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.
Couple things to think about here.....
the shorter time you own the house the great the risk of losing money on the property. But it sounds like you are mostly trying to lower your monthy expenses.
With your assumptions of a $175,000 (or less) house - if you can put 20% down your payment would be less than $1000 per month (depending on where you live and taxes). That means you would be saving $500-750 per month plus get a tax break. AND some of that monthly payment would go to paying down the mortgage.
As long as you think the house won't lose more than $500/m in value the time you live there, seems like a no brainer. Even if the house doesn't go up in value at all you would have a tough time losing money.
Best of Luck,
Dear Is It a Sound Financial Decision to Buy a House We Plan to Live in for Four to Five Years,
Deciding whether to rent or buy a home is an extremely important investing decision; you 25, your husband 27, he- still in school to become a PhD (BRAVO) you a caring nurse (BRAVO). You both, wise beyond your years.
Collectively, you present a "sound picture" of a family unit with a strong money conscience/mental awareness of financial fitness despite your youth, this trait is to be applauded. With $70,000 saved and with ongoing contributions to a 401K of 10% with 6% matching you are in a unique position, keep up the good/great work!.
To buy versus owning real estate you plan to own for a four to five year period will be impacted by many things; mortgage amount, monthly payment, credit scores for both, major expenses, down payment 10-20%, private mortgage insurance cost and maintenance expenses of ownership while your husband is still actively engaged in challenging work to complete his higher degree. My son is in his PhD program, year two in, it takes up every waking moment of his time requiring focus and dedication! Remember to acknowledge all priorities.
FIRST - FINANCIAL ABILITY
Put emotion aside, investigate and be aware of the required down payment and mortgage/insurance part of home ownership. (10-20%) Seek out a number of top recommended mortgage professionals, interact face to face, allow them to explain the mortgage process. Take the time to learn, allow them to empower you, until you are able to trust completely their presentation. If they offer to provide you with a pre-qualification letter and you are ready to purchase in a specific market area (perhaps: college rental area) request a pre-qualification analysis. Get an estimate of expenses over mortgage to maintain ownership on a monthly and yearly basis.
SECOND- MARKET TRENDS
Is the desired market where you are buying growing? When it comes to the balance of risk and reward in investing, understand that much like an investment in stock, etf, bond or mutual fund, you must understant the location, location, location before you fall in love with the "perfect" tree lined neighborhood! With a short term goal of four to five years, place keen attention to the question of anticipated yield for 1, 3 and 5 years as you would an investment fund, seek affordability first and see that there is potential for growth in the short term.
The emotions of home ownership are daunting. Make certain you are both in this together. You do not want for ownership of a residence or condominium to rock the boat that keeps your relationship afloat. If as you say, you are both "in" 100%, you with a professional nursing job that is secure and will last over the five year period and you can forsee the expense of mortgage payments coming from your paycheck for the short term, or long term, then a purchase of "investment" real estate can be the best and most empowering decision, improve, call home and in the same breath profit from within a 5 year period of time, my musician son is doing just this! If there is family support behind you to assist with improvements even better, take all the support you can get! Come to the table to write a contract with a professional Realtor with a known track record directing you to the best neighborhood, best value for your money, I acted as my son's "professional", a cost and emotion saver.
Acknowledge that all investing involves some degree of risk. This big step to purchase Real Estate is no different. Dedicate yourselves to do your homework first, dedicate time to investigate the market, the trends and the appreciation of like properties in the area. Are there proposed building of new homes in the area, parks, schools? The trend is your friend.
For me, home ownership is where I shine, get on my tractor, tend to a garden of my own. This is immensely pleasurable and delightful despite the work required for short and long term maintenance and upkeep and improvements. Make certain to speak with neighbors, understand the community, get a feel before you commit. Perhaps get the advice of family, friends, professionals along the way! Bravo to you both.
SIXTH- THE TREND IS YOUR FRIEND
Understand trends of ownership vs the power of renting in a market where the ability to get up and move is key for job, security and growth. Once you understand this point and all the research you and professionals you surround yourself acknowledge make a decision with all the evidence on the table, you are the one to decide. I purchased a home in a declining market, for some a poor choice of investments. Gaining 11 acres of land to grow grapes, plant olives and create the masterpiece of my dreams won out! You decide.
SEVENTH- SIDE HUSTLE
Perhaps give thought to the power of utilizing part of the "home" to either rent it out, air bnb it, or utilize a room or garage to write, to explore, to design, or expand upon an entrepreneurial pursuit of your dreams, the sky is the limit. I advise you and your wonderful husband to "go for it"! You are both young, this is to be seen as an opportunity and a learning experience. Write the book about your experience to share with other millennials.
Should you have any additional questions please contact me,
I am here to empower and support your financial future.
Janet Grace Beers Attard, MBA, RIA, Wealth Accumulation Specialist
Technical & Fundamental Market Analysis
J. Oliver Maxwell, LLC
Tough question, because the time frame is so short, but also because real estate is very illiquid as an investment, and your home's value (and its potential growth) is very subject to not only the area it's in, but even the way your neighbors' homes are valued.
What concerns me about a 4-5 year time frame is that you will pay points (usually) to get into your home in the first place, then you will be starting a new mortgage, which is amortized in such a way that the vast majority of your monthly mortgage will be interest, and you won't actually pay down much of the principal during the first 8 or 9 years (of a 30 year mortgage).
Then there's what's going on in 4 or 5 years - will the market be good or bad for home sellers in your area? Will there be foreclosures or fire sales in your area that drag the home price down? Will your neighbors keep their properties up, to help maintain the values of all the homes in the area?
My gut feeling is, with this short a time frame, it's better to rent and continue to save for a down payment on your more permanent home.
I wish you the best of luck on your decision!
If your mortgage is substantially lower, I'd say go for it. Ultimately, you are paying yourself owning a home by building equity in it. Even if you only live in it for 4 or 5 years, you can rent it out once you move it out and use it as a cash flow tool or sell it whenever it becomes favorable to sell. By living in it for 4+ years, you'll be past short-term capital gains when you sell so you'll only pay long-term gains on the house if it is sold at a profit. While you are living in it and saving money on what you'd otherwise pay in rent, I'd be contributing those savings to your retirement or other investment accounts. I definitely think this is a sound financial decision providing you are able to buy within your price range.
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.