18

Finished my studies and got my first job starting in Nov.

I'll have to move to a city far from where I currently live. I'll get paid around 17.5K/yr (1.4k/month net after taxes) and have to find a nice house to live in.

What I'm looking for is a relatively small house (just for me: 1 kitchen, 1 bedroom, 1 bathroom) which in the area I'll be working in is around $600/month or 200-230k to buy.

Given my family could buy it with savings (without a mortgage) is this a better option than renting with the money I'll be earning?

I'm planning to keep this work for 4 years, then probably move to another area (so we would have to sell the house or rent it to someone).


I'm looking for an answer that sees me and my family as one. So it's not that I get a profit at their expense. It's more that we have our savings and can afford to buy a house for that price and then possibly sell it or rent it. The interest rate we get from savings in the bank is close to 0%, so our money is basically dying there.

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    I would rent for at least a year. Who is to say that you will like the job or the area? After that you can reevaluate. – Pete B. Aug 15 '16 at 15:01
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    Your parents are willing to buy you a house? Are they looking to adopt? – HopelessN00b Aug 15 '16 at 16:04
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    When you go to sell it, you will typically pay around 6% to a realtor plus another 1-3% in assorted closing costs, so factor this into your decisions. – diamondsea Aug 15 '16 at 16:41
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    In my area (Texas) taxes and insurance alone on a $200k house would be more than $600 a month. Owning a house is far from free. – JPhi1618 Aug 15 '16 at 17:40
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    Just a quick reminder that the "h" in "house" is not silent... – Mason Wheeler Aug 15 '16 at 19:28

10 Answers 10

48

Rent.

You have no idea whether you will still be in the same part of the country five years from now; you may not even be in the same country. A house is a boat anchor you really do not need or want at this time. It's also a set of obligations you may not want to take on yet.

And buying is not automatically more financially advantageous than renting, when you remember that money not going into the house can go into your retirement plan or other investments.

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    If his parents buy the house, his own money can go into his retirement plan. Not having to pay rent will free up a very large chunk of his income. Do check though that your area is somewhere where other people will want to buy your house when you want to move! – Graham Aug 15 '16 at 16:42
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    I agree with this answer - There is too many variables and a house is generally a very large responsibility (anchor as you so aptly put it). Too many things could change in the market causing you to lose badly. – Sh4d0wsPlyr Aug 15 '16 at 16:46
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    Or significantly more expensive, @ryan. If you really think it's possible, run the numbers. All the numbers, as discussed in other answers. Rule of thumb, unless you know you will live in that house for 5 years, it isn't worth buying – keshlam Aug 15 '16 at 17:35
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    Owning a house locks you down in a way that is very costly. If you are desperate to get out of the place, you'll lose a TON of money to liquidate your house faster. Considering 10% of the house is already an entire year's earnings, you do not want to be in this position. – Nelson Aug 16 '16 at 3:03
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    I'd go so far as to say "five months from now, let alone five years". OP could be fired or have to leave within weeks of starting the job. No one in their right mind should ever buy until they've at least been in the job for a few months and gotten good feedback. – Lilienthal Aug 16 '16 at 11:42
23

There is a mathematical way to determine the answer, if you know all the variables. (And that's a big if.)

For example, suppose you rent for 4 years and the price of rent never increases. The total amount you will have paid is: 600*48 = 28,800.

If you currently have money sitting in the bank earning only a negligible amount of interest, and you can purchase the house for X, and then sell it for exactly what you paid 4 years from now, and you have 0 expenses otherwise, then purchasing it will save you 28,800 compared to renting.

Obviously that makes some assumptions which are not possible. Now you need to calculate the variables:

  1. Even if you can sell the home for exactly what you paid, what is the price of buying and selling a home? (Closing costs, appraisal, title searches, attorney, realtors, etc.)
  2. Will the home potentially appreciate or perhaps depreciate over 4 years?
  3. What if you decide to leave in less than 4 years? (You may decide to sell it, or become a landlord, or leave it vacant.)
  4. What is the cost of owning the home? (Taxes, insurance, repairs, etc.)

All of these variables can drastically effect the profit margin, and unfortunately they will vary greatly depending on your country, location, and the condition of the home.

Once you estimate each of the variables, it's important to realize that if you purchase, your profit or loss can swing unexpectedly in either direction based on appreciation/depreciation which can be difficult to predict, in part because it is somewhat tied to the overall macro-economy of where you live (state or country). On the flip side, if you rent, it's pretty easy to calculate your cost as approximately 28,800 over 4 years. (Perhaps slightly more for modest rent increases.)

Lastly, if you elect to purchase the house, realize that you're investing that money in real estate. You could just as easily rent and invest that money elsewhere, if you want to choose a more aggressive or conservative investment with your money.

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    On the last paragraph, it's worth bearing in mind that this isn't the OP's money to invest. The parents might be willing to help him buy a house, but not necessarily willing to have him tell them they should invest their savings in something else entirely. If that's the case, then it wouldn't be correct to factor in the opportunity cost of other investments, because that isn't part of the OP's available options. – JBentley Aug 15 '16 at 21:38
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    @JBentley - I agree with your statement, however OP specifically said, "I'm looking for an answer that sees me and my family as one." That is why I elected to word my answer as if OP had the money in the bank. – TTT Aug 16 '16 at 13:53
  • A huge difference where I live is utilities. Most rentals here, the landlord pays for water/sewer/garbage pick up and some even pay electricity and heat. 4 years of utilities isn't trivial. – Myles Aug 16 '16 at 14:16
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    @Myles - I assume that is for an apartment/condo? Usually utilities for a house are not paid for by the landlord. But if they were, then yes, absolutely that would have to factor into the calculation. – TTT Aug 16 '16 at 14:29
  • For single detached it would be uncommon unless you were renting a floor of the house. Where I'm at most rental houses are townhouses and for those it can go either way. – Myles Aug 16 '16 at 16:06
10

Housemate shares.

Seriously. I can't tell you how many times I hear this scenario: Kid graduates college; kid runs out and signs lease on apartment "because that's what you do"**; kid complains that he's in financial trouble and can't make ends meet.

Housemate sharing is most famously displayed in hit shows like Big Bang Theory or New Girl. They get a much nicer place with better furnishings for way less money. (However don't hook up with close neighbors or friends of other housemates, they do it for awkward laughs but it really results in awkward departure.)

It's more financially responsible. It means the rest of your financial life will have more slack.

And when you move, obviously, it's no big deal, you just give all the notice you can, and go to the next town and find another housemate share.


** I suspect a very significant factor is bringing home dates. Well, there's nothing sexy about taking your date to McDonalds because you can't afford anything more. See those shows... it works fine, you just have to be sensible about housemate choices. Pick housemates who view things the same way, and who themselves are invested in making the shared space attractive, and aren't going to mind some ...activities... once in awhile.

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    " Pick housemates who view things the same way" -- well that's hardly going to generate hi-jinks and/or shenanigans. What kind of plot writer are you? Seriously, though, don't actually base your expectations of house-sharing on a randomly-selected sitcom. It's significantly better in some ways and significantly worse in others. Try to talk to people who've done it. – Steve Jessop Aug 16 '16 at 10:50
8

Say the price is $200K. Would I, as a real estate investor, want to buy such a house? If the rent is $600, that's $7200/yr. "the local property tax rate is levied on the tax base, and the applicable tax rate ranges from 0.40% to 0.76%" so, I'll assume .5%, just $1,000. There are rules of thumb that say half the rent will go to maintenance and other costs, if that seems high, say just $2000.

We're left with $4000/yr. Less than 2% on the $200K investment. Italian bonds are yielding 8%.

As an investor, if I couldn't get more than $2000/mo gross rent, I would not buy the house for $200K.

As a parent, I'd have the money invested, have $16K/yr of income and help support you without taking all the risk the real estate investor has.

Note: your question and my answer are in dollars, but I acknowledge the Italy tag, and used Italy property tax. My tax is 1.6% of home value in my US city.

Edit: per the comment below, the 8% is incorrect. The return on the house purchase doesn't change, of course, but the safe yields are not that high, currently, 1%.

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    Italian bonds are currently rated one notch above Junk. On top of that there might be an exchange rate risk to either accept or pay to swap. – Robert Longson Aug 16 '16 at 2:40
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    Italian gov 10Y bonds are hovering at 1%, where did you get 8% from? – pjc50 Aug 16 '16 at 9:51
  • My mistake. I failed to screen the search for time, and the quote was old. I amended the answer. – JTP - Apologise to Monica Aug 16 '16 at 14:00
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    Italian bond yields were high precisely because they were not seen as safe by the market. They might still not be, but now the ECB is in the game. – a CVn Aug 16 '16 at 14:52
4

Having recently been given basically the same question it hinges on a few major factors.

  1. Will you be able to resale the house for (close) what you paid for it?
  2. What are the average closing costs associated? Remember you would have to pay both ways (buying, and again selling).
  3. What does your apartment provide (e.g. heating, internet/etc)?

    My (personal) example.

    • Rent + Monthly Cost of Living = $1,050
    • Price of home = $289,000
    • Est. price of monthly home-ownership = Minimum $600, Could be much higher.

With my numbers (which includes taxes, insurance estimates, minor repairs to home as needed), also ignoring all costs that are shared (e.g. food, internet, car insurance, etc), I am only making a difference around $450 per month.

In 5 years I would save ($450 * 12 * 5) $27,000.

However I also have to pay costs for buying the house (transfer deed, laywer fees, home inspections, etc) which in my case cost around $3000. Not to mention selling a home has some costs (I think around $1500+ in my area) as well as the realitor taking a cut (which I also think is around 2.5% = $7,225. So we can probably estimate you would lose around $15000 at most, buying and selling the home when all final costs come in.

Which means in my case I would at most be saving around $12,000... probably less (assuming I did not miss anything).

So basically 12,000/(12*5) = $200 per month saved.

TLDR: I don't think its worthwhile, because there is a lot of risks involved, and houses tend to require a lot of extra work/money. With apartments you have little/no risk, and can freely leave at the end.

  • 1
    As a slight follow up to this - I ran the numbers last night. I'm actually only making a difference of closer to $150 per month. – Sh4d0wsPlyr Aug 16 '16 at 16:13
3

No one has considered the tax write off at the end of the year?

Will the house be in the parent's name or his, and can one of them take a write off for taxes and interest at the end of each year?

On a small salary this may mean he has no tax liability for the four years, and can possibly make up the extra buying costs.... also, look at the comps in the area for the past five years and see if home values have increased and turnover rate for the area will tell you if people are buying in that area...

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    If his parents buy the house, they get the tax write off, assuming such a think exists in Italy. If they give or lend him the money to buy a house then he would get the tax write off. – stannius Aug 15 '16 at 22:51
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    Does Italy have such a write off? – Freiheit Aug 16 '16 at 14:18
2

Firstly, I'm going to do what you said and analyze your question taking your entire family's finances into account. That means giving you an answer that maximizes your family's total wealth rather then just your own. If instead of that your question really was, should I let my parents buy me a house and live rent free, then obviously you should do that (assuming your parents can afford it and you aren't taking advantage people who need to be saving for retirement and not wasting it on a 25 y/o who should be able to support him / herself).

This is really an easy question assuming you are willing to listen to math. Goto the new york times rent vs buy calculator and plug in the numbers:

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

Firstly, if you do what you say you want to do buy the house all cash and live there for 4 years, it would be the equivalent of paying 1151 / month in rent once you factor in transaction costs, taxes, opportunity costs, etc. Take a look at the calculator, it's very detailed.

This is why you should never buy houses all cash (unless its a negotiating tactic in a hot market, and even then you should refi after). Mortgage rates are super low right now, all that money sitting in the house is appreciating at maybe the rate of inflation (assuming the house value isn't going down which it can very easily do if you don't maintain it, another cost you need to factor in). Instead, you could be invested in the stock market getting 8%, the lost opportunity cost there is huge.

I'm not even considering your suggestion that you hang onto the house after you move out in 4 years. That's a terrible idea. Investment properties should be at a maximum value of 10x the yearly rent. I wouldn't pay more then 72K for a house / apartment that rents for only 600 / month (and even then I would look for a better deal, which you can find if you time things right).

Don't believe me? Just do the numbers. Renting your 200K house for 600 / month is 7200 / year. Figure you'll need to spend 1% / year (I'm being optimistic here) on maintanence / vacancy (and I'm not even considering your time dealing with tenants). Plus another 1% or so on property tax. That's 4K / year, so your total profit is 3200 which is a return of only 1.6% on your 200K. You can get 1% in an ally savings account for comparison.

Really you are much better off investing in a diversified portfolio. You only need 6 months living expenses in cash, so unless your family is ridicuouly wealthy (In which case you should be asking your financial planner what to do and not stack exchange), I have no idea why your parents have 200K sitting around in a savings account earning 0. Open a vanguard account for them and put that money in VTI and your family will be much better off 5 years from now then if you buy that money pit (err house). If risk is a concern, diversify more. I have some money invested with a robo advisor. They do charge a small fee, but it's set it and forget it with auto diversification and tax loss harvesting. Bottom line is, get that money invested in something, having it sitting in a bank account earning 0 is probably the second worst thing you could do with next to buying this house.

0

I would strongly try to influence circumstances so that buying is feasible.

That means:

Buy something where it is likely that you can resell it at the same price or even higher - or, at the least for significantly more than "total cost of ownership - rent payed elsewhere". For example, if it is in an area where you have good reasons to assume that prices will go up in the future. Or if the object needs refurbishing and you are sure that you can do it yourself.

You will, no doubt, sell it later. You will near certainly not live in such a small house for all time. So the question of "whether" you will sell it is moot.

So, when you have a potential house to buy, you will have to calculate everything very carefully, with an estimate of how long you will stay. You need to make your calculation as optimistic/pessimistic as you like (this is more a question of your character). Whatever calculation comes out better, wins.

It goes without saying that if you miscalculate (for example, overestimating your ability or time to refurbish; forgetting to calculate non-obvious costs of refurbishing; being surprised by hidden damage to the object; misjudging the price development in the area) you run a considerable risk. So, the question of whether you are able to calculate the risks correctly will need to influence the calculation itself (add 20% or whatever risk buffer if you are not sure, etc.).

But the potential is for you to have a very good start in the whole financial game of your life. Your house will likely be for a considerable time the biggest single part of costs in your life, and getting that under control from the get-go is a huge benefit.

0

Personally, I started renting out because I couldn't afford to buy a place but now I'm quite comfortably past that point. My three main issues are:

  1. I still have no certainty I'll still live here in 3-5 years' time
  2. I live in a much nicer area renting than I could afford to live in purchasing
  3. I don't know if I want to work all my life for a large asset when I believe that inherited wealth is unfair in society.

These views aren't for everyone but I find it hard to seriously contemplate dealing with 2 while 1 and 3 are issues.

To be honest, I found that I learned a lot sharing a place for the first few years and still enjoying it now. I don't really think you should bring it down to a financial issue unless your decision is already made.

0

As everyone is saying, this depends on a lot of variables. However...

I had my dad help me with the downpayment on my house. In my case, the cost of mortgage payment and all maintenance expenses is still lower than paying rent. If I sell my house and walk away from the closing office with just $1 then I've still come out ahead compared to renting.

The New York Times has a fantastic tool figure out if it's a good idea to buy vs. rent. http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0 It's asks all the relevant questions, and then it tells you how cheap rent would have to be make it the better option.

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