Author Topic: Fresh out of college, rent for a year or buy cheap and move up to land lording?  (Read 1443 times)

thorbjorn88

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I'm just finishing my master's in electrical engineering. I'll start my first job in June.  My wife and I were planning on renting for a year while we save a downpayment for a Duplex house hack then move out of that a few years later. The places we've looked at renting are about $700-$850 a month. 

Would it be wise, instead of renting for a year while we save up a downpayment to buy a cheap house at about $70,000-90,000 now, pay a mortgage of about $575 and save up a 20% downpayment on a new house or duplex over the next year or so? When I have a downpayment of 20% saved up after 12-18 months would I be able to qualify for a new mortgage on a modest home or duplex (about $175,000) in addition to the original mortgage without any landlord experience?
« Last Edit: March 23, 2017, 10:04:36 PM by thorbjorn88 »

Ocinfo

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Run the numbers but your rent options are inexpensive for your income. 1 major repair in the year could wipeout any difference between renting and buying.

That being said, honestly you're probably just fine whichever option you choose as all of them are well below typical income to debt/rent ratios. So, run the numbers and also put a lot of weight on intangibles such as what happens if you get a job offer in 6 months for $100k but requires a move?


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waltworks

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You're somewhere so cheap that the housing world is your oyster. Buy a place, rent a place... doesn't really matter at those prices and your income. You're sitting pretty either way. If you think you'll stay in the area and don't mind some DIY/house hacking (or even enjoy those things) then by all means buy a place. If you're not sure you'll like the job/area, then just rent a year and see how things are going after that.

I'd probably rent for a year. After that you'll have a much better idea of where *exactly* you want to live, your favorite neighborhoods, and your future plans. Plus you'll have a ton saved up to purchase with a nice sized downpayment and no financial stress.

-W

Lmoot

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Unless you have previous work experience in your field (of several years), you may not qualify for a mortgage with a brand new job. I bought my house as soon as I could after graduating, at 25. Best decision I made. I have been renting it out for the last 4 years while living with family and saving for a 2nd rental property.

GizmoTX

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1.5 years following DH's graduation as a EE & our wedding (1969), we relocated from Austin to a Dallas startup. The fact that we were renting a 1 bedroom apartment made our move so easy. We continued to rent for another 4 years until we were sure of our jobs & the location, saving prodigiously in the interim. When you move to a house, you tend to add more furniture & stuff to maintain it. Also, there is no such thing as a cheap house -- it always requires maintenance & repairs, plus property tax & insurance. And if you sell, add the transaction costs.

How are your credit scores? If you don't have several years of great history and/or have debt, getting a mortgage will be more difficult.

thorbjorn88

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Thanks for all the input! GizmoTX the number I mentioned $575 was for the mortgage, home insurance, property tax, and mortgage insurance combined. My wife and I both have very good credit. As for debt, between my student loan and car loan it's about 15% of my annual salary. So if they look at the debt to income ratio for my new job I should be good.

As for work experience, I've got two years experience as an "engineering assistant" and a year and a half as a graduate research assistant in engineering, do you think those would count for experience in the field?

We'd be fine if it ended up not being completely cheaper than renting, the plan would be to live in that house for 12-18 months, buy a duplex, rent out the first place, and then after about 2 years buy a single family house and rent out both the duplex and the first house.
« Last Edit: March 23, 2017, 10:06:28 PM by thorbjorn88 »

Capt j-rod

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If you plan on staying in this area for life, then I say start now. A duplex usually won't cost that much more than a regular house. If you have to rent and save then so be it. It allows you to be more selective on what you want. The problem you might run into with buying a house now and looking at a duplex later is your debt to income ratio. If you can't borrow any more money then you can't get a rental. If you buy a duplex and live in half, you get the tax shelter as well as a place to live. Make sure what ever you buy will rent for more than the payments. I use the rule of 10. $65,000 house needs to rent for $650 minimum. 10 months of rent is a 10% return, and the remaining 2 months is for taxes and insurance. It isn't fool proof but it is a quick gut check. Be careful and make sure you can do most of the work yourself.

aFrugalFather

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Only problem is its hard to know where you are going to settle down, but that is always the case I suppose.

thorbjorn88

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Thanks, Capt j-rod that's very helpful. Debt to income ratio is just monthly debt payments divided by gross monthly income right? If we did end up buying a small house our plan would be to pay off my student loan and my wife's car loan before buying the second property. If we do that and have a mortgage/tax/etc payment of $575 a month that would put the debt to income ratio at less than 10%. That's pretty good for getting a mortgage, isn't it?

GizmoTX

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Your house buying plans depend on finding well priced properties, i.e. preferably underpriced compared to others with similar specs. HVAC & appliances should be no older than 5 years; if not, plan on replacing them, especially when you go to rent it. Finally, run the math on the total debt you'd be carrying, plus a reserve for any breakdowns or vacancies.

In the interim, I'd want to be debt free; even if the interest rates are low, you're still paying the bank. With your new salary, you should be able to max your 401K & an IRA for each of you. A Roth IRA can be tapped for a first home without penalty or considered an emergency fund, but I'd make any withdrawal only as a last resort because you can never put the money back in to get the tax-free compounding.

Your new job will be the one that really counts for lenders, i.e. income level, the masters degree, & the kind of experience you will gain. Your previous experience likely helped you land it, along with the degree, of course.

My DS is also finishing his MSEE this spring & will be starting his first full time job as an Applications Engineer this summer. He's single & will rent an apartment for at least the first year while he scopes out the area & the job.