Profile picture for DParz30

23 Years Old - Should I Buy?

Let me start by laying out my financial situation:

I make 60k per year gross income
20k in student loans @ 6%, now paying off at $500 per month (min is $200)
$375 monthly car payment
~$8,000 cash
~$15,000 in mutual funds, stocks, IRA

I typically have about $1000 additional income that I save at the end of each month.  I pay $650 for rent, + $75 for utilities.

I plan on getting an online MBA over the next 2 years, which will put me an additional $40,000 in debt.

I will stay at my current location for at least 3 more years, but I may move after that time period.

If I buy a house I am looking for one in the $100,000-$125,000 range, and I would rent out a room for $550-$650 a month. 
  • February 24 2011 - Hendersonville
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Be a Good Neighbor. Be respectful and on-topic. No spam or self-promotion! See our Good Neighbor Policy.

 
 

Answers (33)

What happens if, when you finish your MBA, you get offered a job in a different town (or state, for that matter). Buying a home can be quite a committment. Something to consider at 23...
  • March 02 2011
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Not living in the house, if you rented the house you want to buy, how much income would the house have a month?
  • March 02 2011
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Talk to a mortgage rep, he or she will sit down with you run the numbers and you can see what your ratio is and how much of a home you can exactly afford, the mortgage rep will run your debt to income ratio to see where you stand.
  • March 02 2011
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Profile picture for klarek the realist
Sergio: "Buy!"

Yes, we get it, agents want people to buy, even if they plan to move in three years.  This is why people don't trust agents.  I'm sure you were saying the same thing to people back during the bubble.
  • March 02 2011
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Buy!

If you do your homework and buy right, it will ultimately be a good investment for you.
  • March 01 2011
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If you were here in Kansas City, I could show you a couple of different ways that buying might be cost effective for you.
I don't know the real estate market in Kentucky though so couldn't give you accurate, specific and practical advice about purchasing and / or renting there. Here is an address with several different agents who do work that area. Maybe you could talk to a few of them to see what they have to say.
http://activerain.com/states/KY/cities/Henderson
http://activerain.com/states/KY/cities/Henderson
  • March 01 2011
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Do you need a mortgage calculator and rent vs. buy calculator to show you what the monthly is on a $125K home? 

You're presently paying $675 renting.  When owning you would have someone pay you $550 for a room!
 
Do the math and let me know which works to your advantage?
  • March 01 2011
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Profile picture for dacolan
"If I were to move in 3 years after buying a house, how difficult is it to rent it out while living in an apartment in another city?  Is it generally a better idea to do that or to sell it at that time?"

I probably should have addressed this question before my last post in this thread. Conservatively speaking, the house you buy will need to appreciate ~10%, after adjusting for inflation, if you were to sell three years after buying just to be reasonably sure you'll break even on your investment. This equity should cover most, if not all, of your closing costs, RE agent commissions, etc.
  • March 01 2011
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Profile picture for DParz30
Jdsdaddy,

I appreciate your response.  I will say that right now I can't say I am leaning either way.  I currently do not live in this location, I live in Kentucky, about 50 miles north of where I'd like to move.  I wouldn't purchase a house without living in the area for at least 6 months.  My time frame to purchase would be in December/Jan of next year.  I am posting this now because if people suggest it might be a good decision, I want a lot of time to do the necessary research.  This definitely is not a decision that I would take likely, and right now, because I don't know much about this topic, I wanted to get opinions from others who have experience.
  • March 01 2011
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Profile picture for dacolan
To add to Dunes comments below, another thing you should consider is educating yourself about cash flow RE investing, and researching and tracking closely your local rental market. Watch individual neighborhoods for rental rates, rental:owner occupied ratios, vacancies and how long comparable units remain vacant before being leased.

Here are a couple of links to help get you started:

Want to Know When Housing Has Bottomed? Here's How

When Should I Buy a Home? Have We Reached Bottom Yet? What Is The Right Price?

Don't worry about the "have we reached bottom" themes (we haven't in most markets). These articles also describe how to evaluate a good cash flow RE investment, which is one fundamental way to gauge fair market value when buying residential RE.
  • March 01 2011
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Profile picture for klarek the realist
So it seems that there are arguments for owning and for renting.  Posting this question seems to have made the decision even harder.

Agents will always tell you it's a good time to buy.  If any of the ones responding to you were in the industry five years ago, they were saying the exact same thing back then.  Just consider that in three years of owning, you will hardly have paid any of the principal balance.  The cost of selling will be at least double the amount you've paid it down, and there's no assurance that it will be worth any more.  In other words, if you buy and sell in three years, be prepared to bring thousands of dollars to the table.

  • March 01 2011
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Profile picture for jdsdaddy
Look at the comments you have gotten.  Sales people who encourage you to buy but can't for the life of them provide you with any numbers or evidence to support their claim.  They keep forgetting that intelligence does not convey with having an "agent" tag next to their name.

On the other hand, those who have urged you to be careful have followed up with plenty of numbers to back it up (I especially agree with the thought that your time frame is far too short).  Seems like a no brainer as to which group is more sincere.

You sound like a smart fella, but it seems to me like you've pretty much made up your mind to buy and came here looking for affirmation.  We've seen this plenty of times here over the years, and the message from the honest folks has been and will always be to use extreme caution and prudence when making real estate decisions.  Some listen, some don't, but I can make a pretty good guess as to which group is presently happier.

 
  • March 01 2011
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Is your alternative; paying more in rent?
  • March 01 2011
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Profile picture for Dunes....
DParz30

The most Honest answer is....Depends

You have posted the General reasoning for Investing and what you feel would be acceptable results so let's put aside all the Good market/Bad Market, Home Ownership Matters, always a good time stuff and get Real..

You obviously know Credit Score will be a Huge Factor so let's start by assuming Credit & Loan are a given just to move on....
YOU STILL HAVE TO START AT THE BEGINNING!

Achieving your goals in Education requires Study...Achieving your goals in Employment requires Study & an understanding of the Playing field..
Why would investing in Real Estate be any different?

First...YOU (This is your Money) NEED to know your Market....YOU need to become knowledgeable enough that YOU know if your goals are Realistic....

Religiously cruise the MLSs for your Market, The Bank REO sites, the Gov. Foreclosure sites, these sites, know the neighborhoods, schools, sales price med vs listing price med...will prices drop, low sales, more inventory coming, local economy, city budget, county, state, services, jobs

Now what fits your goals?...Cheap Fixer in good neighborhood..gonna be there 3 years so can hire out of work carpenters cheaply to fix up/improve over time...duplex.....lot and modular or have something built cheaply (In my area there are Reputable Builders offering 2bd/2ba Turn Key construction for $80-90,000..sometimes you can buy, tear down and build for cheaper than a straight purchase if you stay on top of things/alert)

You need to Study so YOU can tell who knows the Market, who's blowin smoke, what your options are and how to best achieve your Investment goal...

You have a lot of options to consider and yes you could achive your stated goals IMHO but only if you Study & have a understanding of the Playing field.....(Learn to recognize smoke then ask RE Agents/Lenders questions..they are Selling Services for a good amount of Money so be a Wise Shopper)

Start at the Beginning, learn all you can about your Market Area so you answer your own question..Should I Buy?



  • March 01 2011
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Profile picture for DParz30
If I can chose a home with with good renting capabilities, and hire a property management company, what is the probability that it can generate revenue?  What are the typical margins for that type of situation?  I know each individual scenario is different, but if it can provide a stream of income and can sustain itself then it seems like a good investment.
  • March 01 2011
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Profile picture for sunnyview
It is a bad idea to buy in this type of market if you plan to sell in 3 years. Renting out can be an option, but you need to make sure that the property can basically carry itself and it's bare bones expenses like taxes, mortgage, insurance so that it does not squeeze you if you are living somewhere else.

If you plan to buy and then rent it out, you may want to change your parameters to focus more on property that can give you a small positive monthly cash flow to cover management (in case you decide that's not something you want to do) and small repairs. That way you won't have to sell even if the market stays down for a bit and it won't significantly affect your ability to buy another house if you decide to keep it long term.
  • March 01 2011
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Profile picture for DParz30
So it seems that there are arguments for owning and for renting.  Posting this question seems to have made the decision even harder.  I'd like to ask another hypothetical question to tag onto this one...

If I were to move in 3 years after buying a house, how difficult is it to rent it out while living in an apartment in another city?  Is it generally a better idea to do that or to sell it at that time?

For more information about my situation please see my previous post.

Thanks!
  • March 01 2011
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Profile picture for klarek the realist
This is a great opportunity to buy right now.  The interest reates are still very low and that gives you more buying power.  Rates like these won't stay low forever.  Buy, while the rates are still low.

realtor emphasized urgency to buy NOW is just as sad as it was in 2005, 2006, 2007, 2008, 2009, and 2010.  Any realtor uttering such garbage should be avoided at all costs.
  • March 01 2011
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This is a great opportunity to buy right now.  The interest reates are still very low and that gives you more buying power.  Rates like these won't stay low forever.  Buy, while the rates are still low.
  • February 28 2011
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Profile picture for SteadyState
For you to break even 3 years:

Renting:
Year 1: $650 * 12 = $7.8K
Year 2: $700 * 12 = $8.4K
Year 3: $750 * 12 = $9.0K

In 3 years the total rent paid will be: $25K

Buying ($100K home):

Buying closing cost (title, inspection, loan origination etc.): $4K
Mortgage Interest: $5000 * 3 = $15K
Property taxes: $1500 * 3:    = $4.5K
Maintenance: $1000 * 3: = $3K
Insurance:     $500 * 3:   = $1.5K
Opportunity cost (lost interest on $20K down payment): $800 * 3: $2.4K
Selling closing costs (commission, title, etc.): $10K
Income: $600 * 12 * 3 = $21K - $7000 (taxes) = $14K.

In 3 years you will spend: $40.4K - $14K: $26.4K

The total possible gain over renting in 3 years  assuming you can rent the room every month for the next three years and your property does not decrease in value is $1.4K. To gain $1.4K you risk $20K + $4K = $24K on day one (not including the risk that your property goes down in value).

Your (risk free) interest in three years using a conservative 4% return per year is $3K over three years  based on compounding and the type of security.
You can tweak the numbers somewhat to refine the estimate and you can then decide. (perhaps some of the maintenance expenses are tax deductible - but your CPA can guide you on that).
  • February 24 2011
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Have you ever heard the phrase "being at the perfect place, at the right time?" Sure you have! You're there my friend and based on the details you gave us, you would be very wise to buy now.

Just ask yoursel...why do you think Investors buy when the market is down and sell when it's high? I rest my case.

Best to you!

  • February 24 2011
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Profile picture for clo1136
Are you joking

You should rent.  Anything you buy will be 10-20% less valuable in the next couple of years.  Does that sound like a good investment to you?
  • February 24 2011
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I will stay at my current location for at least 3 more years, but I may move after that time period.

With the cost of selling, financing, buying, etc, it would not be prudent to buy a home that you plan to own for only three years.

My guess is since you're going for an MBA that you are way smarter than me, so I will let you do the math (which was never my strong suit).

I also think your expectation of getting $650 for a bedroom is too high. Plus you have to consider any rental is not 100 percent rented 100 percent of the time.

The best advice I've gotten from watching CNBC is from author Suzy Orman. She is soooo right when she says you need at LEAST 8 months of emergency money on hand. Judging by my math, you don't have that money on hand, much less a down payment.
  • February 24 2011
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Profile picture for DParz30
Hey, thanks for the comments.  I want to clarify a few things...

1.  I graduated in 2010 with a chemical engineering degree.  I am a product development engineer at a company, and I feel comfortable with my job security.

2.  I am looking at top MBA colleges only such as Indiana University, Penn State, Arizona State University.  If I wanted to I could pursue a degree for much less money, but I want a top of the line online education, which means more out of pocket.  (My company gives 7k/year for advanced education)

3.  I currently rent an apartment for $650/month.  I don't mind renting, but if it is possible that it is financially better to buy a home, then I would like to explore that option.

4.  I can afford $1000 a month, but I would prefer to pay less than $900.  I do not know how much my salary will increase in June, so that will have an impact on what I can afford.

5.  I am on track to pay off my student loans in 3 years if I continue paying them on my current plan.  When in Grad School I can suspend the loan payments since I will be considered a full time student.  I intend to do so and invest that money. 

6.  I am going to get the MBA so I can get a better paying job.  I will have to stay with my company for 3 years to get the $14,000 to go towards education, but after that I do plan on looking around if my current company can not give me a substantial pay increase.

7.  Renting out a room in a 2 bed/2 bath house would be the only way I can see this as a feasible plan.  Having that ~$5000 a year would cover quite a lot.  If at the end of 3 years, my cost will be less than an average of $700 a month (this would include closing costs, the rental income averaged in, etc) then I think it would be worth it to get a house.

8.  I do realize I am young, and most of you have more experience than I do, so I will trust your judgment.  Thank you!

  • February 24 2011
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Profile picture for Connie Klemme
my only two cents is to stay in a budget where that renter for your extra room might not pay on time, might move out without much notice, you might not like them and want them out quickly and have no one to replace them. So if you can't comfortably afford it without them it might not be a good idea.    I can't imagine paying that much rent for a room when you could rent a whole smaller house for the same amount since you pay that type of rent now- are you renting just a room?  Don't add extra financial stress while in school and taking on new debt.  That doesn't mean don't buy, just consider your buying options carefully and consider re-sale issues or rentability of the whole house in 3 years when you are ready to move. (not sure rentability is a word...but it sounds good to me)
  • February 24 2011
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Profile picture for dacolan
"You're not too young to buy!  The most important thing is to find a situation that you can handle financially without too much stress.  My suggestion is to consider a two-family home that will generate rent to offset the cost of the mortgage."

Of course 23 is not too young to buy, especially when an individual is as mindful of the commitment they're considering as the original poster obviously is. But what is the probability of adding the responsibilities of landlord (in the same building no less) to a person working full-time while pursuing their MBA not resulting in significant added stress?
  • February 24 2011
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Profile picture for the_country_hick
Normally I would say the opposite. Stop saving so much money now. Start using it to pay off your student debts. Student loans have put a huge pressure on many people. In some cases it has made them unable to buy a house. Pay off as much of your college costs as possible while still in school. If possible get an extra job so you can make more money. I know, extra hours = no life. Financial friendliness does come at a cost.

After you are finished school and have enough cash to cover your moving expenses and some extra rent for 1-4 years. The reason is you never know how well a job will work out or how long it will last. It would be horrible to move 1,000 miles to get a job, buy a house, and then 3 months later have the job go away. Renting gives you some financial safety.

The site below gives house price predictions. Look a it.
Tennessee

Tennessee is sustaining the real estate crash better than most of the U.S. That isn't to say the state is out of the woods yet, but the hills of Tennessee are looking better than a lot of the country. Sluggish home sales produced by weak consumer sentiment riding over the housing market are keeping the lid on a quick recovery.

Look at the numbers.
"Does it make more sense to buy, or to rent? Here is the way to find out for sure."

This gives some solid reasons renting can be the best choice especially short term like 5 years or less.
"Why rent if you could buy for less money? Valid reasons inside."

"Do low interest rates really make it a good time to buy a house?"


Peter Schiff: Here's Why Home Prices Have To Decline At Least 20% And Probably More
  • February 24 2011
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You're not too young to buy!  The most important thing is to find a situation that you can handle financially without too much stress.  My suggestion is to consider a two-family home that will generate rent to offset the cost of the mortgage.  You can still benefit from great rates and a minimal downpayment because it will be owner-occupied by you! If you decide to move, you can rent out your unit and have an investment property. 
  • February 24 2011
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Profile picture for dacolan
"Another option available to you is a 5/1 I/O ARM."

Hard to believe any RE pro is still recommending (or even willing to underwrite) interest only ARMs to anyone these days, much less a single, 23-year-old student.
  • February 24 2011
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Profile picture for dacolan
"I will stay at my current location for at least 3 more years, but I may move after that time period."

Your finances are irrelevant given such a short time horizon. After you account for transaction costs (closing costs, commissions, etc.), it takes ~7 years to break even in a flat market, longer in a declining market.
  • February 24 2011
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