Advice Please! Young couple needing to relocate (rent or buy)?

[sillyoleme]

Hi everyone, I used to blog regularly on this site... I miss it.

Anyway, we are at a major crossroads and need all the advice we can get.

I just got a promotion at work, which means I will be working at a new location. From where we live now, it's a 45 minute drive. Our lease is up at this apartment next month, so we need to decide where we will be living after that.

We have been paying $875/month for rent for the past year, but if we renewed our lease it would increase to $925. If we go month-to-month, they will charge $1,025/month.

Our debt includes a $4,000 loan on FI's car, $2,000 in student loans, and $14,000 in credit cards.

Savings include $1,200 in my 401K, $300 in my Roth IRA, and $1,500 in our savings account.

My credit score is 682, FI's is probably about that. My score was 730 last year, but when the credit business started having problems, it mysteriously decreased to 650. It has been slowly climbing back up since then. Neither of us have any late payment history.

Income:
My Salary: $42,500
FI's Salary: $19,750
Total: $62,250 (5,187/month)
Net Take-Home Per Month: $3,233 (conservative estimate)

Our total monthly payments to debt are about $631.

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Now, taking one townhouse that we looked at as an example, here are the pro's and con's and I see them:

Pro's of Buying:
-Possibly A Good Deal on Foreclosed Home
-No More Worrying About Landlords, Maintenance Guys, Etc.
-No Extra Security Fees For Our Pets
-Freedom of a Backyard, decorating ourselves, etc.
-No Security Deposits of $1,200
-Would Feel Like We're Actually Investing Instead of Throwing Money Away
-Estimated Payment (on $98,000 loan) is $871 ($600 P&I, $70 insurance, $51 PMI, $150 taxes)... less than the $925 we'd be paying to rent here.

Con's of Buying:
-Home Values Could Continue To Decrease (Wouldn't concern me, except that we may have to move again in about a year, or whenever I am able to get promoted again.)
-More Responsibility for Insurance, Maintenance, Etc.

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Random thoughts...

If we are asked to relocate in a year, my company might offer to buy our home at the market value. Or, we could keep it and rent it out until we feel comfortable selling it. Rental townhouses in the same neighborhood are renting for $800 right now.

When we relocate, my company will pay for all the moving expenses and also gives us a $1,500 allowance for miscellaneous expenses.

If we buy this year, we would qualify for the new homebuyer tax credits.

We will also be paying for a wedding this year, in October. Our parents are helping a little, but most of it will be on us. It would be nice if our mortgage payment was lower than what we are paying in rent right now, because then we could just bank the extra salary I'm making and use it for the wedding.

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If you read all that, God bless ya. Any thoughts/comments/advice would be greatly appreciated.

[srblanco7]

You have debt and no savings to speak of. Find a cheap place to rent and get your debt paid off. While paying off debt keeping contributing to 401k - to at least the match. After debt is paid off, save for downpayment on house.

[sillyoleme]

Thanks srblanco7, we appreciate the advice. I agree that paying off our debt is a major goal. We always make timely payments, and always more than the minimums on the credit cards. Our balances have been steadily decreasing for over a year now.

The only issue is, there is no cheap place to rent in this area. The absolute cheapest apartment we've found is $500 plus utilities, and they don't allow pets. It's also in a slightly scary part of town. Besides that, there are houses for rent for about $750 (built in the 1920's-1930's), but they look like they might be about to fall apart, and we don't know the neighborhood there. And of course there are townhomes and decent duplexes for rent, at a rate from $800-$1400.

Before we moved to Maryland, I was renting a decent one bedroom apartment for $450/month. You just simply can't find that price level around here.

So, taking into consideration that we will end up paying $800+ for ANY type of housing, I can't seem to make it make sense that we'd be paying off our consumer debt any faster by renting. And as for the downpayment, with our tax refunds and $1,000 from savings, we could have about $3,000 to put down, which is over the 3% required for an FHA loan. Or perhaps there will be some other 0% legislation in the coming months.

Anyway, the situation is complicated, and I am a pretty conservative person, so I'm not taking the plunge into home ownership lightly. But I also don't want to keep renting and throwing my money into someone else's pockets while I wait and try to get into the perfect position. Stress!

[Ima saver]

I understand the stress about the rent, but you really need to have a bigger emergency fund before you consider buying a home. Too many things can go wrong.

[jIM_Ohio]

Income:
My Salary: $42,500
FI's Salary: $19,750
Total: $62,250 (5,187/month)
Net Take-Home Per Month: $3,233 (conservative estimate)

Our total monthly payments to debt are about $631.

Here is my suggestion- send 20 percent to debt right now- meaning pay $1000+ per month towards the debt (cc in particular) until paid off.

Renew the lease- see if there is a 6 or 9 month option (as opposed to 12 months).

Once debt is paid off, look to buy townhouse.
Once debt is paid off (cc) make sure the retirement accounts (401k and Roth) get 15 percent of gross income
Once debt is paid off, put 5 percent of gross into short term savings.

[Seeker]

If the chances are good that you'll be moving in another year or so (when promoted again), then I would not recommend buying.

Buying is a losing situation always when you have to be mobile for the short-term. Unless you can see staying in an area for 5+ years, don't buy.

[sillyoleme]

Thanks to everyone for their advice.

Seeker - can you explain why buying is always a loss in the short-term? I'm trying to understand all that I can, so that I don't miss anything in the decision.

[jIM_Ohio]

Originally Posted by sillyoleme

Thanks to everyone for their advice.

Seeker - can you explain why buying is always a loss in the short-term? I'm trying to understand all that I can, so that I don't miss anything in the decision.

2-10k to buy in closing
maybe 10-18k to sell in closing and realtor fees

Unless house goes up 28k in year, in value, very tough to come ahead unless tax bracket is real high.

[sillyoleme]

Thanks, Jim_Ohio. I apologize for what are probably obvious questions, but like I said, we're trying to gather all the information we can to make a good decision.

One thing my fiance brought up... what if, if we did have to move in a year, we rented out the townhome for a while? The amount of rent charged for basically the same townhome in the same neighborhood is about $800-$900, which would theoretically be enough to cover our mortgage/taxes/insurance. I've heard that you can pay someone to manage the property & collect rent for you, at a rate of 10% of the rent or similar. Any thoughts on that?

Also, what if we were not paying closing costs to buy the home (we've looked at many foreclosures, and the realtor said the bank would more than likely be willing to cover closing costs). Would that make it a better short-term investment (assuming it doesn't devalue alot in the mean time)?

[Ima saver]

speaking as someone who has had 3 rentals, I would strongly advise against them. All three of mine got trashed by the tennants and I had to sell them all at a loss. You need to live in the same city and being very handy at repairs to make money on a rental. Especially right now.

[Seeker]

Jim is right.

In addition, one year is not enough time to make up for the continuing of lower home values in this economy (so in all probability you will be paying more now, just for the market price, than you can sell for in a one year future -- assuming that you can even sell in that future).

Historically, the prices of new houses have risen over 250% in the last 20 years. They are still overpriced. Demand determines price in each location ; and while some areas are in demand more than others, the risk in the short-term is huge.

The realization of saving by not paying someone else (ie renting) is only realized long term... because the costs are balanced over the term of the home. You save rent money and end up in the end with property that you can live in... but it only works when "settled".

Renting a house out to other people, and even outsourcing the management of property upkeep, can also balance that cost, but only if you can get renters. That really depends on the location and the economy in that location. You will have competitors and may end up lowering rates to attract renters.

At the same time, you will have a lot of $'s tied up in the first place, and what will you be doing to finance the place where you'd live in the future at another location? Do you then rent?

[MiikeB]

Really I have no idea how you think buying is even an option at this point.

Credit is tightening on mortgages, you have a good chunk of debt and not even 3% down.

Just tough it out and rent.

[Rainelli]

I think you can afford to buy your own house now,based on your monthly income,it's better to pay then it will be yours,than keep on renting for it will goes up.

[creditcardfree]

If you are pretty sure you will move in a year after purchasing, I would NOT buy a home for reasons mentioned earlier. It will most likely cost you too many dollars on both the buy and sell side of the transaction that you are unable to recoup.

I think you should rent. It is just a matter of where.
Current Apartment
Apartment in your current town
Apartment in new work location

Best wishes!

[jIM_Ohio]

Originally Posted by sillyoleme

Thanks, Jim_Ohio. I apologize for what are probably obvious questions, but like I said, we're trying to gather all the information we can to make a good decision.

One thing my fiance brought up... what if, if we did have to move in a year, we rented out the townhome for a while? The amount of rent charged for basically the same townhome in the same neighborhood is about $800-$900, which would theoretically be enough to cover our mortgage/taxes/insurance. I've heard that you can pay someone to manage the property & collect rent for you, at a rate of 10% of the rent or similar. Any thoughts on that?

Also, what if we were not paying closing costs to buy the home (we've looked at many foreclosures, and the realtor said the bank would more than likely be willing to cover closing costs). Would that make it a better short-term investment (assuming it doesn't devalue alot in the mean time)?

I would caution digging you debt hole to deep.

You have cc debt and do not own even one property now.
I would look at two things short term:

1) eliminate the cc debt- until you prove to yourself you can spend less than you earn, no need to spend even more.

2) Once the cc debt is eliminated re-assess the whole situation. Buying might make sense... with your income your "tax benefit" to owning is low, so rushing into a decision might be a mistake.

Owning a house will mean you are required to pay the following you do not pay now:

1) trash
2) water (maybe- some condos might include this with HOA fees around $100-$300/mo)
3) property taxes (between $1000-$10,000 per year)
4) roof repairs (might change for condo- check HOA)
5) hot water heater
6) inside structure (walls, ceiling repairs)
7) carpet and surfaces (counter tops and carpet wear out over time)
8) siding and landscaping (HOA might require outside to look a certain way and that costs money)

If you spend every penny you have now, what makes you think you can tackle the added expenses of home ownership?

Renting is not a short term answer... as the solution which renting is fixing has not even presented itself to you yet. Solve the problem immediately in front of you.

My suggestion was 20% of gross pay to debt each month. In 10 months you are probably debt free and then you could look to buy a house and save for retirement.

[isthisused]

This one is easy. No emergency fund! DONT buy a house. No down payment, Dont buy a house. Dont know if youll be in the area for at least 4 years, Dont buy a house. I love being a homeowner and I would be very happy for you to enjoy homeownership. But you should get yourself into a better situation first.

[wincrasher]

You are getting good advice here. Please follow it. You are living too close to the edge to commit to owning your own house.

Especially if there is the potential to move again in a year, bearing the costs of buying one place, then having to bear them again for a new one will push you into a financial crisis without a major change in your debt levels and savings.

[SnoopyCool]

Even if the odds are in your favor in that area, you have no guarantee that you'll find a renter when you need one. And if that happens, you'll be paying a mortgage plus rent in your new place.

[Goldy1]

I would say home ownership has been one of the biggest joys of my life. Me an dh hate the idea of paying rent.
WE have freinds who rented for years, and behind thier backs we called them unwise for not buying, but with the housing crach an ensuing job losses, it kind of worked out for them to stay renting.
However, they were unwise to chose extremly high rent properties and not build up emergency funds.
My house has sucked tons of money with repairs ie new roof, furnace, ac,sprinklers etc, but we do one thing every year or 2.

I feel cons to being tied down to my home. It's finally almost paid off, and I love that but when looking for work, it really limits us as far as how far we are willing to drive. This is esp. a factor in MI b/c our winters can be pretty nasty.

[TBH]

I totally understand your impatience to buy, but I have to agree with everyone else that you're not ready. There are a lot of unexpected expenses when you own a house. Rent is very predictable, but when you own you have to be prepared to spend money on unexpected repairs. Dealing with a landlord can be a bummer, but since we bought our house five years ago there have been many times when we've wished we had a landlord to call. Toilet broken. Pipes frozen. Water damage behind siding. Heat not working when the baby already has a chest cough. These are all calamities that we've had to deal with ourselves.

Yes, home ownership is great, but you need a better cash cushion first.

Also, what folks have said about closing costs is important. It means you need to live in the house for several years so your principal payments and market gains recover the costs to you of buying and eventually selling the home.

Also--nothing is a good short term investment right now. Not real estate. Certainly not stocks.

I agree with Jim. Pay down debt. Keep renting. Contribute to your 401k, at least enough to get the match. Maybe when the next promotion comes around, if you expect to stay put for at least 3 years, you can go ahead and buy.

Of course the decision is yours, but this is what I think you should do.