Author Topic: Advice Needed: Continue to Rent or Buy  (Read 1667 times)

outside

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Advice Needed: Continue to Rent or Buy
« on: August 22, 2014, 03:56:30 PM »
First post here!  Spouse and I live in a college town with a strong rental market.  I will be finishing up a grad degree in 2-3 years and we will almost certainly need to move out of state at that time.  We are thinking of buying a single family home or a single family home plus a small studio or other rentable space.  The idea would be to live in it for the next two years or so, then rent it out when we move out of town.  If we had rentable space, like an attached studio, we would also rent that space while we occupy the unit and put that money toward the mortgage.  We aren't sure if this is a great idea or a horrible idea.  Here are our parameters.

We currently rent for $820/month but our place is too small.  We would like to continue to pay about that much or maybe just a little bit more on a mortgage.  We can put around 15k down, leaving a reasonable cushion for improvements and emergencies.  We are looking at properties in the 150-175K range that would rent today for around $1200-1300/month.  Our monthly payment including taxes and insurance would be around $900.  This is much lower than it should be in 2 years or so, due to the current student status.  No other debts.

I think the math for return on the rental purchase works well, especially if rents continue to rise.  Specific properties vary, but each seems to be in line with recommended rental cash flow and cash on cash.  Question is, would we set ourselves up for a lot of trouble getting a mortgage to buy a new place when we relocate?  Are there any other factors that I have not taken into account?  Would we be better off sucking up and paying rent, even if we have pay a bit more for a larger place?

Thanks for any and all advice.  Can provide additional info if needed.
« Last Edit: August 22, 2014, 05:06:52 PM by outside »

waltworks

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Re: Case Study: Continue to Rent or Buy
« Reply #1 on: August 22, 2014, 05:08:43 PM »
Google 1% rule, read some other rent/sell/buy threads and come back. Your plan probably is a very bad one from a financial standpoint (properties don't meet basic decent-rental thresholds for price/rent, you have very little money to cover emergencies/repairs/etc, you're about move out of state, no landlording experience, etc) but if you can find a smoking deal on a place you might be able to make it work.

-W

outside

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Re: Advice Needed: Continue to Rent or Buy
« Reply #2 on: August 23, 2014, 09:24:43 AM »
As for money for repairs, etc. we have an additional 10K liquid that would not be touched for a downpayment.  The landlording issue I am less concerned about.  First, we have 3 years to learn if we want to do it ourselves, but since we would be moving out of state, we would most likely hire a property manager or a local agent to handle in person work and inspections.  Our friend is a property manager for several local properties, and I have 2 other highly rated recommendations if that does not work. 

As for the rest of the numbers, I am aware that the properties do not fit the 1% rule and so in that sense the situation is bad.  My question then is how are people making money on these properties?  We looked at several duplexes that would rent for $700 each, putting the ideal cost at $140,000.  These are selling in the 170K range,  usually just short of asking, and a few that we looked at were not even finished inside (half remodeled no kitchen, no shower, etc).  I have not seen a single residential property that is priced in that range yet they are being bought and rented.   

We got some other advice that if we planned to live in the property for 3 years, rent for 2, and sell at 5 or so that would make sense.  The gain would be in the appreciation of the property rather than in rental income. 

Thanks for the reality check.  I have been lurking for a while but it is so easy to get wrapped up in the detail of our monthly numbers and lose sight of the overall situation.  Started to look at renting a bigger place and upset with the idea of paying $1000/month for a space we could buy and pay a $700/month mortgage on.    Should not make business decisions when you are stressed in that way.



waltworks

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Re: Advice Needed: Continue to Rent or Buy
« Reply #3 on: August 23, 2014, 02:18:42 PM »
Read through some of the posts here and you'll notice that 90% of the first-time rental property folks don't know about the 1% rule. That's true of the general population too, but most of them don't do their homework and figure it out.

So the answer is: people buy houses saying "OMG the rent is more than the mortgage payment! I'm gonna get rich!" They sometimes do ok if they get lucky but mostly they just lose money/break even and then someday sell the place to some other sucker. The fact that people are buying rentals that don't make the 1% rule does not mean that you should do the same.

In terms of making an appreciation play - that's very risky. Remember that housing historically appreciates only about 1% faster than inflation. And you'll pay 2-3% up front in fees to purchase, then another 6% or more to sell - so you need a LOT of appreciation to make money in a short time frame.

-W

outside

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Re: Advice Needed: Continue to Rent or Buy
« Reply #4 on: August 24, 2014, 12:22:04 PM »
Based on your advice, we reconsidered our parameters and decided to scope out properties in other areas that aren't our first choice for areas we want to live but are still nice neighborhoods, wouldn't increase our commuting costs and have a strong rental market.  WOW! WAY better margins and significantly more "deals".  Found several duplexes that are very close to the 1% rule (as in our offer would be at 1% or below that threshold) and cover the 50% rule.  A few are even newly updated.  Even better, asking prices are more in the 130K-150K range which would make our cash go farther.  Like the idea of the duplex because we could get our feet wet as landlords locally working with our "mentor" for a couple of years then determine later whether we need to hire a property manager for long distance. 

We thought we were being smart and conservative in selecting the area and the properties, but really we were still looking at what would be ideal for us to live in instead of sound investment and trying to rationalize why that would be a good idea.  Not rushing into anything, but definitely seeing things differently now.   So grateful!

waltworks

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Re: Advice Needed: Continue to Rent or Buy
« Reply #5 on: August 24, 2014, 02:12:19 PM »
That's great! Keep us updated on how it goes! I agree - a duplex is perfect to start and it will allow an easy out/sale if you move without worrying about capital gains.

-W