Author Topic: Should I live with parents and rent out my studio?  (Read 6963 times)

startingout

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Should I live with parents and rent out my studio?
« on: June 11, 2015, 09:26:43 PM »
I currently live with my parents, but I'm in the process of trying to buy a tiny studio. The studio is located walking distance from my workplace, as well as from grocery stores, department stores, restaurants, and public transportation. In fact, it was what I learned from MMM that drew me to this place. :) Because of the location, I think it would make a good rental unit as well.

My question is, assuming I do purchase this studio successfully and get a 30 year mortgage, should I rent it out while continuing to live with my parents? If so, should I try to pay my mortgage down as quickly as possible, or should I make the regular mortgage payment and invest any other savings?

Also, I made a mistake by getting a new credit card after my loan pre-qualification letter, but before applying for the actual mortgage. (I had no idea that I would end up in a bidding war and that my offer would be accepted so quickly.) Do I have to inform the mortgage company of this, or is it something they will discover on their own once they begin evaluating me for the actual mortgage?


Additional background: I'm in my mid (late?) twenties. My parents don't seem to mind me continuing to live with them. Their culture is very accepting of adult children still living at home. I've also helped them with the down payment on our current house when we bought it, and so in exchange, am not currently paying rent. I'm expecting my parents to retire within the next several years, and with that, sell their house because none of us will be able to afford the mortgage payments at that point. I currently live about 35 minutes away from work, which is a hassle at times. I want to retire early, but that will be kind of hard if I have to move out and start making rent or mortgage payments.
« Last Edit: June 11, 2015, 09:29:48 PM by startingout »

Argyle

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Re: Should I live with parents and rent out my studio?
« Reply #1 on: June 11, 2015, 10:32:56 PM »
My question would be whether the studio is a good economic investment the best use of your money, if you're going to tie it up in something.  In my experience studios are not as good an investment as one-bedrooms, unless you are in a really high-priced market like New York City.  Tiny studios even less so.  And if you're able to continue living with your parents, why would you tie your money up in real estate at all?  The studio would have to have better prospects than an index fund or other more liquid investment. 

I think we'd need numbers on all of this the price of the studio, your down payment and monthly payment, the interest rate, whether there's a monthly fee, your savings rate, your income, etc.  Those will determine whether this is a feasible plan, rather than just relying on theory.  Can you give us the numbers?  Or have you at least run them for yourself?

startingout

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Re: Should I live with parents and rent out my studio?
« Reply #2 on: June 12, 2015, 10:04:28 AM »
Thanks for the response!

I don't live in NYC, but I live in a fairly expensive area. The studio is $170k, and similar studios rent for about $1300 a month. The management fee is $200 a month.

I thought early retirement would necessitate purchasing a place at some point. I figured if I at least break even renting the place out, I could continue living with my parents without giving up anything on my part, except for the down payment. The real estate pricing in my area and the surrounding areas seems to be on an upward trend. I didn't want to end up priced out of the market when my parents retire and leave the area. My parents have offered to help me with the down payment so that I don't have to sell too much of my index fund shares. They would be taking out a home equity loan though, which is less than ideal...

I'm also thinking of pushing back my retirement plans if needed in order to accommodate this purchase. I've started having doubts about retiring super early after a discussion with a financial advisor. (I know, I know, I should disregard their advice.) Plus, I figure my parents are going to want me to chip in once in a while after they retire, given how ill-prepared they are for retirement themselves.

surfhb

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Re: Should I live with parents and rent out my studio?
« Reply #3 on: June 12, 2015, 10:07:56 AM »
For that kind of money you can buy 2 nice homes in Indianpolis and rent them out.   

I say no

mskyle

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Re: Should I live with parents and rent out my studio?
« Reply #4 on: June 12, 2015, 10:14:18 AM »
I also say no. The studio seems like it would be an ok-at-best investment, *and* how likely is it that you'll want to live in it when, eventually, you retire? Why buy a place *for your retirement* that's close to your current job? The reason to buy a place near your current job is to live in it so that you have an easy commute.

I get that your parents want to help you out, but having them take out a home equity loan *and* put you up (rent-free) so that you can buy a studio for no particular good reason? When you're already concerned about their long-term financial well-being? This is not a good deal for them or you.
« Last Edit: June 12, 2015, 10:15:49 AM by mskyle »

starbuck

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Re: Should I live with parents and rent out my studio?
« Reply #5 on: June 12, 2015, 11:04:20 AM »
Plus, I figure my parents are going to want me to chip in once in a while after they retire, given how ill-prepared they are for retirement themselves.

My first instinct was to say No mostly because I think it's important for gainfully employed young adults to cut the apron strings and start their own life independent of ($) support from their parents. Especially for someone approaching their late 20s. Move out and get on with it.

But with the added info above, absolutely not. Don't let your parents put your financial well-being ahead of their own! (And ignore the shit that financial advisors say about early retirement - of course you can do it. )

startingout

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Re: Should I live with parents and rent out my studio?
« Reply #6 on: June 12, 2015, 11:56:54 AM »
Thanks for all the suggestions. My offer was actually accepted already, though I have not started any of the mortgage proceedings. I'm not sure what the process would be for backing out at this point. Would me moving out into the studio help me establish independence? I can sell more of my stocks so my parents wouldn't have to help out as much. I can also pay them back for the down payment, on top of paying for the mortgage myself.

The $170k studio was considered a very low price point for the zip code I'm looking at. Currently, the cheapest listing on Zillow is priced at $475k, and that's just for a 1 bedroom condo. There were some other listings there under $300k a week ago, but it looks like they've all been scooped up immediately.

My parents live in a slightly cheaper area. Most of their assets are tied up in real estate.
« Last Edit: June 12, 2015, 12:00:19 PM by startingout »

CommonCents

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Re: Should I live with parents and rent out my studio?
« Reply #7 on: June 12, 2015, 12:22:44 PM »
Thanks for all the suggestions. My offer was actually accepted already, though I have not started any of the mortgage proceedings. I'm not sure what the process would be for backing out at this point. Would me moving out into the studio help me establish independence? I can sell more of my stocks so my parents wouldn't have to help out as much. I can also pay them back for the down payment, on top of paying for the mortgage myself.

The $170k studio was considered a very low price point for the zip code I'm looking at. Currently, the cheapest listing on Zillow is priced at $475k, and that's just for a 1 bedroom condo. There were some other listings there under $300k a week ago, but it looks like they've all been scooped up immediately.

My parents live in a slightly cheaper area. Most of their assets are tied up in real estate.

I'm confused.  I thought you paid a portion of the downpayment on the house (which is why you live there now rent free)?  Did they then turn around and lend/give you money for the studio?

I think it would be cleaner if everyone paid for everything of what they own themselves.  Are the two sums functionally equivalent or did one lend/give more to the other?  If they lent/gave you more than you did, then yes, I'd definitely suggest you repay them, particularly as you say they will have issues funding their retirement.

I'd also agree that I wouldn't suggest renting it out.  Either don't buy it (and forgo any money you've put up so far - earnest money and money with the P&S) or live in it if you buy it.

startingout

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Re: Should I live with parents and rent out my studio?
« Reply #8 on: June 12, 2015, 01:02:00 PM »
It would actually work out to be the same---the money I loaned my parents years ago for the down payment of our current house, and the amount they would be able to give me for the studio. Of course, if they do give me this amount, it would mean that I've been freeloading for years (a concept that they don't seem to mind, for some reason).

money_bunny

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Re: Should I live with parents and rent out my studio?
« Reply #9 on: June 13, 2015, 06:09:16 AM »
Look up my name and you will see me do the numbers for my studio by NYC and ask the experts here for advice. I'm selling and almost under contract. Should be Monday. It was not a mistake and I made some money on my investment. If I was 23 I would do it differently. I state the word luck in here frequently. I had a bunch of locational things line up around the apartment which was very fortunate.

1. The only people you can rent studios too are:
          A. Single people like yourself.
          B. A couple who are trying to live super frugal for 1-2 years to get a down payment on a place of their own.
          C. A couple/single people who really cannot afford to live in your area and are going to be sensitive to any other money problems.

2. This means you probably will not get be getting the "Good" long term tenant. You could be lucky. You may have a string of good tenants but turnover every year or every other year.

3. Many places won't let you rent it out. I got lucky or I would have had to sell in 2012.

4. It limits where you can go. This did not come up as much but there were some opportunities that I could not take because I was locked into apartment X in NJ and not able to break a lease and move on. If you are in your 20's this could be a big limitation.

thedayisbrave

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Re: Should I live with parents and rent out my studio?
« Reply #10 on: June 13, 2015, 07:34:17 AM »
Because of the location, I think it would make a good rental unit as well.

Have you done a rental analysis? Looked at the numbers? Just saying "I think it will make a good investment" does not make it so.

I say no.  There is absolutely NO RUSH for you to be buying anything right now.  I'm curious why you say "I want to retire early, but that will be pretty much impossible if I have to make rent/mortgage payments."  It seems like you have absorbed bits and pieces from the forum but haven't actually thought about how they would fit the context of your life/financial picture.  "I thought" and "I figured" tell me that you haven't thought this through as much as you think you have.  I'm not disparaging you, but clearly you are not in the right place financially to be buying anything, whether you rent it or not.  "Breaking even" is not an investment.  "I need to buy NOW or else I'm going to be priced out" is also not the right mindset.  Can you predict the future? How do you know with any certainty if prices are going to rise, and for how long? That is a trap that I saw happen to many when the housing market boomed in 2007 - people bought at the peak, thinking "it's just going to keep going up so I better get in now" - then 2008/2009 happened and they're just now getting back on their feet, having been underwater for 7 years.  Not fun.

My suggestion would be to back out before you get too deep, and work on growing your income.  Real estate state laws vary by state, but here in NC you can back out during the due diligence period for any reason or no reason at all, and just lose your due diligence deposit which is typically a few hundred bucks. 


startingout

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Re: Should I live with parents and rent out my studio?
« Reply #11 on: June 13, 2015, 04:25:01 PM »
Thanks! You all have given me a lot to think about. @thedayisbrave, yeah, I'm fairly new to this and have only been reading starting a few months ago. I left this part out, but I meant to say that it would be near impossible for me to retire in 10 years if I have to pay rent or mortgage, given that I'm single and would have to come up with the full stash on my own, plus have enough to eventually buy a place to live. I suppose I could aim for retirement in 20 years instead... but that seems really far away. Far away enough that the thought makes me want to indulge in a spendy lifestyle instead.

So, would it be better for me to continue living with my parents into my late twenties, and possibly thirties? I'm not opposed to the idea, but it's not how I pictured my life turning out. I don't want to wake up one day and feel like I've failed to develop the mindset and life skills of a proper, functioning adult.

GrayGhost

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Re: Should I live with parents and rent out my studio?
« Reply #12 on: June 13, 2015, 10:31:38 PM »
I don't live in NYC, but I live in a fairly expensive area. The studio is $170k, and similar studios rent for about $1300 a month. The management fee is $200 a month.

This is a poor real estate investment. Rent should be at least, and I mean at least, 1% of purchase price. These days, I don't look at anything under 1.5%. Why bother settling for okay deals when I can find good deals? Yeah, it could appreciate, but it could also depreciate, and if you don't believe me, find someone who bought a house pretty much anywhere around '07-'08.

If you want to live in this studio and the numbers work out in favor of owning rather than renting, that's a different story. But from an investing standpoint, I would give this studio a big fat no thanks.

Argyle

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Re: Should I live with parents and rent out my studio?
« Reply #13 on: June 14, 2015, 01:04:38 AM »
I'm confused you ask "Should I live with my parents and rent out my studio?", and when we say "That studio is not a good rental opportunity," you ask "So, would it be better for me to continue living with my parents into my late twenties, and possibly thirties? I'm not opposed to the idea, but it's not how I pictured my life turning out."  But that's what you were planning to do with renting out the studio, no?  If you don't want to live with your parents, then don't buy the studio and rent it out.

I think the real question should be, "Would it make better economic sense for me to rent a place or buy a place to live in?  Or to live with my parents a bit longer and save more before doing either?"  And then give us the numbers so we can help you work out the finances.

pbkmaine

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Re: Should I live with parents and rent out my studio?
« Reply #14 on: June 14, 2015, 01:22:42 AM »
What is it you really want? Isn't MMM really about that?

thedayisbrave

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Re: Should I live with parents and rent out my studio?
« Reply #15 on: June 15, 2015, 09:23:17 AM »
So, would it be better for me to continue living with my parents into my late twenties, and possibly thirties? I'm not opposed to the idea, but it's not how I pictured my life turning out. I don't want to wake up one day and feel like I've failed to develop the mindset and life skills of a proper, functioning adult.

What is keeping you from moving out, say with friends or an apartment share?

Bicycle_B

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Re: Should I live with parents and rent out my studio?
« Reply #16 on: June 15, 2015, 05:23:14 PM »
Lots of adults rent, especially in high dollar areas.

Financially, it's cheaper to:
1) live with parents
2) rent
3) if the deal is so great, but living in it is costly, flip it... but is it that great?

In terms of maturity, anything you do that's new will cause you to mature in some way.  But some paths are wiser than others.  Most of the USA is on a buy-buy-buy path that, as this blog asserts, is unwise.  So buying something is common for an adult, but may be a mistake - it might be more mature not to buy!

What YOU want is indeed important; kudos to the person asking you to focus on that.

Maturity, your own desires, and how you relate to your family are all questions of values that depend on you, and your family; from a financial standpoint, they're nonfinancial variables.  So deciding what to do isn't just a financial decision, it requires balancing non-financial values and the financial analysis.  In the end, deciding may be a valuable experience.

Deciding to buy locks you into an expensive path of new experiences.  Not buying gives you financial freedom to have other new experiences which you decide on as you go.  It also makes you different from the adults this blog describes as consumer suckas.

Bicycle_B

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Re: Should I live with parents and rent out my studio?
« Reply #17 on: June 15, 2015, 05:26:58 PM »
PS.  Don't make a giant decision decision because you don't currently know how to back out.  If you haven't signed the final mortgage contract, there are probably lots of ways out.  Learn what they are - it's a very informative experience!  Much cheaper than giving up your freedom due to a slight current lack of information.

SpicyMcHaggus

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Re: Should I live with parents and rent out my studio?
« Reply #18 on: June 18, 2015, 01:23:23 PM »
Ways to back out:
find out what your offer was conditional upon. Usually it is inspection and financing. See if you can get a lending offer letter from a lender that is above the interest rate stated on your offer.  -or- a letter of decline from a lender.

OR

if you have had the inspection, you can decline for any reason you decide to. They do have the ability to force you to complete the sale by fixing those problems on the inspection.