Author Topic: 1st time buyer  (Read 2581 times)

DocLago

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1st time buyer
« on: July 02, 2013, 05:01:05 PM »
I posted this in the ask forum but after looking around a little bit this seems more appropriate?  Maybe not?  I'll go ahead and say yes!.  Rent or buy?

So a little background.  I'm a 28 year old male, currently a specialist in the U.S. Army.  In February 2014 I will be concluding my contract and will not be reenlisting.  At the conclusion I will be moving to Pennsylvania in order to begin nursing school.  I currently have plans in the works to make sure that upon leaving the Army all debts will be paid.  Car note will be paid off early february, credit cards are currently at 250$ on zero interest and will be paid off by October(can pay now but there is no difference between payin now and over the course of the next few months).  I am already paying double my monthly payment on my car in order to have it finished by February.  And from February 27-April 27 I'll still be getting paid full pay and benefits.

The conflict I have mainly comes up with housing.  Based on the financial projectons I have made on February 27th when I begin my drive up north I will have 15k in a savings account and roughly 5k in cash/checking.  The nursing school I will be going to is a satelite school from a major university so there is no housing/dorms.  School doesn't start until September 2014 so from February - September when i begin nursing school I will be free to do what I choose.  The plan is to work as an EMT which means a severe pay cut but at least income.  And upon beginning school will be paid ~1000$ a month for housing plus full tuition from the military.

My parents own 2 houses, 1 a mile from the school, which they live in.  And a house about 10 miles from the school.  They have openly given me a few options, 1. Live in the house with them, they have a spare bedroom as well as a basement that is livable. 2. Rent the 2nd house. 3. Buy the 2nd house.  They wouldn't expect rent if I was to move in with them on option 1, and I actually doubt they'd accept it if I offered, but I don't know how I feel about being a 28 yo leaving in the basement/spare bedroom.  Option 2 I'd probably be looking at 500-600 a month for rent.  I believe they paid 55-63k for the 2nd house but my father has done many things to enhance the house so in theory it is worth 75k.  Again I'm sure my father would sell it to me for what he paid, but after he has put in a few K and many man hours I don't feel right about low balling him on that either.

School will be paid for for 3 years and I'm looking at being at the school for 2-4 years.  So financially speaking which would be the better option?  Live for free, rent or buy.  I like the property they have on the 2nd house, and the house is livable and a nice little house.  Good for a single person or a family starting out if things go that way in the near future.  And my father is a very handy person so any maintenence can be done on the weekend with me and him.  It's close to schools, parks, a small town.  With V.A. and the other military benefits I feel like all the options available to me are viable.  And a 30 year VA loan on a 70k property is almost manageable scrounging through couch cushions.

Any help would be thankful, I'm 28 years old and very good with my money and don't spend crazy stupid like most of the people I know.  However, when it comes to the big ticket decisions y'all are smarter than I am for sure.  Thanks in advance.

fiveoclockshadow

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Re: 1st time buyer
« Reply #1 on: July 03, 2013, 07:50:10 AM »
Very interesting case.

My first inclination is to say when you are a student if your family is nearby live there (assuming you can tolerate your family, and it sounds like you have a good relationship).  This can work well when you are a bit older and have already had your "away from home" time, which fits your case.  My brother actually did this during his masters after being away for his BS.  A friend of mine actually did this during his first few years of employment (that paid extremely well actually) after being away for college.  It can be an enormous savings vehicle early in your career.  When you are young savings make the biggest difference because money has the highest opportunity cost early in your life (it will grow for longer) and typically money has the highest marginal utility as well (your income is low early on).

Obviously I think most people don't want to move back in with their parents, and for your generation it has become an almost cliche mark of "failure".  But you aren't a spoiled kid who got a Medieval Art History degree on $150K of student debt and now lives in the basement holding out for a job that will never come.  You are a successful person who has already made a difference and is making excellent and pragmatic financial decisions.

I'd hesitate to buy in your situation, it seems like you'd be selling within five years.  Keep in mind the high transaction costs of real estate. Though if buying from your dad these could be greatly reduced, and factor that in if you do purchase from him - typically he would pay a 6% real estate commission that the two of you could avoid so there is money in reduced price for the two of you to share guilt free.  Remember, though, that these are a seller responsibility and you will likely pay them when you sell to a third party later.  You do probably have some good benefits in mortgage options coming out of the service, but also keep in mind for the next few years you will have vanishingly small income and so you will actually get no mortgage interest deduction (i.e. you will be taking a standard deduction, so property taxes and mortgage interest really aren't deductible).  That's going to tilt the rent vs. buy decision a bit more towards rent compared to a higher income earner with a more expensive house.  State income taxes are also deducted on Sched. A so how much of a true mortgage interest deduction you get is dependent on how much state income tax and property tax you pay.  If you aren't familiar with standard vs. itemized deductions now would be a good time to become familiar with that topic, low income folks buying lower priced homes often get sold on buy vs. rent because of the "fact" that mortgage interest is deductible when really for low income/low house price this is often not true at all.  It turns out the mortgage interest tax deduction is actually a regressive tax, that is it benefits high income earners much more than low income earners.  Despite that fact real estate industry members often try to sell it as a benefit to low income earners.

Also keep in mind the life transitions going on.  I'm sure entering the Army was a huge change.  Leaving it likely will be as well.  Being a student is a different life and mindset from having a job, so you will have another transition in a few years.  While I haven't done the military service thing myself, I have yo-yo'd through a fair number of transitions from student, to over worked and highly paid employee, back to student, to government job in the middle of no where, to married with two decent incomes owning a big house, to renting a townhouse with two excellent incomes, to a too large house in preparation for a family with two excellent incomes.  Each of these transitions was an opportunity to change my housing situation as there were so many other changes going on that it is just natural to adjust to a new housing situation.  With that in mind you might consider whatever you choose now is going to be different from what you will chose when you finish school.  Living with your family might be just the right kind of change for a few years and it is of course economically advantageous.  I also know that when my brother lived at home it strongly encouraged him to get out of the house a lot.  As a new student just coming out of the army you might very well want to be spending more time out in the community at large, finding nice external study haunts and groups.  So maybe a room at your parents would be just fine since you will be doing little beyond sleeping there...

Anyway, you seem to have your head wrapped around the various options well and they are all pretty sound.  I'd put my vote in for stay at home, but that of course depends a lot on how you feel about that and you will be the best judge.  It is clearly the best economic decision, but so is living in cardboard box in the park.  There are limits.

lhamo

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Re: 1st time buyer
« Reply #2 on: July 03, 2013, 10:02:19 PM »
I'd move into the basement (slightly more private space, assuming there is a separate entrance), which will reduce your living costs to almost nothing, even if you pay a bit of rent/cover your own food/utilities.  You'd be within easy walking/biking distance of school, so no need for a car, reducing costs further.  Focus on getting through school in 3 years, while it is fully paid for.  Stash as much cash as you can from your living stipend -- maybe also work a bit on the side so that you can put some of your cash into a Roth, but don't work so much that it delays your completion of school beyond what would be fully covered.  If your parents are interested in acquiring more rental properties, maybe you could work for them and learn rehab/property management skills in the meantime.

If you REALLY can't stomach the thought of living with your parents, then renting their other house is a good second option.  Your costs will go up, though.  I wouldn't buy now.  They aren't going to sell it out from underneath you, after all.  I bet they will still give you a good deal, and waiting ensures you don't get money sunk into something you will want to unload in less than 5 years. 

Awesome plan, BTW.  You are going to end up very wealthy.  And thanks for  your service.   

DocLago

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Re: 1st time buyer
« Reply #3 on: July 05, 2013, 12:20:19 PM »
Appreciate the input, I get along well with my family but there is just that stigma that I don't like.  At this point it might just be too soon to evaluate everything.  Thanks again, will keep evaluating my situation as time passes.

mpbaker22

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Re: 1st time buyer
« Reply #4 on: July 05, 2013, 12:47:57 PM »
What is the situation on the 2nd house?  Is it rented?

If he can rent it out and you live in the basement/pay small rent, your family could be receiving 2 rent checks making them better off, and you would be better off as well.  That seems like the obvious financial decision.
If he has no plans to rent it out, then living there would work just as well, but why would he be holding it?

DocLago

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Re: 1st time buyer
« Reply #5 on: July 05, 2013, 01:18:58 PM »
He has the intention of renting it out, and it is currently occupied for minimal rent to a family that lost their house to a fire.  About 500 a month, not really something he'd notice coming in but better than it sitting there and him losing money on it.  They are currently planning on being out by the end of the year. 

He bought it when he moved back to his home town and was waiting for my mother to join him and then when she did they bought a bigger house for all her "stuff".

mpbaker22

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Re: 1st time buyer
« Reply #6 on: July 05, 2013, 02:53:42 PM »
I'd suggest a talk with the parents.  See what they prefer.  Maybe they want to be close to you and you don't care.  Maybe they don't want you at home or don't find it worth the extra money ... etc.
There's so many variables, I'd make it a group decision as long as everyone is open about what they want and the expectations.