Buying vs. Renting during Grad School

[emorygrad87]

I am looking into buying a condo instead of renting during my time in grad school.  I will have someone else helping me with either mortgage or rent payments (whichever way I decide to go).  My calculations show that my partner and I will end up paying at least $15,000 less than if we rent.

 

Without getting muddled in numbers (given that different areas--esp. rural vs. urban--will have totally different circumstances) what have your all's experiences been in housing during a doctoral program?  Has anyone bought a condo and found it to be a better value?

 

Thanks in advance for the input!

[queenleblanc]

I bought a condo when I moved to my first teaching job, thinking I'd do small renovations and sell the condo in 5 or so years (about the time of a PhD program) ... and it is STILL on the market.  Honestly, the money savings might look attractive, but consider the carrying costs when the time comes to sell it.  Get some good advice from multiple real estate agents in the area where you are looking to buy and really look for homes that will have a good ROI when you want to sell, because let's face it... it's not a forever home.  

 

That's just my perspective; others may have had much better experiences with purchasing a condo for the duration of time of the doctoral program... check into the housing market history where you are looking and see what kinds of homes are hot on the resell, because that's the kind of home you will want to buy, if you buy. 

[iowaguy]

My calculations show that my partner and I will end up paying at least $15,000 less than if we rent.

 

Would you mind sharing your calculations?  I'm also contemplating buying vs renting, but my calculations for buying don't come out $15k less, even if I pay for it with cash and therefore don't have bank loan origination fees...

[Usmivka]

Would you mind sharing your calculations?  I'm also contemplating buying vs renting, but my calculations for buying don't come out $15k less, even if I pay for it with cash and therefore don't have bank loan origination fees...

 

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

 

Be sure to use the advanced settings to take into account things like security deposits, local taxes, etc. I also think their default assumptions for increasing property value are too high for most parts of the country, and the assumed rent increase too low.

 

We bought a year after starting grad school, and it looks like we'll save 30-60k over renting in just those four years (depends on whether the unit gains value or not, and even greater savings than that if rents continue to rise at 7-10% in our area as they have been). But we live in a very expensive rental market where condos, and our unit was bought far under market value so we are very confident of selling it, so the math was more in our favor than it might be for you. Origination fees should be fairly minimal compared to the unit cost, but if your margin is only 15k it probably isn't worth the hassle and lack of flexibility that come with home ownership--for example you can't move quickly if your neighbors are shitty or circumstances change. I honestly don't think it is worth it unless the savings are something you will really notice (eg more than a few thousand a year) or it is your dream unit. Better to save your money for a home wherever you settle for the long term after grad school, in my opinion.

 

Mortgage apps and house hunting were also essentially a full time job for a few months. Also, unless you can pay full asking price in cash, you will probably need to find a "non-conforming" loan (exceedingly hard to get post 2012 finacial reforms)--this is because most of us were previously in the work force (got W-2s), and when we switch to getting fellowships (1099-MISC) it is considered changing job type to "self-employed," and you are expected to have a 2-5 year work history proving sufficient income on the 1099s. Rediculous, I know, but try convincing the bank that your income is gauranteed despite the 1099 and you'll see how difficult this is. I had better luck with local credit unions that offered "portfolio loans," Fannie/Freddie and the big banks won't touch you.

Edited February 20, 2013 by Usmivka

[rising_star]

There have been a bunch of threads about this in the past. emorygrad, if you are planning to stay in Atlanta, you will need to look very carefully at the market. Prices haven't gone up in many places in the last 5 years (a long term investor's dream!), which may mean that you'll barely break even when you sell. Also, don't forget that with ownership comes maintenance and that you will be on the hook for things like roof repairs, new water heaters, plumbing or electrical issues, etc., which can very quickly eat into the ~$15K you might save and dwindle it down to practically nothing.

[emorygrad87]

As far as getting the loan, both of our families would be willing to co-sign and have stellar credit.  Also, I am looking into a condo unit, which will obviate the need for certain types of upkeep associated with home ownership, but also may have less resale value.  As the first reply said, all of my bet would hinge on the ability to resell it in a fairly short period of time without accruing huge fees.  

 

In regards to saving for a future house, I'm not too concerned about that, as my partner is going into a pretty safe 100k+ a year field.  We'll get by.

 

Rising_star, I wasn't planning on making money on it.  It is just that the mortgage payments would be considerably less than rent in the same period of time.  Then I would be hoping that a sale at the exact same price as I purchased it for would wipe out the rest of my principal on the mortgage.  Water heaters, plumbing, and electrical issues are certainly something I will keep in mind, but I also already plan to save for such contingencies.  There are also financial risks in renting, especially because so much renting is controlled by companies these days that have the ability to be lax tenants and not be on top of the maintenance. 

 

Either way it is a tough decision and one that I am approaching with the utmost caution.  Thanks for giving me more to think about!

 

I will try to search more for past posts on this topic.  If anyone else has experience or has a link to another post on this topic, I'd love the info!

[rising_star]

If you're looking into a condo, you *have* to make sure that they have solid internal management and reserves. Otherwise, you could get stuck with a huge assessment if the roof needs to be redone or the parking lot repaved, for example. I have a friend (non grad student) who moved into a condo and got hit with a $10K assessment in year 1 because all of the buildings needed new roofs and the exterior needed to be painted and the association didn't have enough in reserves to pay for that.

 

The other factor is considering the 6% hit you'll take when selling unless you manage to keep realtors out of the equation altogether. Also, when doing your calculations, don't forget about homeowner's insurance (and whether you'll need separate coverage for high winds or flooding). I know my renter's insurance is like $100/year but that homeowner's insurance in my neighborhood runs closer to $1K/year for the same basic coverage. The difference, of course, is that renter's insurance doesn't cover the structure since that's your landlord's problem and not yours.

 

I thought about buying when I started my PhD and again after my first and second years. I opted not to because the market here has been crazy (condos that were $100K my first year sold for $70K my second year and, in several cases, have fallen in value even further since then). Also, I've had great luck with landlords. I've rented three times from private owners, all of whom lived in town and had an interest in maintaing the property. So, don't be down on renting just because some management companies suck. Right now I'm renting from a big company (seriously, they manage more than 700 rentals) and they're actually fantastic about calling the maintenance company when I need something fixed.

[Usmivka]

If you're looking into a condo, you *have* to make sure that they have solid internal management and reserves. Otherwise, you could get stuck with a huge assessment if the roof needs to be redone or the parking lot repaved, for example. I have a friend (non grad student) who moved into a condo and got hit with a $10K assessment in year 1 because all of the buildings needed new roofs and the exterior needed to be painted and the association didn't have enough in reserves to pay for that.

 

The other factor is considering the 6% hit you'll take when selling unless you manage to keep realtors out of the equation altogether. Also, when doing your calculations, don't forget about homeowner's insurance (and whether you'll need separate coverage for high winds or flooding). I know my renter's insurance is like $100/year but that homeowner's insurance in my neighborhood runs closer to $1K/year for the same basic coverage. The difference, of course, is that renter's insurance doesn't cover the structure since that's your landlord's problem and not yours.

 

I thought about buying when I started my PhD and again after my first and second years. I opted not to because the market here has been crazy (condos that were $100K my first year sold for $70K my second year and, in several cases, have fallen in value even further since then). Also, I've had great luck with landlords. I've rented three times from private owners, all of whom lived in town and had an interest in maintaing the property. So, don't be down on renting just because some management companies suck. Right now I'm renting from a big company (seriously, they manage more than 700 rentals) and they're actually fantastic about calling the maintenance company when I need something fixed.

It might help prospective buyers/renter to evaluate your experience and how it could inform them if you said what sort of city you are living in. You have lots of great advice, and I agree with it by and large, but I know that where I am, my anecdotes are sometimes virtually the opposite of yours.

 

I'm in Boston, and rental prices have gone up 7-10% every year, while condo units have shown slower but steady gains in sale prices since 2010. My homeowner's insurance is about half the price my renter's insurance was, and I only moved three blocks, so it isn't a difference in neighborhood--my insurance rep said that their formulas assume a renter my age in Boston is significantly more likely to make a claim than a homeowner, so the price difference in a city could depend heavily on how much of a "college town" you live in.  And I do have duplicate coverage, but my HOA has master insurance that covers the structure including the unit and appliances inside ("walls-in"). I agree that checking on reserves and structural issues is always a good idea, but the same issue is true for renting--right before we moved into our last rental some kids upstairs had a house party that collapsed the back deck and ripped the back wall off three stories of the house--everyone in the house previously was kicked out for repairs and got minimal relocation assistance, so their out of pocket costs were about the same as a mid-size assesment. The owner didn't have enough money to cover his liability, so he ended up being a real scheister thereafter too, upping the rent massively, confiscating some occupants' security deposits with barely justifiable pretenses, and transferring all his cash assets overseas.

 

 And the sales fees and insurance and maintenance expenses and many other factors are taken into account or estimated in the above calculator. It sounds like emorygrad87 is doing what I did, and assuming a worst case scenario--even steady state in the rental and housing markets, plus taking a year to sell, would be an improvement over my baseline assumptions and the savings are still tremendous.

 

I agree, as before, that 15k isn't enough of a buffer to be worth the hassle and risk. But even in the short term, if rent is much more than the mortgage then the money saved and used for other things now is worth more than the cost of floating the unit later, when inflation has decreased the real value of the debt and we presumably have higher paying jobs (if we believe economists that money now is worth more than money later).

Edited February 21, 2013 by Usmivka

[iowaguy]

One other thought, in general this is a buyer's market for homes - record-low interest rates, some pretty low-priced homes due to foreclosure pressure on housing markets, etc...

[emorygrad87]

Thank you Usmivka and rising_star for your thoughtful posts.  I'm glad I decided to consult the gradcafe community.  I convinced my parents to come down with me for grad weekend.  My dad is just a general handyman and they own a few rental properties.  I'll share your all's input and if they give the ok on a property, I think I will go for buying over renting.

 

The one downside I see is that I will be in a quieter area versus renting and being in a hipper/trendier area.  That may benefit my studies though!

[awe]

Actually, even if you sell the place at the same price you bought it for, you'll probably still end up better off. If you rent, you're basically flushing your money down the toilet. If you buy, you pay the bank, and then when you sell, minus the interest and the agents' fees, you get your money back, and you'll have lived for free for that time period. If you're able to buy a place with a few small fixable issues, you could improve it slightly (or a lot), and sell it for more, even in the case that property value stays the same. The main thing to watch for is the area; otherwise very nice houses are limited by the surrounding houses / neighborhood. So, a very nice house in a poor neighborhood is worth less than a poor house in a very nice neighborhood. 

 

You're only in trouble if the property value goes down. Other than that, assuming nothing terrible happens (your roof gets ripped off, etc.), you're almost certainly in a better position if you buy vs. rent. Think about it - if renting wasn't profitable, no one would do it. So, not only are they making money off your rent each month, but by the time you leave, all your money is gone, and you have nothing to show for it. 

 

If possible (generally speaking, and not taking into consideration special circumstances) my impression is that as a rule, if possible, buy rather than rent. 

[33andathirdRPM]

Interesting thread. I've been thinking about this same thing.

[Onedayx3]

Wow. I can't believe I found a thread on this. My figure is the same. I will save at about $15K if I buy. Rent in Boulder, CO goes for $800-$1,000, and I could buy a home under $100,000 and pay $300-$500 a month and get some of my money back when it sells. I will be saving money every month, unless I decide to turn it back into adding equity into the house - which still profits me.

My concern is having to commute 30 minutes to school for a house in this price range. I would like to put my daughter in school close to campus because I will likely be keeping decent hours on campus and there's an on campus child care facility as well as girls/boys clubs local. My thought is that when I graduate I might have to take a crappy adjunct job before getting a tenure track position, and I prefer not having a massive debt looming over my head. I just want to set myself up for the best post-graduation scenario.

[travelnguy]

Wow. I can't believe I found a thread on this. My figure is the same. I will save at about $15K if I buy. Rent in Boulder, CO goes for $800-$1,000, and I could buy a home under $100,000 and pay $300-$500 a month and get some of my money back when it sells. I will be saving money every month, unless I decide to turn it back into adding equity into the house - which still profits me.

My concern is having to commute 30 minutes to school for a house in this price range. I would like to put my daughter in school close to campus because I will likely be keeping decent hours on campus and there's an on campus child care facility as well as girls/boys clubs local. My thought is that when I graduate I might have to take a crappy adjunct job before getting a tenure track position, and I prefer not having a massive debt looming over my head. I just want to set myself up for the best post-graduation scenario.

$300-$500 for a $100k loan? Don't forget to add property tax, insurance, and mortgage insurance if you don't put 20% down.

 

Still, depending on the city, buying can be cheaper than renting. We are looking at doing the same thing.

 

We found an older home with a new roof and a new central AC unit for $80,000 in Minnesota. Rent in the same area would cost us $800-1000 for a 3 bedroom. Campus housing is out of the question as we have dog that we can't separate from our son's side.

 

Great thread.

[ylimer]

Ok, I have a few cents to add. I'm not gonna lie, I didn't read everything before my post. So, I bought a condo right before a Master's program (and was planning on staying). I have to admit, it was the best decision ever. But you have to be careful, here is my advice.

 

- Get a condo. Houses are going to be so much more work than a condo already is.

- How much square feet do you think you need? Now buy something 75% as big. You do not need space if it costs much more.

- Get a 15 year mortgage. If you can't afford the difference, buy a cheaper property. You might not have to pay PMI then as well.

- Look for a mortgage with credit unions. They tend to have more flexibility.

- Location, location, location. Better a 400 sqft apartment near the university than 600 sqft slightly out of the way.

- Buy what you would want to rent, not settle down in. As much as you want to nest, when it's time to leave, you'll want it to be rentable.

- Think you'll fix things? You'll get around to 30% of it, it'll cost twice as much, and take three times as long as you expected.

 

Here are the details of my purchase:

 

I bought a 410sqft condo in a very desirable neighborhood in Austin, TX.

I was 82k and I put 15% down. I do not pay mortgage insurance. My interest rate is 3.425%

I have a 15 year mortgage and my payments are about 500/mo. Plus an additional 150/mo for taxes.

I pay 171 in HOA fees, which includes utilities, cable, and internet. So it costs me little over 800 a month, which is about what it rents for.

After about 2.5 years, I only have 60k in principal left, and luckily the property value rose. I'm looking at about 40k in equity.

It was worth it! But I settled for a lot less than I "wanted."

 

That being said, I ended up applying to PhD programs and fully intend to buy when I move. So, I'm probably going to lease my condo this Fall. I'm sad to go.

[ylimer]

I wanted to add one more thought. Even though I probably spent the same if not more money in the past 2.5 years, a huge chunk of it went into an "investment" account called home equity. So when you're crunching your numbers, remember that you can be paying your own mortgage, or someone else's. Only one will you get some of your money back, technically. Just be smart about the housing market.

[lypiphera]

There are a lot of good points people have already mentioned that you should take into account when considering buying.  One to add (that has been touched upon) is the possible maintenance that you will need in the future - not just the cost but the convenience.  If the difference is really only $15k, I would definitely rent for that.  Something will come up in 5 years (likely multiple things), and when you buy, you not only foot the bill, but have to really take care of it and not just call the apartment manager and have them send maintenance up.

 

Of course, there are hidden benefits to owning as well (e.g. allowed to make changes, less rules/restrictions), but the hidden costs of listing, re-selling, HOA fees, waiting while it doesn't sell, etc., mean that it really needs to be a big difference to be worth it for 5 years, IMO.

[Chasely]

Holy smokes, you all live in cheap areas. Jealous over here. I would only save $200/month by owning instead of renting. Not worth the risk for me.

Edited March 18, 2013 by Chasely

[ylimer]

To address Lypiphera's good point, this is the main reason I would advise to purchase a condo only. With condos, maintenance is very low because you're only responsible for the inside. So, you might have to replace a faucet here or a refrigerator there. You'll never have to pay for the biggies though like a roof, or foundation issues etc. Just make sure you get an inspection! Second reason to stick to condos, homeowner's insurance is super cheap. It's basically like renter's insurance, because the HOA insures the rest. I think I pay like 14 bucks a month. Third reason to go condo, it's way easier to rent out if/when you move. You could even make a profit.

 

 

Lastly, if you look at a mortgage as a cost, it certainly paints a dimmer picture in terms of cost savings, but it's technically not. I look at it as just putting money into a long-term investment account.

[biscuits]

This discussion raises a lot of very valuable points, particularly regarding the hidden costs of home ownership. My issue with condos is that you are stuck living with other people, with very minimal outdoor space. After years of renting apartments, I don't want to have to worry about upsetting the neighbors, and I'm tired of dealing with their antics. (Holler, Boston on St. Patrick's Day!) I also yearn for some amount of green space. Pressing my face to the glass doesn't count. I realize this makes me sound like a crochety old lady. I'm cool with that.

[Sumac77]

This is a great thread! I'm curious about many of the same questions, and would really like to know people's experiences with lenders. Any credit unions/banks you can recommend that have worked with graduate students before? I'd be purchasing alone, with parents co-signing, in the NJ/PA area.

[Domino]

Bump!

 

Would love to hear from more on this topic.  I'm moving to a city where it would cost roughly the same monthly whether I rent a place or have a mortgage, so I'm thinking buying is the way to go.  I understand there are additional costs associated with ownership (maintenance, taxes, HOA fees, etc) but I'm hoping to maybe a buy a place and have a roommate move in.  Anyone have experience buying and renting out a room or two?

[zipykido]

Bump!

 

Would love to hear from more on this topic.  I'm moving to a city where it would cost roughly the same monthly whether I rent a place or have a mortgage, so I'm thinking buying is the way to go.  I understand there are additional costs associated with ownership (maintenance, taxes, HOA fees, etc) but I'm hoping to maybe a buy a place and have a roommate move in.  Anyone have experience buying and renting out a room or two?

 

I've been up in grad school for almost half a year now and I've been in the market to buy a place. My current issue right now is that unless you buy it outright, you don't really save much money in the long run. I'm currently paying $650 in rent. Over 4 years that's 31.2k which seems like a lot. However if you consider that you need at least two years of income to get approved for a loan it becomes much harder, on top of the 20% down payment, the hassle and fees quickly outweigh the benefits. I know people who were able to get financed and then rent out their place which pretty much covers their mortgage and association fees so they effectively pay 0 rent, however to do that you need quite a bit of capital. 

 

If I got a 2 bedroom condo for 100k (middle of nowhere New Hampshire), my condo association fees, taxes, loan, and insurance it would probably be about $800 a month. Which is no problem if you have a roommate constantly. If I charged a reasonable $600 a month up here, I would only end up paying about $200 a month. However this assumes that I have a roommate all the time guaranteed and paying that much a month would make things very tight. Additionally closing cost for a property of that value is about 3-4k, and selling it after I moved would be 6k, and maybe 2-3k for fees. I could rent it out when I moved away and make it an income property but that has risks as well. Honestly I have the credit and down payment, but I still think renting is usually the better option for a grad student unless they have a spouse/partner with decent income. 

[danieleWrites]

I spent time moving with the military, meaning a new city every couple of years (his tour was weird).

In the end, our buying/renting decision came down to a single thing: pets. We bought in places we weren't going to stay for long because we had big dogs and we didn't want to lose them. Home ownership can be a for serious hassle. It's nice that we can do whatever we liked with the house (air conditioner? No probls. New stove? Sure! Repaint cabinets? Why not?) But that's not as easy peasy with homeowner associations that have rules about renovations and such. Sure, you can paint the kitchen, but can you stick in a window a/c if you want one?

While there is money to be saved with purchasing, there are also some serious cons. Imagine that your pipes burst in the bathroom. You may get your insurance company to pay for it, but you may find out that drives the cost of your insurance up. They may not cover the damage caused to neighboring condos. And so on. Will you be able to off-load the property when you want to leave? If you can't, or if it takes time, can you afford to pay the mortgage and the upkeep for a home you're not living in while paying for the place you are living in? Sometimes the market is hot and a place goes in a day, but these days? Not so much.

[juilletmercredi]

Actually, even if you sell the place at the same price you bought it for, you'll probably still end up better off. If you rent, you're basically flushing your money down the toilet.

 

This is a common myth that I see bandied around a lot, but I've done a bit of research on this and the consensus seems to be that it depends on a LOT of factors, including how long you intend to be in a place.  First of all, renting isn't flushing your money down a toilet; you're paying for a roof over your head.  It's just like paying for any other service.  Secondly, the assumption comes in that your maintenance costs will be nil in the house/condo; that you're going to at least break even when you sell the property (definitely not an assumption anyone should make in the current market); that your property taxes won't drive the cost of your mortgage above what you would pay to rent; and that, as someone pointed out earlier, that the cost of your homeowner's insurance (and mortgage insurance if you put down less than 20%) won't drive the cost up and over what you'd pay in renter's insurance.  Minus the interest and the agents' fees is a big minus.

 

Also about fixing up small issues to resell, you must consider the value of your time especially as a graduate student.  Do you want to worry about trying to sell your house when you are writing your dissertation and applying for jobs/postdocs?  Are you going to have time to work on fixing up that room or that deck or whatever when you are also studying for comprehensive exams?  I'm not saying no one absolutely will (in fact, many grad students buy!) but these are things to consider in addition to just the money.

 

I've heard it said that if you plan to be in an area for fewer than 5 years you should rent instead of buy.  Of course renting is profitable for the owners; that doesn't mean that it's a bad deal for the renter.  I mean, Coca-Cola is making a profit off your Coke too, but that doesn't mean that a Coke isn't satisfying.  Your money is gone but you weren't sleeping on the streets.  You might not have any equity in the place, but you DO have mobility (once your lease is up, you can move out and don't have to worry about listing and selling the place) and the luxury of free maintenance (pipe bursts?  Call the super, no out of pocket costs).  For some people - like myself - mobility is far more valuable than equity in a place, especially when I have no idea what my next move will be.  (My opinions are also colored by the fact that I live in NYC, so I wouldn't be able to afford anything here and more than likely I would have to hire a management company to rent my place out after I move.  One of my friends does own a 3-bedroom apartment here in the city, though, and he plans to rent it even if he moves away from the city.  It's very nice and he probably will make a little income off it.)

 

I'm not saying absolutely don't buy - in a lot of places buying is the way to go, as you'll save a ton of money.  But it's not true that buying is universally better than renting.

 

*

 

FWIW my younger brother bought a 4-bedroom house in suburban Atlanta (where we're from) for $125,000.  I think his mortgage is maybe $800/month.  (One-bedroom apartments in that suburban area can range from $650-800/month.)  He does sometimes rent out at least one of his extra rooms to roommates.  Mostly he finds them through personal contacts; I don't think he lists it on CL or anything like that.  He also bought the house because he planned to live there permanently; he can afford to pay the mortgage by himself.  I think the threshold, for him, is a bit higher for a roommate because any damages the roommate makes are to his personal property and he has to fix it himself if the roommate does not, unless he's willing to take the time and expense to take the roommate to court.  He hasn't had that experience yet, thankfully.

 

IMO if you're going to buy a property it should be a mortgage that you (and a partner) can afford to pay on your own without roommates, just in case something happens.  It's not quite like signing a joint lease with a rental company.  If you're renting an apartment and your roommate skips out on rent, you might be SOL on the apartment but you're not out any money.  If you buy a place and your shady roommate disappears on the 30th, you're out their part of the mortgage that month and however many months it takes you to find a new roommate.  If you can't afford it by yourself, you could put yourself in a bind.

Edited March 12, 2014 by juilletmercredi