Is it a sound financial decision to buy a house that you will only live in for four to five years?
My husband and I have no debt. I am 25 years and he is 27 years old. We currently have about $70,000 saved between our investment account and a money market savings account. I am contributing 10% to a 401(k) with a 5% match. Our household income is $65,000. My husband is a PhD student and I'm a nurse. The rent we would pay for a similar-sized house is $1,500-1,750 a month. We are planning on looking for a house that is under $175,000. We can afford a down payment that's 15-20% of this amount. Is this a sound financial decision? We do not want to continue living in an apartment, but we would only live in this house for four to five years.
Buying in your case is a sound decision if the home can easily be converted into a rental property when you leave. If you buy a home that is difficult to rent out (and difficult to resell for that matter) the bare minimum time you spend there should be 7 years. When I think of homes that are difficult to rent out or resell I think of way out in rural areas, new constructions, bespoke homes, homes with high upkeep costs, etc. However, if you buy a home that you know will be easy to rent out because it is in an area where there is a lot of rental demand (near a major university, lots of transient young professionals, etc.), you can always just turn it into an income-producing asset when you leave by putting it on the market as a rental.
If you don't want the hassle of being a landlord, you can usually hire a rental agency for a modest one-time upfront fee and then about 10% of the ongoing rent. That way, it is out of sight and out of mind, being professionally managed, and you just sit back and collect the check.
You are well-educated young people clearly committed to making smart decisions and growing your assets. Owning rental real estate is a nice diversifying tool as you grow your assets. It's good to own some stocks, some bonds, and some real estate. I think buying a home, living in it for a while, and then turning it into a rental property for income when you move on could be a great play for you.
Great question and kudos for planning ahead.
I wouldn’t recommend buying a house if you only plan to live there for a few years. Real estate is illiquid and the transaction costs are high. Further, the cost of home ownership is much more than just the monthly payment. You need to consider the extra insurance and property taxes you’ll pay. Maintenance costs would be your responsibility instead of your landlords. Repairs expenses are your responsibility, too, and often they can cost thousands of dollars. Expecting your potential home to appreciate enough to cover these costs, plus return a profit, may be unrealistic in such a short time frame.
Further, when your husband completes his PhD, the best opportunity in his career field may well be located elsewhere. Trying to sell the home quickly is far from advantageous. Being a long-distance landlord usually doesn’t work well either.
I love home ownership and would certainly encourage you and your husband to consider it when his schooling is complete and you both have settled into great jobs. Continue to save for a down payment, keep your costs of living low, and consider bumping up your retirement savings to 15%. And enjoy this time without the burden of home ownership opportunities!
There is no need to feel rushed to make such an important decision! Take your time and buy when it makes sense for your life plans and your finances.
I am generally not a fan of this. I recommend at least 7 years as a break even and feel even stronger about this in a world where most people will be taking Standard deductions vs itemizing. Remember the first 4-5 years of a loan you will be paying down very little principal. Not only that you'll have added real estate costs and purchasing and selling a home generally cost a lot of money. 6-8% cost to sell alone! Also a house valued at $175,000 typically isn't one you'll see highly appreciate over that time period. I'd much rather see you remain liquid and continue to save money to purchase a more permanent house a couple years down the road. You'll be able to afford much more then and will also be eligible to take advantage of first time home buyers benefits that may be made available to you. Hope this helps.
The argument to purchase a house is usually a personal one (Esteem value, pride of ownership etc) or a financial one. One can't argue against the former. But there are several situations when the financial argument for purchasing a house breaks down.
One of the arguments for buying a home is that when you rent, there is nothing to show for it at the end of the lease period, but if you own you are putting money towards the equity in the house. It is not that simple- for one interest on mortgage is front end loaded which means in the beginning a larger part of your mortgage goes towards interest than towards principal (ie equity). There are other costs involved with home ownership such as taxes, insurance and maintenance. You also probably have to pay brokerage fees paid while selling and buying a house. All that adds up and usually, home prices have to appreciate a lot to overcome these expenses.
Secondly, the tax deductibility of the interest on mortgage is a bit less attractive for a lot of people now that the standard deduction has almost been doubled. (You may want to run this by a tax accountant who has all the details of your tax situation.)
Finally, buying and selling a home takes a lot of work and you would rather have the flexibility that comes with renting if your outlook is only five years.
So, there are a lot of factors that go into this decision and some of the factors are not that clear cut. Here is a calculator that helps you decide whether it is better to buy or rent, but remember this calculator is only as good as the data you put into it.
You’re going to love this answer - it depends!
It might be a sound decision, but it depends on more than just the finances you listed. For starters, where you live and the current housing trends in that location are important. It’s hard to predict what will happen in five years, but real estate analytics can offer a little bit of guidance.
You also have to think about maintenance, taxes and other fees associated with homeownership. If you drive your monthly cost much higher than what you’re currently paying in rent, you could end up with crippling debt. Conversely, if you get a good mortgage and have the time and money to deal with owning a home, you could end up with a good piece of real estate to either rent or sell down the road.
What’s most important is that you don’t take on a bunch of debt for a house you’re not planning to immediately rent or sell. Buy a home because you can afford it and have a plan for its future use, not because you love the idea of owning instead of renting. If you crunch all the numbers and feel like your finances are stable and you’re investing in a good property, go for it. But make sure you aren’t leaving lots of variables unaccounted for that will sneak up and bite you later. Good luck!