Author Topic: Rent or Buy - Check my math and my plan for holes?  (Read 4706 times)

Future Lazy

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Rent or Buy - Check my math and my plan for holes?
« on: November 08, 2014, 09:53:05 PM »
It's cheaper for me to rent, because I've been creative in my choices, but the place I live is less than comfortable for me, for a variety of reasons. I want to move, and I want to own my residence. I want to be the one charging rent, for a change. I want to build equity. It's a day I've been dreaming of and striving towards for a few years now, and being frugal has made it possible for me to get as far as I have gotten on my very low income.

I'm looking to purchase a property in the ranges of 1-3 bedrooms, between 60k-120k purchase price. Extra bedrooms are for renting out, so a higher mortgage payment in exchange for extra bedrooms is ok with me. In fact, I can get a spare bedroom to pay my mortgage, I'm 100% confident. That leaves me to pay all the other overhead costs. Property values in my area have been rising an average of 3%, which means that it's only going to be more expensive the longer I wait.

My gross income is $28,800/yr and my FICO score is between 702 and 725. I'm fairly confident that I can get a good rate on a 30 year mortgage in the range I'm seeking.

My DH will also be helping pay the mortgage, of course, but his income won't be used in the application due to his lower credit score.

However, I've only got $5000 saved up, which is quite a few thousand short of the 16-30k I need for a down payment of 20% and closing costs. It would take another 4-6 years of dwelling in an unfinished basement to save enough for a full down payment, and property values here will continue to rise 3-5%, or more as the economy continues to recover. There are quite a few down payment assistance programs available for this area, but none of them help avoid PMI. However, as I mentioned above, I feel a two or three bedroom condo or townhome could ease the cost. That frees up extra funds for me to pay the mortgage down twice as fast, or make other investments to increase my wealth.

That being said, I'm still hesitant to take this on, because conventional wisdom says never to tackle a debt like this without a full down payment, and common sense says not to piss money away on something like PMI.

Here's some example properties, and my math. I'm not so great at math, so... It's probably not perfect, please correct me if I am wrong! My math doesn't take into account any kind of tax credits, either, since I haven't really gotten a great understanding of those. If anyone can help me add that to my math, that would be awesome. Thanks to everyone who considers and responds.

http://www.zillow.com/homes/for_sale/Jefferson-County-CO/fsba,fsbo,fore_lt/house,condo,apartment,duplex,townhouse_type/2734_rid/1-_beds/40000-120000_price/150-449_mp/39.986591,-104.330978,39.055451,-106.116257_rect/9_zm/0_mmm/

Current Rent -----1 Bedroom Condo -----2 Bedroom Condo/Townhome -----3 Bedroom Townhome
Total Purchase PriceN/A~$65,000~$105,000~$120,000
Ideal Down PaymentN/A~$13,000~$21,000~$24,000
Closing CostsN/A~$2,600~$4,200~$4,800
Monthly Payment w/ Ideal Down$460~$250~$400~$450
Monthly Payment w/ Min Down$460~$289~$470~$533
Tax/Ins per yearN/A~$1680~$2040~$2160
PMIN/A~$65~$95~$110
HOA FeesN/A~$150-$250~$150-$250~$150-$250
Moving ExpensesN/A~$2000~$2500~$3500-5000 (finding this size of property for this price would mean replacing carpet/painting/repairs)
Potential Income/MoN/AN/A$500*11 months = $5500$1000*11 months = $11,000
Initial Costs*$0$9600$11,700$14,800
Total Cost over first 12 Months**$5520$16,848$18,020$16,676
Total Cost over second 12 Months***~$5520+?$7248$6320$1876

*Initial Costs includes $5,000 down payment, closing costs, taxes/ins and moving costs
**Total cost over 1st 12 months includes Initial Costs, 12 months of mortgage payments based on minimum down, PMI and HOA payments, and income from renting bedrooms with a 10% vacancy rate over the first 12 months after purchase
***Total cost over 2nd 12 months includes 12 months of mortgage, PMI and HOA payments, and income from renting bedrooms with a 10% vacancy rate

waltworks

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Re: Rent or Buy - Check my math and my plan for holes?
« Reply #1 on: November 09, 2014, 12:17:51 AM »
At $460/mo, I'd keep renting and saving/investing. $5k in savings is not enough to even consider buying a house - why are your savings so low if you've got 2 incomes and (I think?) no kids, living in a $460 space? You should easily be able to save one entire salary and revisit this question in a year or two when you're in a position of strength.

-W

Future Lazy

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Re: Rent or Buy - Check my math and my plan for holes?
« Reply #2 on: November 09, 2014, 08:27:22 AM »
My take home is around 24k, and my husbands is less than mine, somewhere around 17-20k, even though he worked two jobs and far more hours over the last 10 months. We don't share bank accounts and I don't tell him what to spend his money on or save his money for. We each pay half of the bills, and then I save what I have left over. That being said, he paid off about $3500 in debt over the summer, for which I am proud of him. DH is still using his excess to pay off debts, but his excess is currently only ~$100 more than his bills (~25 hr/wk @ $8.50/hr, retail). This year, I also paid off about $2000 in debt, and put about 7-8k into my savings account, but 2-3k was spent on car repairs, medical bills and new phones to switch to Republic with (estimated to break even in ~6 months on Republic). So, 5k is what I have now, and $800-1000 is what I am able to save each paycheck.

My current land lady has about 9 months left on her lease, and is gearing up to move herself to California next summer. What my rent is now is certainly fine and allows me to save a lot of money, but what it might be in 10 months if I have to move is somewhere between $600-800 for a studio apt/moving back in with my mother (gag), or $1000-1200 for a two bedroom. Both options that come without the luxury of not having to pay for utilities and toilet paper, so add those into the budget too.

Because of that anticipated change, I feel getting the ball rolling on buying my own place might be the best thing for me, since it is disgustingly less expensive than standard rents in my area. Likewise, the kind of condo/townhome I would be looking for, in the price range I am looking for, isn't very common in the areas close to where I work (W 44th Ave and McIntyre St, for anyone looking at a map). I'm afraid it might take me 8-10 months to find and successfully put an offer on one, since they tend to be purchased in cash, and my understanding is that cash offers almost always take the cake.

TL;DR I don't anticipate this position of strength that you describe. I anticipate life kicking me in the ass if I don't act decisively and soon.
« Last Edit: November 09, 2014, 08:32:11 AM by KaylaEM »

waltworks

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Re: Rent or Buy - Check my math and my plan for holes?
« Reply #3 on: November 09, 2014, 09:14:51 AM »
Well, I don't *think* you can get approved for a loan with your income due to debt-to-income ratio limits anyway, so it might be irrelevant. It would be worth talking to a mortgage person at your bank to find out for sure. You are right near the limit for even the cheapest 1 bedroom places you mentioned.

Your problem is not housing and buying a house is not going to be helpful if your long term goal is FI - you just have to make more money. I'd look hard for new jobs and stay where you are as long as possible. Then I'd consider living with mom if necessary. Buying a house will just eat all your money and leave you with nothing in the bank for any form of emergency. Miss a couple mortage payments because you got laid off... and your minimal equity is gone.

-W

Future Lazy

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Re: Rent or Buy - Check my math and my plan for holes?
« Reply #4 on: November 10, 2014, 07:51:06 AM »
Financially, housing is not my problem.

Quality of life, my housing is a problem. It's dark (no windows), wet (in the other end of the room, water comes in over the foundation during heavy rainstorms, condensation from water pipes pools around cardboard boxes), cold (bare concrete walls and floor), moldy (due to moisture + cardboard), not ventilated and just generally far too small for two people (15ft by 15ft). Likewise, moving would allow me to telecommute for my job. I am not able to do that now, due to the noise and disruption of 3-5 people living in the same apartment, depending on who else is renting. That would save me $40/mo in gas, and 32+mi/day wear and tear on the car.

The situation was supposed to be temporary - a few months, at the most. Instead, it's been 18+. I moved away from my mother to this situation, because my mother is in financial ruin and frequently tried to get my husband and I to pay her past due bills. She's my motivation to be frugal and keep it together. We won't be moving back there, unless our only other option is to be homeless.

It's completely accurate that home ownership mostly a want, and not entirely a need, but the stability of a better place to live would create a stronger launching pad for increasing my income, which is also very high on my list of priorities. Moving to a different apartment and putting first, last and deposit down would also drain a huge chunk of my savings and incur a much larger monthly liability than home ownership.

It seems to me that if I am going to be forced to move soon, within a year, then moving to something I own is more economical. If it's really not, please explain with numbers and in detail.

That being said, if the debt to income needs more income, a gross income of ~$48,800 can be presented instead by adding my husband to the application, but that would make the lowest FICO closer to mid 600s instead of low 700s, meaning a higher interest rate. Which is looks more attractive - more income, or better credit?

Christiana

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Re: Rent or Buy - Check my math and my plan for holes?
« Reply #5 on: November 10, 2014, 08:35:17 AM »
It sounds like living in a van would be a step up for you two.  Seriously.

How much would rent for a small, cheap office to telecommute from be? 

Future Lazy

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Re: Rent or Buy - Check my math and my plan for holes?
« Reply #6 on: November 10, 2014, 09:18:54 AM »
http://denver.craigslist.org/off/4710786471.html

Here is an example of one within 1.5mi of where I currently live. It's $150/mo "special pricing for the first 3 months", aka "will increase after you're established".

I've considered living in a van - and in that case, I would continue to work from the office, since they have a shower I can use after working out. :) However, I think that my gas/food costs would go through the roof, and I wouldn't be able to cook in bulk, and I would also be without internet access, which keeps my phone bill much cheaper. This also means giving up an almost new queen size mattress, etc. I've considered it, and I'm not really willing to make all of those downgrades... Once again, not unless my only choice is homelessness.

Hummer

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Re: Rent or Buy - Check my math and my plan for holes?
« Reply #7 on: November 10, 2014, 11:32:22 AM »
No offence, but with low income like that I would NOT buy. You would be leveraging yourself for more than 5 times your annual income in mortgage debt. That is not good. Real estate is a questionable investment anyway. Look at the recent financial crisis. Over a trillion in net worth was wiped out in America due to home values dropping.

If you buy a house, you will be constantly spending money on upkeep and maintenance. You will also deal with renters which can be a really annoying.

My advice.
Find a new place to rent that is in better shape to improve your quality of living. Invest in a balanced portfolio. Just go over to the investing part of this forum, there's lots of great advice. The best thing about investing is you never incur any debt. A mortgage is on the wrong side of compound interest.

Future Lazy

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Re: Rent or Buy - Check my math and my plan for holes?
« Reply #8 on: November 10, 2014, 02:13:54 PM »
No offence, but with low income like that I would NOT buy. You would be leveraging yourself for more than 5 times your annual income in mortgage debt. That is not good. Real estate is a questionable investment anyway. Look at the recent financial crisis. Over a trillion in net worth was wiped out in America due to home values dropping.

If you buy a house, you will be constantly spending money on upkeep and maintenance. You will also deal with renters which can be a really annoying.

My advice.
Find a new place to rent that is in better shape to improve your quality of living. Invest in a balanced portfolio. Just go over to the investing part of this forum, there's lots of great advice. The best thing about investing is you never incur any debt. A mortgage is on the wrong side of compound interest.

While applying for the mortgage would only list my measly gross income of 28k, my husband brings our actual take home to more than 40k. So, that's more like leveraging 2-3 times our income. Having renters means being able to put twice the money toward that debt, if we want to, or otherwise invest more of our income. Likewise, if I moved to a 2 bed or 3 bed rented apartment, I would still need to sublet and have room mates. The difference is, everyone's chunk of the rent would go the rent payment, and none of it would go in my pocket. I have to have room mates, no matter my situation. I really want to wrangle renters, actually, because they're a massive cash cow - if I had $150-200k right now, I would walk out and buy a .5mil Denver Metro fourplex. Fill that sucker up to the tune of ~3000k+ gross income a month, aww yiss. Too bad I don't have any rich relatives to ride the coat tails of.

As you can see from my chart above, the opportunity cost of not having renters is massive. Just the difference between the rent I currently pay (money that disappears forever), and what I would pay out of pocket the second year of ownership on a 3 bedroom townhome is ($5520 - $1876 =) $3644 that could be invested or used toward home improvements, etc. Over 5 years, that's, $18,220 at face value, or if I invested it, ~$26,607, using this calculator and assuming 7% returns:
http://www.bankrate.com/calculators/retirement/roi-calculator.aspx

My opinion backed up with a little evidence: I don't feel that RE is a questionable investment at all. People who purchased their homes in the late 90's and 2000's lost out in 2009, most especially those who agreed to crazy terms like interest only payments for X years, or $0 down, etc...  But those who purchased prior to 1995 and took good care of their properties still came out with higher home values and equity. The exact same thing can be said about stocks at that time; if you dumped money into stocks during the 2000's, chances are you lost that money, but before the 2000's...
http://www.mrmoneymustache.com/2014/08/25/indexview/ (1998 to 2009, compare with Shiller Home Price Index overlay...)

That's not really the point, for me, though. The point is to strike a balance between economical housing costs and comfort.

waltworks

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Re: Rent or Buy - Check my math and my plan for holes?
« Reply #9 on: November 10, 2014, 04:03:59 PM »
Oh jeez. Your apartment building idea is even worse. Clearly you don't know much about maintenance, property taxes, or the hassles that come with renters...

Look: if you are making >$40k/year net as a couple, and your housing is <$500/mo, you should be rolling in dough by now, relatively speaking. Why do you only have $5k? That is, at most, 6 months savings if you are even vaguely living frugally. It really should be more like 3 months worth.

You need to just save, dump money in something that fits your risk tolerance and requires little/no thought, and wait for more opportunties for better paying work. Real estate is a terrible idea when you have no money.

-W

Future Lazy

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Re: Rent or Buy - Check my math and my plan for holes?
« Reply #10 on: November 10, 2014, 05:14:09 PM »
Not having personal experience with something doesn't make me an idiot, and while there might be a lot I don't have experience with, there isn't any question or hurdle the internet can't help me tackle and overcome. There are answers and help, for the resourceful.

I am rolling in dough, for only having discovered that I could be more frugal, and the possibility of cutting back in July of this year. Only having begun to make changes and cuts to my budget and lifestyle in September of this year. 60 days ago I cut away $150/mo of cellular costs - a savings that has yet to build up - and in the last 30 days, I cut away $200/mo in food costs, also a savings that has yet to build up.

I already answered your question:

My take home is around 24k, and my husbands is less than mine, somewhere around 17-20k, even though he worked two jobs and far more hours over the last 10 months. We don't share bank accounts and I don't tell him what to spend his money on or save his money for. We each pay half of the bills, and then I save what I have left over. That being said, he paid off about $3500 in debt over the summer, for which I am proud of him. DH is still using his excess to pay off debts, but his excess is currently only ~$100 more than his bills (~25 hr/wk @ $8.50/hr, retail). This year, I also paid off about $2000 in debt, and put about 7-8k into my savings account, but 2-3k was spent on car repairs, medical bills and new phones to switch to Republic with (estimated to break even in ~6 months on Republic). So, 5k is what I have now, and $800-1000 is what I am able to save each paycheck.

As I detailed above, I am able to save ~40-50% of my personal income, while my DH is still paying off debt and has a much harder time understanding budgeting (or accepting my help doing so).

As someone who is trying her hardest every day to beat the odds of life's lemons and break down the psychological, financial and social barriers against a cycle of poverty, not just for myself, but for my DH and my closest friends - my idiot friends that are my entire reason for blogging on financial consciousness - I really, really don't appreciate being told that I am just not trying hard enough. If that's all you've come to tell me, please bite your tongue.

waltworks

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Re: Rent or Buy - Check my math and my plan for holes?
« Reply #11 on: November 10, 2014, 05:58:23 PM »
Hey, you wanted holes poked in your plan. If you wanted cheerleading, shoulda titled the thread differently. Your plan is swiss cheese because you have no money. Save more money. Make more money. Come back in a year when you have a real DP and enough income to qualify for a mortgage.

-W

GoCubsGo

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Re: Rent or Buy - Check my math and my plan for holes?
« Reply #12 on: November 11, 2014, 09:24:07 AM »
OP-  You need to know exactly how your DH's income is spent AND he needs to be  totally on board with budgeting before you can even begin to research a home purchase.  At your income levels, every penny needs to be tracked and accounted for.  If your DH isn't ready to do that then he's not ready for home ownership plain and simple.  You'll never break the poverty cycle if your not willing to tell him how to spend his money or him being willing to take the help.  This is THE biggest issue facing you right now because you have a tiny safety margin for error (what if the HOA hits you with a $7k roof project, roommate bolts, or you have a furnace go or medical issue....).   

Renting out rooms when you are young is a phenomenal way to juice your returns but you are putting the cart before the horse.  Talking to a lender will probably open your eyes to the fact that you won't get approved for the 3 BR (they do not count rental income into your application).   My state does offer home loans without PMI and downpayment assistance for people that make less than $65K but I wouldn't do it until you are in a better spot financially.  You are doing the right things by coming to these forums and doing your research which puts you miles ahead of most people in your financial situation.  That said, to most on this forum, your situation throws up a lot of red flags and the advice given worth considering.

johnhenry

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Re: Rent or Buy - Check my math and my plan for holes?
« Reply #13 on: November 11, 2014, 10:36:27 AM »
As someone who is trying her hardest every day to beat the odds of life's lemons and break down the psychological, financial and social barriers against a cycle of poverty, not just for myself, but for my DH and my closest friends - my idiot friends that are my entire reason for blogging on financial consciousness - I really, really don't appreciate being told that I am just not trying hard enough. If that's all you've come to tell me, please bite your tongue.

I agree with the advice you've been given.
a) don't buy yet until you have more savings. the full 20% down plus emergency fund
b) if you don't like where you live, move now, but don't buy.
c) roommates save you money even if you don't own a place.  If you want to save money faster go ahead and get roommates before you buy.
d) if you are not one financial unit with your hubby and don't have knowledge and some control over his spending, then if/when you buy a place, you need to charge him rent as well.

I didn't hear anyone tell you you weren't trying hard enough.  You put forth a plan, asked for criticism and your plan got some, rightfully so.

The responses you got were just trying to keep you from doing something stupid.  To me its ironic that you take offense at this advice while you are apparently in the business of blogging about "financial consciousness" for the benefit of your "idiot friends".  Maybe you aren't as different from them as you think if you are considering buying in your situation.  Or maybe you are trolling.  Or fishing for traffic to your own blog.  Who knows?

You seem pretty proud of strides towards frugality.  You should be.  This forum encourages that.  But saving 50% for a year, or whatever short period you've been able to keep it up won't get you a medal and sure won't get you close to financial independence.

No one is saying you aren't on the right track.  But you need to stay on that track (and get your DH onboard) long enough to see some results before you buy a place.  You'll be there in no time if live as frugally as you claim you do.

daKing

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Re: Rent or Buy - Check my math and my plan for holes?
« Reply #14 on: November 12, 2014, 11:03:06 PM »
KaylaEM - I took a quick glance through your blog.

First, congrats on starting down the path towards financial independence.  The road ahead may be long but the goal is worth it.  And keeping a blogged record of it is a great way to keep yourself on course.  Plus it is nice to get the non-college educated female perspective on this.

Second, remember that you are just starting.  You should not expect to go from in debt to an accomplished mustachian in two months (you said you started cutting expenses in September).  You definitely should not expect to go from zero to hero on just your income, which brings me to my third point.

Third, you need to decide if financial independence will be for you or for both of you.  If for both of you, then you need to get your husband onboard (I realize you are already trying).  Your blog made reference to you individually purchasing both of your phones and getting the expensive ones. 
  If you are currently subsidizing your husband's phone and by extension lifestyle (at him only working 25hrs per week), you can hopefully realize you are not in a position to buy a house, yet.  If your husband increases his workload to 40hrs per week, that would bring in an extra ~$6400 per year, and the phone cost can come out of his earnings.  A big increase in earnings, and that should increase your collective ability to buy after a couple of years of saving.

Lastly, consider renting closer to one of your jobs and ditching a car.  You talk about saving $40/month on gas.  But the real cost is a lot higher than that, as evidenced by the car repair bills.  Call it 25cents per mile (Well below what the IRS calculates).  32 miles per day is 160 miles a week or $40 PER WEEK ($2000 per year).  I'd bet that still understates the car cost.

You've taken a couple of great initial steps, but you have a ways to go before you are ready to buy a house.  But if you keep this up, you should get there, especially with your husband onboard and pooling his income.

Future Lazy

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Re: Rent or Buy - Check my math and my plan for holes?
« Reply #15 on: November 13, 2014, 03:05:12 PM »
KaylaEM - I took a quick glance through your blog.

First, congrats on starting down the path towards financial independence.  The road ahead may be long but the goal is worth it.  And keeping a blogged record of it is a great way to keep yourself on course.  Plus it is nice to get the non-college educated female perspective on this.

Hey, thanks for looking, I appreciate that.

Second, remember that you are just starting.  You should not expect to go from in debt to an accomplished mustachian in two months (you said you started cutting expenses in September).  You definitely should not expect to go from zero to hero on just your income, which brings me to my third point.

Third, you need to decide if financial independence will be for you or for both of you.  If for both of you, then you need to get your husband onboard (I realize you are already trying).  Your blog made reference to you individually purchasing both of your phones and getting the expensive ones. 
  If you are currently subsidizing your husband's phone and by extension lifestyle (at him only working 25hrs per week), you can hopefully realize you are not in a position to buy a house, yet.  If your husband increases his workload to 40hrs per week, that would bring in an extra ~$6400 per year, and the phone cost can come out of his earnings.  A big increase in earnings, and that should increase your collective ability to buy after a couple of years of saving.

To be completely clear and fair, DH also worked 60-65hrs/wk at two jobs over the summer and more than pulls his weight. He is continuing to apply to other jobs in our area, in an attempt to find something PFT (perm full time) that will teach him some skills or provide real experience to build on. He is not NOT on board with the financials - in fact, he is far far far more frugal than I am, naturally, having been raised in a big poor family (as opposed to my 250K/yr earning parents lavishing everything in the world on their only child prior to divorce nastiness).

He has a mixed educational background (one of 9 poorly home schooled kids, but still better off than thousands of No Child Left Behind HS dropouts) and familial background (extremely physically ill mother, bi polar father, now an orphan) that makes the implications that he isn't doing well enough to please me very, very strenuous. There are lots of therapy hours going into this. I am not subsidizing anything; he doesn't let me, even when I want to, such as pushing him into more of the aforementioned psych appointments. 

How this became a discussion of the quality of my marriage is a bit beyond me. I reject the notion that we are not working together as a team by holding our finances separately.

Lastly, consider renting closer to one of your jobs and ditching a car.  You talk about saving $40/month on gas.  But the real cost is a lot higher than that, as evidenced by the car repair bills.  Call it 25cents per mile (Well below what the IRS calculates).  32 miles per day is 160 miles a week or $40 PER WEEK ($2000 per year).  I'd bet that still understates the car cost.

You've taken a couple of great initial steps, but you have a ways to go before you are ready to buy a house.  But if you keep this up, you should get there, especially with your husband onboard and pooling his income.

Here is the closest major intersection to where I work:

https://www.google.com/maps/place/Golden,+CO+80403/@39.7761981,-105.1748348,19z/data=!3m1!4b1!4m2!3m1!1s0x876b8575087ca909:0xe7c3998ab7ec4a8b?hl=en

Check out this map to see the public transportation desert that I work in:
https://www.google.com/maps/search/public+transportation/@39.8137749,-105.1665687,12z?hl=en
(All those little red dots along roadways are bus stops.)

Within two miles north and northeast, you have quarter to million dollar houses; Within two miles east, an industrial area and cemetery; Within two miles south east, more fancy houses; South and west for two miles, open space parks. Four to five miles west, you can find the town of Golden, which is a college town, making all housing there enormously expensive.

Rentals within this general area:
http://www.zillow.com/homes/for_rent/house,condo,apartment,duplex,townhouse_type/1-_beds/40029-533722_price/150-2000_mp/paymenta_sort/39.85507,-105.079937,39.714978,-105.316143_rect/11_zm/



Anyways, this thread seems to be drawing me in circles, and I'm about done here.

Thanks to everyone who answered, I appreciate all of your input, critical and supportive alike.

waltworks

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Re: Rent or Buy - Check my math and my plan for holes?
« Reply #16 on: November 13, 2014, 03:40:06 PM »
Dude, you are coherent and can spell/punctuate/do your own research... you are going to be fine. Look for a better (much better) job.

Looks like cheapest possible place to buy in the area is $100k or so. If you can rent for $800/mo, I'd take that over buying unless you have a big 'stache already built up.

You are doing awesome. Keep doing what you are doing (and find a better job) and the house thing will be no problem in a few years.

-W