To buy or rent, struggling with the math

[Travis]

I'm about to move to Phoenix, AZ and all manner of housing options are open to me.  I'm looking mostly at renting a house or apartment, but I could easily afford to buy a house of similar proportions for a smaller monthly payment.  For example, I found a 4 bed, 3 bath, 1700 sq ft house for $185k, or I could rent a 3 bed, 2 bath, 1700 sq ft house for $1400.  If I were to buy the first house with a 0% down 30 year VA loan at 4% it would be just over $883/mo.  Adding in all other household expenses I'm guessing the total cost would be no more than $1100/mo (not including property tax). The catch is I'm only going to live there for two years.  The last time I bought a house for two years and sold it, it didn't appreciate enough for me to make any money on it. I had to pay all the closing costs out of pocket because I had little equity.  If I turned this one into a rental I could probably get $1300-$1400 a month for it.  Does it make mathematical sense to do so?  I'd be out of state so I'd have to hire a company to manage it for me (no idea what that costs).  At what price point would it make sense to buy and convert to rental? Or buy and flip after two years?

[waltworks]

Do not buy a house if you will only be there for a couple of years. You'd need quite a bit of appreciation just to break even on closing costs/fees at the front and back end.

Here's a link to the NYT calculator if you want to run numbers for fun, though:
https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

The standard rule of thumb for investment rental properties is that they should rent for about 1% of their purchase price per month (for your hypothetical place, $1800 or so) in order to be a "good" investment.

-W

[Travis]

According to that calculator, it looks like my target for renting instead of buying is just too close considering the potential risks of renting it out just a short time later.  Every time I do one of these moves (every 2-4 years) many of my coworkers talk up the benefits of buying in order to create rental properties, but I wonder if deep down they haven't actually done the math and are renting just enough to pay their mortgages with a tiny profit.  In my many moves I've never seen the 1% rule work on a house that I'd want to live in, but I suppose if I was only looking for homes that would make good investments I'd discover more of them.

[waltworks]

If everything went really well, you would probably break even vs renting over a 2 year timespan. If not...

Your coworkers don't know anything about rental investments, probably. Most people just buy places and rent them out and figure they're doing great if the rent covers the mortgage. They'd be better off just sticking money in index funds, but in some cases the enforced savings is actually a good thing (for folks who would otherwise just spend surplus money).

-W

[Shanksy]

I live in Phoenix, AZ. My husband and I are currently renting a one bedroom apartment for 900/month. We are looking to purchase a home for around 150-175k as well. However, we plan to live there for at least 5 years. Depending on how much space you need, you might not have to pay $1400/month for a rental. But that may also change depending on where you want to live in Phoenix, there are definitely more desirable areas with higher rents.
 
The market for homes in Phoenix is really hot right now, we've put 3 offers in over the last 3 months and 2 times they had multiple offers, and once they wouldn't accept my FHA financing, even though it said FHA on the listing. You might consider short term housing, if you want to purchase a home, it might take longer than you think to find and close. I have heard that the inventory of homes under 200k is low, which is why we keep getting these bidding wars. Best of luck to you.

[Another Reader]

Where is the 4/3 for $185k?  I'll bet it is not in commuting distance or it's in a bad area.

For a rental example, I have a 3/2 in Tempe for which we ask $1,350 a month.  It's in the Fuller school boundaries and your child can walk to school about 4 blocks away if you live in this area.  Cross streets are McClintock and Guadalupe.  There are two other similarly priced houses in the same school attendance area currently available.  That's a relatively easy commute for you and a well regarded school for your child.  You can rent above 60, with an easier commute and less well regarded elementary schools for the same price or a little higher.

Houses in these areas are older, but there is a more family friendly atmosphere than in an apartment complex.  For reference, houses in my area sell for $250,000 to a little over $300,000.  Completely remodeled houses go for over $300,000 and rent from $1,550 to $1,800.  Not sure where you are looking at $185k houses.

[Another Reader]

Four bedroom with a pool at $1,450.

https://www.zillow.com/homes/for_rent/Tempe-AZ-85283/house,mobile_type/8135756_zpid/94872_rid/0-400731_price/0-1500_mp/33.399954,-111.889573,33.337304,-111.981841_rect/13_zm/

[Another Reader]

I live in Phoenix, AZ. My husband and I are currently renting a one bedroom apartment for 900/month. We are looking to purchase a home for around 150-175k as well. However, we plan to live there for at least 5 years. Depending on how much space you need, you might not have to pay $1400/month for a rental. But that may also change depending on where you want to live in Phoenix, there are definitely more desirable areas with higher rents.
 
The market for homes in Phoenix is really hot right now, we've put 3 offers in over the last 3 months and 2 times they had multiple offers, and once they wouldn't accept my FHA financing, even though it said FHA on the listing. You might consider short term housing, if you want to purchase a home, it might take longer than you think to find and close. I have heard that the inventory of homes under 200k is low, which is why we keep getting these bidding wars. Best of luck to you.

There are very few houses in that price range unless you are willing to accept a small house an outer suburb or a marginal house in a bad neighborhood close in.  Nothing in Tempe under $200k any longer, and the typical 3 bedroom 2 bath in a decent area now starts around $250k. 

Listing agents check the FHA financing box, but no one accepts it because of the hassles.  If I were selling another house, I would not accept FHA.  See if you can get a conventional 3 percent loan instead.  You will have better luck.

[Travis]

Where is the 4/3 for $185k?  I'll bet it is not in commuting distance or it's in a bad area.

For a rental example, I have a 3/2 in Tempe for which we ask $1,350 a month.  It's in the Fuller school boundaries and your child can walk to school about 4 blocks away if you live in this area.  Cross streets are McClintock and Guadalupe.  There are two other similarly priced houses in the same school attendance area currently available.  That's a relatively easy commute for you and a well regarded school for your child.  You can rent above 60, with an easier commute and less well regarded elementary schools for the same price or a little higher.

Houses in these areas are older, but there is a more family friendly atmosphere than in an apartment complex.  For reference, houses in my area sell for $250,000 to a little over $300,000.  Completely remodeled houses go for over $300,000 and rent from $1,550 to $1,800.  Not sure where you are looking at $185k houses.

https://www.zillow.com/homedetails/6601-S-43rd-Pl-Phoenix-AZ-85042/7555564_zpid/

The house from my example. It's within walking distance of Nevitt elementary school and 50 min bike ride to work.

https://www.zillow.com/homedetails/423-W-Alicia-Dr-Phoenix-AZ-85041/95122436_zpid/ This is a brand new housing area just being completed within walking distance of Valley View elementary and 35 min bike ride to work going for $195k.

There are a few possible places to live and a school near your cross street in Tempe that I have my eye on, and our church will be a couple blocks away. I just haven't cracked the code on the commute.  If there's a park & ride on Apache I might just hit the light rail going in.

On the north side we're looking at something like this in the vicinity of Orangewood, Amerischools, and Westwood: https://www.trulia.com/rental/4009508520-1941-W-Whitton-Ave-Phoenix-AZ-85015#photo-1

I tried finding something near Madison Simi, but this was the closest for rent:

https://www.zillow.com/homes/for_rent/Phoenix-AZ/house,mobile_type/7774859_zpid/40326_rid/3-_beds/2-_baths/267089-400633_price/1000-1500_mp/33.562639,-112.04115,33.522649,-112.099772_rect/13_zm/

And the closest for purchase:

https://www.trulia.com/property/3064968370-2136-W-Glendale-Ave-Phoenix-AZ-85021

Sprinkle in the $1200-$1400 apartments in those areas and that's where I'm at.

[Another Reader]

At the risk of offending another poster that owns a house in that area, I would not buy or live in the neighborhood of the house on S. 43rd.  Not a great neighborhood in my view.  I'm not familiar with the elementary school there.  Alicia is in the Baseline Corridor. The schools are not great.  The area between it and downtown is South Phoenix.  Would not want to bike there.  Use Google street view level maps to "drive" your route to work and see what you think.  I would not buy there for appreciation and you will not attract good renters if you decide to keep the house when you move..

I cannot comment on the house on W. Whitton.  It's near Encanto.  The area is spotty, but has a good chance of gentrifying if it isn't already.  Glendale is a busy multi-lane thoroughfare, and I never consider properties on busy streets.

I'm not a fan of Valley Metro, but there's a bus on McClintock that connects with the light rail at Apache and McClintock.  It's a 15 or 20 minute ride from McClintock and Guadalupe to light rail.  Buses run every 15 minutes at peak commute time, every 30 minutes the rest of the day.  According to the Valley Metro map, there's a park and ride lot at Apache and McClintock. 

https://valleymetro.maps.arcgis.com/apps/webappviewer/index.html?id=a6a907b7c23546cca889f253a17eb1a1 

I don't recall seeing it and I don't know how well used it is. Per Google, it's under the building on the southeast corner.  Don't know how much it costs, if anything.  I have only gone as far as the airport on light rail, so I don't know how long to get to your work place.  You would probably be fine doing that commute.

Hope that helps.

[Travis]

I'm getting second opinions from my coworkers, and one of them sent me this. I'm taking a closer look at southern Scottsdale. I hadn't really considered as far east as Mesa/Gilbert, but if there's a good school/housing near the rail I'll take a look.

[Another Reader]

There is very little good housing near the light rail east of Tempe.  Light rail stops at Mesa Drive.  You will not like the neighborhoods or the schools in that area.  Until you get out to the Groves area, east of the light rail, Mesa north of 60 is to be avoided. You could drive in from East Mesa and use a park and ride lot, if there are spaces.

I would like to know why the maker of this plat hates South Tempe.  Guadalupe, yes, South Tempe, no.  Plenty of million dollar houses in 85284.  In general, South Tempe has fewer problems than Central Tempe.

You want a 60 minute plus car commute to downtown?  Try South Gilbert at rush hour.  No easy access to light rail.

South Scottsdale is hot.  Rents will be high.  The older areas are gentrifying.  What houses in Scottsdale there are under $300k are concentrated there.

"Drive" the areas you are considering using Google street view.  It's helpful to see the neighborhoods and the main streets.