Buying versus Renting

[walt526]

So I've been evaluating my housing options for East Lansing, and I'm starting to think that it would make sense to consider buying.

 

For instance, e could get a 3bd/2ba around 1000sqft in East Lansing (plus basement and two car garage), right on a bus line (that drops off right in front of where most classes are) for a little over $90,000. From the pictures, it looks like it's in pretty good condition (obviously we would fly out there to see it and have it thoroughly inspected before making an offer). There's a $7500 downpayment/closing cost assistance from the state (basically, it's a no-interest loan that has to be repaid when the house is sold). At 5.125% (rate from the credit union affiliated with MSU) for a 80/20 30 year fixed-rate loan, we would be looking at a monthly mortgage payment of about $400/month (about $90 going against principal, $310 to interest). Property taxes would be about $300/month, so total payment would be around $700/month. There would be other tax breaks (besides the interest deduction of around $3750 in year 1, it appears like there might be other credits that would lessen the taxes).

 

Now my wife will most likely be staying in Sacramento for the year and we'll just keep our current apartment. But between my stipend and her salary, we'll have the income to make it work. And I could potentially rent out a room the first year to make it work. We have sufficient saving to have enough to cover any unexpected repairs even after putting down a downpayment.

 

I had been looking for a decent apartment (either 1 or 2 bedrooms) along a bus line, but that would probably be around $650-700/month.

 

I guess that the big drawback is what happens if I fail my prelims... but based on what I've observed with the rental market, a house like this would rent for ~$800, so we could basically break even if/when we had to hire a property management company. But that's a worst-case scenario. I'm very confident that I'll be able to "survive and thrive" at MSU over the next 5-6 years.

 

Any thoughts?

 

PS: asquare, a discussion on housing options is very much "on topic" for graduate students. I am interested in hearing the thoughts of other PhD Economics students and will continue to repost it in this PROPER SECTION until you leave where it belongs or Erin terminates my account. It will get NO attention in the Lounge and we both know it.

[Mark_B]

snap

 

I just pm'ed asquare asking the same thing (after I noticed it had been moved).

 

Walt, from what you've said I think you should buy (subject to the usual d/d).

 

M

(fwiw, I have nil experience in the US real estate market but I have had a lot in Australia and NZ)

[Norsker]

Plunking down the money for a house doesn't seem prudent when you know you're almost certainly going to leave East Lansing in five years-what happens if the housing market tanks and you have to resell the house for much less than what you paid for it, if you can sell it at all?

[Mark_B]

@ Norsker

 

My initial reaction too, but from what Walt said it would basically pay for itself as a rental. So if the market does tank - sit on it. Time heals most f*** ups in real estate.

[Norsker]

@ Norsker

 

My initial reaction too, but from what Walt said it would basically pay for itself as a rental.

 

Well, rental prices should drop with housing prices.

 

 

So if the market does tank - sit on it. Time heals most f*** ups in real estate.

In the long run, it'll go back up. But in the short run, Walt may end up stuck in East Lansing!

 

I have a friend(graduating from college this year) who recently decided to buy a house because (in addition to the currently low housing prices), she could get an $8000 dollar subsidy for it. Unfortunately for her, the "Teach for America" program she was accepted to is almost certainly going to give her a teaching assignment outside of her region of residence, which means that she have to sell off the house and pay back the $8000(difficult in this housing market) and take the job(or pay the mortgage on it indefinitely in addition to rent wherever she's going to be living), or decline the position and have uncertain job prospects. That, of course, is the danger of 'encouraging' home ownership-it amplifies the recession by making it difficult for workers to relocate to where work is available.

[walt526]

Plunking down the money for a house doesn't seem prudent when you know you're almost certainly going to leave East Lansing in five years-what happens if the housing market tanks and you have to resell the house for much less than what you paid for it, if you can sell it at all?

 

Absent a major repair bill or housing market crash, I have trouble seeing how we're going to come out worse off. Our closing costs would be about $2000 and figure that a commission when we sell would be 5% or less (no one pays 6% anymore). So the transaction costs for both buying and selling would be about $7000 if it sold for $100,000 (it would be a little less if did not appreciate). At the same time, we'll have built about $5400 in equity over five years.

 

The local housing market did not really appreciate much in the "boom" part in the earlier part of this decade, but it did decline a bit from 2005 (although nowhere near as bad as other areas, like Sacramento). I don't really know if it has anywhere lower to go (seems to be similar prices to mid-1990s). And if it does, the rental market seems pretty stable (there's not a lot of new construction--12 new residences built in East Lansing last year--but the undergraduate population has stabilized after about a decade of slightly decreasing). As I said, I'm pretty sure that we could hire a property management company and rent it for something around break-even if we couldn't sell for whatever reason.

 

At the same time, I think that there is a very good chance that we're looking at high inflation once the economy starts to recover in earnest. In which case, the house would be a decent hedge against that. And if inflation does take off, rentals (which usually increase at the same rate as nominal wages) would likely increase while the mortgage would be fixed (although property taxes might increase).

 

There's some degree of risk (as there is with any real estate investment). But it seems to me like it's relatively minimized... is that just wishful thinking?

[walt526]

Even if the rental isn't quite enough to break even, we're only talking about a "cash burn" of $100-150/month. Which would basically be the portion of the mortgage payment going toward principle (in Year 6+), so we'd basically be breaking even on the balance sheet even if it's a negative cashflow. And even if it is negative, -$150 is annoying, but manageable (especially if we're both working full-time at that point).

[Mark_B]

@ Norsker

 

Yeah, it sucks big time when property prices slump and transactions levels slow to a snails pace. Believe me, this I know.

 

But unless you're predicting a japanese style extended slump (are you?) then what we're talking about here is a fairly long way in the distance (5-6 yrs) and, by then, the ship should be back on an even keel.

 

Incidentally, does the US still have non-recourse loans?

[Norsker]

I doubt buying the house is going to cripple you financially, I just personally wouldn't do so-the stress of buying, maintaining , and reselling the house, in addition to the risk of dealing with a property value bust easily outweigh the benefits for me.

[Mark_B]

Otoh, if you buy you avoid the possibility of being forced to move if your landlord sells, and you can give your wife (who from what you've said is making some sacrifices in support of your PhD) a place she can call home.

 

I've been a renter and a home-owner. After several years of the latter, I could never go back to the former again (I know my wife likes to have her house).

[gatorgrrl]

For what it's worth, I'm interested in the same thing. I can't afford any houses in Vancouver, but if I were looking at houses in a market like East Lansing...and maybe in 2 years I will be...the story will be much different.

 

Also, if the house is really that conveniently located, finding willing renters shouldn't be too difficult if you do decide to leave the program early. I search by university name when looking at craigslist rental ads... As long as the costs of a management company aren't too high, you may still come out ahead or break even should you decide to leave the program.

[walt526]

Incidentally, does the US still have non-recourse loans?

 

It varies by state. CA is a non-recourse state. MI has what is called "Full Bid Credit Rule." As I understand it, at the foreclosure auction if the lender bids for the full amount owed, then they essentially forgive any difference between what is owed and what it ultimately sells for. It's essentially a judicial foreclosure (i.e., non-recourse) and happens most of the time. It looks like a lender might have the option of going after someone for the difference, but on a

 

 

I doubt buying the house is going to cripple you financially, I just personally wouldn't do so-the stress of buying, maintaining , and reselling the house, in addition to the risk of dealing with a property value bust easily outweigh the benefits for me.

I guess that my perspective is that being a tenant in an affordable apartment complex along a bus line will entail having to deal with mostly undergraduates, and that's something that I'd prefer not to have to put up with. And at the same time, renting a comparable place would be at least a hundred more per month (possibly more) and there's a good chance of rent increasing over the 5-6 years of the grad program. Also, there is some potential upside from a financial standpoint (i.e., the value of the property may appreciate). If the house is in decent shape for a 30 year-old home, then maintenance and upkeep shouldn't be exceptionally much. I'd be comfortable doing most of the routine things (and know enough to hire a professional for something major)--I worked for a number of years in the construction industry (purchasing agent for an electrical contractor).

[Team3]

Walt,

 

We put renters into the houses we bought during our assignments, and rental income helps to cover the notes. We were diligent, and on the balance our places have appreciated through the bust. That said, you already know real estate is risky, and MI more uncertain than most places. Not sure where this is, but my sense is that you might need some more macro analysis on this one.

 

I'd advise against a "student" neighborhood (if that is a possiblity) simply because property values tend to be suppressed, rents lower, and expenses higher if you become a landlord. Also, busline commutes to the University might be nice for you, and they might be nice for student renters, but they probably won't mean much when you try to resale it....which brings me to this: when you buy a house, you're buying into a neighborhood. And there is an aweful lot that you don't see on the internet when you're doing real estate research. That means you spend at least a week to a month somewhere getting a feel for the area and the comps before you make a decision. Give yourself that probationary period (maybe before the school year starts or maybe looking at houses is a good way to blow off steam), stay with a friend or rent during that time, and reconsider only after you've got a better feel.

 

Additionally, you've got to consider utilities and especially maintenance (...the last time I was in E.L. there wasn't a ton of new construction in the area around the school).

 

PM me if you want to talk.

[walt526]

Well we sort of have a feel for the neighborhood, in that we looked in that area for rentals when we were out there a few weeks ago (but we decided that a $850 rental for a multiple bedroom place wasn't worth it if it would just be me). It's part of the residence zoning area where they have pretty tight restrictions on how many people can rent it (I talked to someone who owned a few properties and said that although a homeowner has to "apply" for a license to rent, it's usually not a problem if the prospective landlord doesn't have a history of being fined or whatever. And they almost always approve applications from someone moving out of state who can't sell, as they'd rather not have the property be vacant. Also, fwiw, it's one of the smallest/cheapest places in the neighborhood.

 

Renting it out after we moved out-of-state would be a contingency plan if we couldn't sell... I just can't see the local economy getting any worse. The major private sector employer (Oldmobile) closed up shop years ago, so that shock to the local economy has already been absorbed. Within 5-6 years, I would be very surprised if overall, national economy hasn't improved; even if growth isn't occurring in Central Michigan, it's hard to see how it could get any worse (since the major employers are the university and the government).

[walt526]

I just located the actual property tax record and it looks like I overestimated what it considers taxable value. Based on Summer 2009 and Winter 2010, taxes would be $185/month, rather than $300/month. So $585/month for a place that would probably rent for at least $800/month...

 

Looks like it was foreclosed on in early 2009 ($127k owed) and bought by an investor who is now looking to sell it (been on the market for about a little over a month, property tax is current as of February). Hmm... (obviously need to see the property in person to figure out whether or not it's something worth considering, since I really don't want to get into a fixer-upper as a first year grad student).

[dsdoodle]

This is also something of great interest to me... I'm looking to maybe buy a house instead of rent. May be a good investment... thanks for giving me that idea!

[tm_member]

Hey walt, going through the same process myself, but I've decided that I would like to get to know Pittsburgh before committing to living in one particular area. So this time next year I'll probably buy something (with the help of my wife of course... Pitt's stipend is not $30k...)

 

As an aside, the reason I feel this is a valid conversation for the forum is not only because it is relevant to the Fall 2010 incoming students, but because econ students are in a unique position to be able to evaluate the costs and benefits in a particular way which Physics/Comp Sci/Chemistry/Math students cannot. It is unfortunate to have disagreement over such a small matter...

 

It is also important to note the difference between a brand new poster posting something irrelevant versus a respected and valued member trying to ask the opinion of people he trusts and he knows understand the issue at stake. Go easy, asquare. Rules are meant to be broken, once in a while.

[ilikefreefood]

Given those numbers, and the fact that you're moving to the state of Michigan, I would almost definitely buy. Sure, the housing market entails some risk, but five years from now there will still be a Michigan State University in East Lansing, and that means that demand for houses there will be much more stable than in the rest of the state. The vast majority of housing analysts believe that we are primed for a situation in which nominal housing prices remain flat and inflation eats away at people's investments. However, with the numbers you're presenting, you could probably come out ahead in this investment even with annualized decreases of a couple percent per year.

[Erin]

I've tried to split this discussion into two parts--the part right here that you're reading and the part about where this thread belongs. You can see and comment on the other part of the thread in the Feedback Forum here: http://www.www.urch.com/forums/feedback/119217-topic-off-topic.html

[hotfuss]

I've tried to split this discussion into two parts--the part right here that you're reading and the part about where this thread belongs. You can see and comment on the other part of the thread in the Feedback Forum here: http://www.www.urch.com/forums/feedback/119217-topic-off-topic.html

 

For what it's worth, this other thread is gold! It's well worth a read!

[Worcester35]

Well done Suja..I thought i would be all mine :(