When is it a good idea to buy a house rather than rent an apartment?

[InquilineKea]

If the rental costs are at around $1000/month and I'm staying for 5 years, then it all adds up to $60k that will go permanently down the drain.

If I bought a house worth around $60k (maybe with some temporary assistance from my parents), however, then I would be able to resell the house and I wouldn't lose money on renting costs.

With that said, feel free to use this thread for more general inquiries too (I'm interested in hearing about what situations others are facing, as I'd like this thread to be useful for everyone).

[akyl]

Try out this link!

http://www.nytimes.com/interactive/business/buy-rent-calculator.html

I thought it was pretty cool

[Sigaba]

Something to keep in mind. If something goes wrong in a flat you're renting, the issue will inconvenience you but it is someone else's problem to fix. However, if something goes wrong in a flat that you own, you're the one who will be on the line to fix it.

Given the demands of graduate school, will you have the time to deal with such issues? (And, down the line, assuming things go according to plan, will you have the time to sell your place while proceeding with the next step?)

[InquilineKea]

Thanks very much for all the replies so far! That graph was very helpful!

Something to keep in mind. If something goes wrong in a flat you're renting, the issue will inconvenience you but it is someone else's problem to fix. However, if something goes wrong in a flat that you own, you're the one who will be on the line to fix it.

Given the demands of graduate school, will you have the time to deal with such issues? (And, down the line, assuming things go according to plan, will you have the time to sell your place while proceeding with the next step?)

Yeah - these are also good points. The question is - how often do things go wrong in flats that I might rent? The one thing is that I'll most likely have to rent a house that's around 100 years old, so I might have to expect more problems to come up.

Interesting point about selling the place while proceeding with the next step - hmm - how time-intensive is it to generally sell a house?

[ZeChocMoose]

Interesting point about selling the place while proceeding with the next step - hmm - how time-intensive is it to generally sell a house?

I think it depends on the area that you are in, what type of house or condo that you buy, and how competitively you price the house/condo. I have seen houses sit on the market for a couple days up to a year or so. Some houses don't sell and the owners take it off the market and try for another time. There are so many factors involved that it would be really difficult for anyone to tell you exactly what is going to happen or to give you a guarantee that your house will sell. It might help to talk to people who know the area well or examine past real estate data of the community that you are interested in.

I did seriously consider buying something, but the risk just felt too great. What happens if you can't sell it once you get a job? What happens if you need a repair that is way beyond your current savings? What happens if you lose your funding or decide the PhD is not for you?

I think if you have a partner or another person that could financially contribute to the house, maybe it is a less riskier situation. If you go the renting out a room route then you are stuck with screening the prospective tenants and becoming a landlord. Personally, it just seemed too much of a job to take on given how busy and stressful graduate school can be. Personally, I am going to save buying a house to a time in my life when I have a steadier income. It is something to help motivate me finish the degree!

Edited March 23, 2012 by ZeChocMoose

[anthropologygeek]

Don't forget, first five years of making payments on a house you buy goes directly to the interest. You must stay there five years to break even so if you only plan on being there five years I don't recommend buying

[UnlikelyGrad]

Don't forget, first five years of making payments on a house you buy goes directly to the interest. You must stay there five years to break even so if you only plan on being there five years I don't recommend buying

With today's current interest rates, that's not necessarily the case.

I know several students who have bought (besides myself; I'm a special case). In at least a couple of cases, their plan is to rent the house out after they're done with school rather than selling it. Since the homes are close to school, they know they can always find renters.

[riceandbeans]

Another thing you'll need to consider is whether or not you can find a house/condo in a safe neighborhood for only $60K in an area where rents are $1000/month. Rents for one bedrooms in my area are $400-600/month, and even small condos go for >$80K. Unless you're willing to buy a fixer-upper (which, who has time for in grad school?), you would likely be looking at prices upwards of $100K, if not much higher (I recall in the DC suburbs, townhomes started at $300K). So, it really depends on the housing prices of the area to which you are moving.

[ktel]

A house for $60K? Wow. I'm living in Toronto. More like $600K for a "starter" home....

[mirandaw]

Another thing you'll need to consider is whether or not you can find a house/condo in a safe neighborhood for only $60K in an area where rents are $1000/month. Rents for one bedrooms in my area are $400-600/month, and even small condos go for >$80K. Unless you're willing to buy a fixer-upper (which, who has time for in grad school?), you would likely be looking at prices upwards of $100K, if not much higher (I recall in the DC suburbs, townhomes started at $300K). So, it really depends on the housing prices of the area to which you are moving.

Exactly. I'm curious how the rent on an apartment is $1000 and houses are only 60k where you're going. With that disparity between prices, I would wonder at the efficiency, safety, and reliability of the house. Most like this is a very old house with an old furnace, poor energy efficiency, etc. Either that, or the house is further out from campus in a totally different neighborhood that may not be accessible to students. If that's the case, who will rent it when you're gone? In the town I went to UG and grew up near, my partner at the time bought a house for a little under 60k, which was 10 miles from campus. A few months after he bought it, the foundation cracked, slowly flooded the finished basement, and molded. He then spent thousands of dollars and countless hours trying to fix it. When the engine on my car died, it was almost impossible for me to get to school since we were so far away. That's just one scenario.

Most students in my area rented an apartment or a house: apartment complexes near the greek district went for, at most, $800 for a 2 bedroom (all inclusive with gym and pool and in unit laundry). If you rented a 4+ bedroom house, each person could easily get rent for $200 each. I rented an apartment in a heritage building split into 4 unitst, 2 bedroom, and each room was $300. This was fairly recently in Michigan, so take that for what it's worth, I suppose.

Point being, housing prices will vary but it was certainly more cost effective to rent when you consider all the things that could go wrong with a house. And if you're moving across the country - which, from another of your posts, looks to be the case - who's to say you'll want to stay there? Dealing with finding tenants or a management company for this house when you've been offered an amazing job across the country after you're finished with school might be a lot more hassel than it's worth.

Edited March 24, 2012 by mirandaw

[mirandaw]

A house for $60K? Wow. I'm living in Toronto. More like $600K for a "starter" home....

Yeah. I moved from MI to Vancouver. Talk about a slap in the face. I'm NEVER owning. 1 bedroom strata? half a million, easy. What a joke.

[stell4]

When is it a good idea to buy a house instead of rent?

When you have 5 dogs! Or if you own one of the many dogs that are on the breed restricted list so no one will rent to you.

I am in the process of buying a foreclosure I found that is a great deal. I am pretty handy too so I plan to make improvements to bring up the value more. It's also in a great place for possible renting later which leaves my options open when I move. A lot of college towns have a serious shortage of rental properties, and like everywhere else in the US have been hit by the whole housing/loans crisis leaving a lot of really cheap bank owned properties and a lot of high priced rentals. If you are at all handy it can be pretty easy to turn over a foreclosure quickly, you just have to keep in mind the additional cost of tools and materials (and maybe hiring someone when you realize what you're doing is well over your head).

[Eigen]

So some things to worry about (other than already mentioned):

House sitting on the market- the last house we were selling sat on the market for 3 years. Consider whether you can have your money tied up in it for that long. Not only that, but you'll be responsible for the house, upkeep, etc. during that time, even if you're accross the country/out of the country doing post-doctoral work.

Repairs- generally, a good estimate is 2-5% of the cost of the house per year, on average, in repair costs. There are the low-cost plumbing and electrical repairs, and then the much higher "need a new roof every 5-10 years" costs. And also the potential for much larger failures. They usually aren't evenly spread, but do even out to about 2-5% per year over time.

Upkeep- putting this separately, but there is also the yearly upkeep. Termite inspections+certificates, property tax, and then of course, homeowners insurrance. At least where I am, homeowners insurrance and property tax are expensive- like really expensive. Don't underestimate them.

Downpayment- last time I looked, most banks wanted a 25%-ish downpayment. That's a lot of capital to come up with at once. Depending on your credit score, it might be better or worse.

And I'll agree with everyone else that I'd be really leery of paying 60k for a house in an area that's renting for $1000 a month.... That's so underpriced that I'd want to know what was wrong with it. Around here, rent's about that or a little cheaper, and you *might* find a 1-bedroom, tiny house with no yard for around $200k. Less than that, and you're looking at places that are an hours drive from campus out in the suburbs (where rent's $300 a month), condemned, or in the really, really bad parts of town. Even townhouses/condos are going for upwards of 200k, mostly.

And as to fixing up foreclosures- keep in mind that grad school is already a more-than-full-time job. Even if you have the ability to do the remodeling, will you have the time, energy, and desire?

Edited March 26, 2012 by Eigen

[wheatGrass]

Ideally you could find a place with a basement apartment. The income from the apartment can help with property taxes, repairs, etc... Obviously it's going to be more than 60K, but if your family is going to help out with the down payment that should be ok, right?

In Canada you can borrow from your RSPs penalty free if you're buying your first home. This might be an option where you are, I don't know.

You should find a local website that has real estate details listed. You need to really get a sense of where the market is going in the area you're considering. If houses really are 60K then we can pretty safely assume there is no housing bubble where you are looking. Look at how long houses are staying on the market, and how much below or above the asking price they are selling for. Look at houses in similar neighborhoods to the one you are considering and that are of similar size/condition. Is your city/town looking at a condo glut in the near future? What is the state of condo developments around? Are they really hustling to get people in them or are they in high demand? A condo glut is bad news for cheap house re-selling. Is the town/city/neighborhood experiencing renewal? Any new industries coming to town? Or are they shutting down right, left, and centre? These are all things you need to consider if you want to recoup your $$ in just a few years. Keep in mind money spent on property taxes is gone--you don't recoup that when you resell.

Good luck, I don't think it's an altogether bad idea, depending on the area. You just need to do your research!

[TakeruK]

A few more things to consider as well:

- Mortgages aren't an automatic thing. Do you have the right credit rating/history to get a good interest rate? Will your family be able to cosign to help you get a good rate?

- You might also need to take out mortgage insurance, which could also increase your costs

- As others pointed out, a $60k home in an area with $1000/mo rent is suspicious. I think, realistically, your actual monthly cost when buying will actually be higher than renting an equivalent place. But, you will likely recoup some of the cost when you end up selling. Don't forget all the fees related to selling a house too!

When is it a good idea to buy a house? It would depend on each person of course, but personally, I would only consider it if there were two incomes, e.g. a spouse (I guess you could buy with a friend, but it's a pretty serious investment!).

[MoJingly]

I bought a house before I started my first year. I really disliked living in somebody else's space, and I love having my own place. I found a little 700 square foot house for an affordable price, got a good interest rate, and settled in.

If you do buy, I wouldn't suggest doing it WHILE you are juggling classes and research. That was one of the most stressful experiences of my life, and I'm really glad I got it out of the way before I officially started.

A house is certainly a lot of work, like others have said. It's like owning a very large pet. I really enjoy taking care of it, but it's certainly not for everybody.

[Sparrowing]

Good advice here, some of which I'll echo. I've recently owned property in Vancouver, sold it just before the market peaked, and came out ahead. Now I'm considering re-investing in a Toronto house. I'm looking into both real estate and rental options, and will take whichever presents as the best value.

One thing to keep in mind is the type of residence you're buying, as the markets can develop quite differently. (See post on condo glut.) A detached house may cost a lot more than a condo (e.g. in Toronto, something small and unrenovated in a peripheral neighbourhood will go for 550 or 600k, realistically), but if you can afford it it will likely pay off in the end. If you think you can reasonably break even after 4 or 5 years -- including associated costs, which are substantial -- then it *might* make sense to buy.

There's always some risk, but where markets are particularly precarious I might opt-out of ownership and be content with a rental. My last Vancouver property sat on the market for five agonizing months before it sold, and meanwhile I was paying rent somewhere else. You can always rent out a vacant property, but if you're located in a different city you'll have property management fees on top of double taxes (rental revenue + property taxes) on top of potential mortgage costs and maybe onto strata fees, too. So then if the place ever sits without tenants, you've likely lost some money -- and things like condo gluts affect the rental market, too. For those who think this is an easy solution, it's not quite as simple as having a tenant pay into your equity.

Also, make sure you have a contingency fund for emergency repairs and longer-term renovations. Last year I had to pay $16,000 out of pocket for unforeseen and unavoidable window repairs. And if you live in anything other than a detached house, the timing of these costs will be non-negotiable; you're legally bound to pay it on the council's schedule. This is part of the hidden value of renting.

Consider also that if you live in one of the more expensive cities, you may be priced out of a neighbourhood you'd otherwise be able to rent. This can considerably alter your grad school experience, and may make transportation an issue.

There are so many different factors to consider in the rent vs. own debate, and I don't think there should be pressure or stigma either way. Although if you're relying on someone else to help finance a house, make double sure it will hold its value, at the very least.

Edited April 18, 2012 by Sparrowing

[Vander]

I'm amazed you can get a place for 60K. My studio apartment (~430 square feet) was > 150 K.