she goes on to get another degree. She's actually with a private company and is the equivalent of a GS11 but in her words does most of the work of a GS13, lol.

I like to say I married up. She had a internship with the DIA and almost took a job at CENTCOM but this job turned out to just offer better everything, and the companies contract is very secure.

All I can say is I can't say much about it.

I appreciate that advice, I'm going to look into it. I'll have to run the numbers with my accountant, which is code for "My mother is a CPA/Accountant" :)

Mike Key

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Re: Keep Renting, Buy, Tackle Student Loan?
« Reply #23 on: February 24, 2012, 09:08:10 PM »
So here is my plan.

The end of march will be our 6th month here. I am going to give us 6 months to determine if this is where we see ourselves for the next 10 years, and how my wife's career looks. If this is the case and we feel positive about staying put, we will get a 1yr lease. During this time we will save a 20% deposit within the first 6 months, while putting any additional income towards the student loans. We'll also be spending time looking at homes and researching the neighborhoods in and around the city.

We have excellent credit, and we have a few avenues we could go with lending and feel confident in a 4% or lower mortgage on a home under $80,000.

I'd like to start the process (if everything in life magically aligns itself with my ideas) around the 7-8th month of our lease. Hopfully closing around the 9-10th month of the lease end.

The goal then is to move in, pay off the remaining student loan, live in our home for 2 years and then convert to our first rental property moving to another home and repeat.