I was having an interesting discussion the other day about whether a college student or recent graduate buy a house instead of rent. Prices of houses and condos have gone up lately, but are still affordable in many places, and in some markets, the cost of renting may be about equal to the cost of a mortgage and such.
Furthermore, the allure of the American dream is alive and well as seen by the number of students graduating college with each passing year, all in the hopes that a college education will provide them with a better life. We’ve been told that after a good education, we can get great jobs that will afford us a certain type of lifestyles and trapping such as a top-of-the line car, a house to end all houses and a dog named Skippy.
A lot of college grads are asking themselves a very important question which, if not answered correctly, will have them battling poor financial health for anywhere between 5 to 10 years, or much longer depending on the choice they make. Your first home will provide you with countless memories that can last you a lifetime. However, the question of whether you should buy or rent is one that needs careful consideration.
The Benefits Of Renting
- Renting saves you a lot of money in the form of maintenance and repairs. This is because it’s the landlord’s responsibility to fix that broken pipe or make sure that the grass is cut every so often. If you decide to buy a house, the amount you will spend maintaining your property will add up over the years. This could’ve been money you could’ve used for other types of investments or put down as part of your retirement fund.
- Renting doesn’t need much equity, since all you have to do is identify an apartment that suits your needs, contact the agent and move in once you’ve paid your deposit and signed the papers. This is cost-effective, especially if you’re in college and don’t have access to large amounts of money.
- Renting may also help if you don’t want to be tied down at a particular location for extended periods of time. If, for instance, you have a 1-year lease and decide to move to Costa Rica once it expires, nobody can stop you. Buying a house will mean that you won’t have this kind of flexibility since you’ll be stuck in one place, forced to keep making payments as well as take care of the house for extended periods of time.
- Renting also gives you the peace of mind in knowing that should anything happen to your apartment, you’ll have the freedom to up and leave. If you buy a house and have it destroyed due to a hurricane or fire, you may have to start from scratch, something that’s not so easy if you’re young and in college.
If you’ve decided to go ahead and rent, there are a couple of things you need to consider. Here’s a helpful list of questions that you can use as a resource. These questions can help you identify any issues as well as benefits of your choice of property before making your final decision.
Do You Qualify to Rent?
Renting an apartment really isn’t as cut-and-dry as most of us would like to think it is. You will need to take your credit score into account as well as your current income before looking for houses in particular areas. Look at your current gross income and see if you’ll be able to comfortably rent an apartment without having to spread yourself too thinly. A great way of making sure that you’re always the first to know when a rental in your price range opens up is to set email alerts on sites like livelovely.com.
Cost of Living
Just because you found a great deal on a rental doesn’t mean that you should pack up your belongings and hurry on over to your new place. Affordability may be one-sided, in that you may be moving to an area that has a high cost of living. The prices of food items such as milk, eggs, bread and other essentials should feature in your pre-rental list. To be on the safe side, simply Google the name of the county or state you wish to live in and then add ‘cost of living’ before or after it to get a clear picture of whether or not this place is holistically affordable.
Other factors to consider when renting a place include the distance between your home and work, whether or not you want to shack up with a roommate, the availability of a washer/dryer, parking space and whether or not you’ll have access to a sizeable backyard or balcony to entertain friends during weekends.
At the end of the day, you have to really weigh your options and carry out in-depth research before deciding to rent.
If you’ve decided to dig in your heels and buy a home straight out of the gate, we have some advice for you as well. Buying a home is a huge undertaking that shouldn’t be done on a whim. In case you still haven’t made up your mind, here are a few advantages of buying that can help nudge you in that direction.
Benefits of Buying a House
- Buying a house gives you security that renting can’t provide. Should your income remain the same over a long period of time, you can automate your mortgage payments, giving you stability and the confidence in knowing that you’ve got accommodation sorted for the better part of the future.
- Buying will also give you access to tax credits which can offset the cost of buying your home. All you have to do is make sure to itemize property-related expenses when filling in your tax return.
- Even if you decide not to stay in your home for long periods of time, you can still make money off it to help pay for the mortgage. For instance, if you don’t want to be tied down to a home and want to travel for a couple of years first, you can opt to rent it out at a price that’s slightly higher than your mortgage amount. This way, you’ll have an income stream as well as be able to pay off your mortgage in a convenient way.
- You can also rent to roommates that live with you, which could offset some or all of the mortgage and other expenses. Some of the millionaires we’ve interviewed followed this strategy to get a leg up in college.
- Owning a house is a good idea if you want to have more autonomy and control when it comes to home improvement projects. You’ll be free to decorate whichever way you see fit, and you can make as many changes as you’d like. In fact, the value of your home will increase over the years provided your home improvement projects are done well and add more quality and comfort to its occupants.
- Buying a home will eventually free you from making mortgage payments. This basically means that you’ll be home free after a certain amount of time has elapsed compared to renting which will have you making checks out to your landlord for an indefinite amount of time.
- Buying would make more sense in case you’re looking to start a family. You’ll have the stability that comes with knowing that you own your home as well as a sense of community especially if you buy in a family-orientated estate or county.
Take Care of Your Debt
Buying a house while saddled with debt is a recipe for disaster. Make a conscious effort to pay off all your debts before committing to a house purchase since factors such as your credit score may come back to bite you in the future. You can do this by coming up with a debt repayment plan as seen in this post or allocating money to a debt repayment account that you can use to slowly whittle down your debt. Your credit score as well as current debt can throw a wrench in your dreams to own a home.
Student loan debt plus a mortgage can be a really bad thing if not managed correctly.
Get Pre-Approved
One of the biggest factors of buying a home lies in what amount the bank gives you with regard to your pre-approval amount. This can be the biggest challenge for college students looking to buy a house. The pre-approval will give you your monthly mortgage payments and takes into account your financial health at the moment (your credit score, annual income and previous financial history with your bank). A word of caution here: just because you’re given a certain mortgage value doesn’t mean you should go with it. In fact, get a house that’s that’s a slightly lower price so you can pay off your mortgage without having to financially strain yourself every month with the payments.
Conclusion
Whether you’re looking to buy or rent, you should take inventory of your student loan debt and other debts you may have and work hard to slash these down. You may also want to consider adopting a frugal way of living for the first couple of years so that you’re able to pay your rent or mortgage without pulling out your hairs every end of the month. At the end of the day, you should do what makes more financial sense in the long run without sacrificing on things like having an active social life and living out your dreams.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here and here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.
Thought provoking post Robert! The way I look at it if you can save 20% for a downpayment plus some as emergency funds, you should buy one or else save towards that goal.
Do you think that should be the case no matter what? What if you need to move somewhere due to work after you graduate?
I’m on track to graduate with zero debt and a good amount of savings in the bank. Still, I’m not going to buy a house until probably a couple years after graduation. Even though I won’t have the burden of loan payments, I want to take a couple years to make and save a good amount of money before I start taking on big expenses.
That’s a great plan. The more you save, the more options you will have when it does come time to buying a house.
I’m getting ready to start college and was looking into buying a place with my boyfriend of almost 3 years now, we’re attending community colleges for the 1st 2 years to save money and then transfer to Los Angelesm. Thinking it maybe more reasonable to just buy a place and stay there for however long it takes us to finish school and then sell or rent it out, but this really changed my ideas on it. Especially the idea of having the space for opportunities in work and such. Thank you both! This was very helpful for me and is worth mentioning to my partner.
I couldn’t agree more with what you said. I personally think that it also depends on exposure to risk. How much of a risk are some college kids willing to take? With the economy how it is what are the chances of find good renters and what happens if the graduate can’t find a job or is laid off.
Personally I’m against home ownership until later on in life like you said. My own thoughts are to live with my parents for a couple years and save until I can pay for most of a house with cash. I would rather not be a slave to debt for a good portion of my life.
-Ravi G.
I love the idea of moving back in with the parents, but I don’t know if all parents are good with that idea!
As someone who got out of college in the last 5 years, I understand the desire to buy a house, now that the market is “cheap.” However, many of my friends who did buy houses are now renting them, as they took new jobs or went back to school in different parts of the world.
I agree with you Robert. Rent, travel, and explore. When you put down solid roots, go for the house.
I have a couple friends renting out their houses now as well. However, with rents being so high, it has turned out to be a good investment for them.
Interesting article about something important that we often overlook. I’m 17 years old right now and I don’t wanna own a house when I go to college. It’s a roadblock for me. It’s really a subjective question when asking if a student wants to buy a home or rent. Some will be content living where they are, others will want to move on to bigger and better things. It’s easier to fit rent in a budget as well. What college student wants a mortgage? Not me!
Haha, good point about budgeting. Houses come with all sorts of unexpected expenses. However, although you may not want a house now, you may change your mind as you get closer to graduating.
When my brother was in college, he resided at one of the houses that a student bought. The house was purchased during the housing bubble and the owner was actually losing money even if the rooms are occupied. She has the right idea of trying to make money or having fellow students pay for the mortgage but it was just bought at the wrong time. I believe the house is in foreclosure now.
Yikes! I had a friend do just that setup, but it is very cash flow positive. Maybe since a student bought it, he couldn’t qualify for great loan rates?
I’d like to see a case where a college student actually qualified for a mortgage while going to school (without parents co-signing).
As for a recent grad buying a house right our of school, I say go for it! It’s the best move I made so far, and I’ve been out of college for 4 years now. I bought my first house 3 months after graduating (age 23) and lived there about 3 years. While living there, I also purchased my first rental property (at age 25).
Just this summer my wife and I sold that first house and got something larger and in a better neighborhood.
Owning my own place at an early age taught me to be responsible for a large asset and all that goes into maintaining it. It also got me on the path to building wealth.
I was actually able to afford a house in college, but I also worked full time and had been working since I was 16. I chose not to buy one, and I’m glad I did as the real estate market tanked about a year after I graduated.
I wouldn’t, unless I knew FOR SURE I’ve found the place I want to live for the next 5-10 years, and who knows that right out of college?
If you live in San Francisco or San Diego, you may not be leaving!
“Owning my own place at an early age taught me to be responsible for a large asset and all that goes into maintaining it. It also got me on the path to building wealth.”
same here, still on the fence though… always say I never regretted buying @ 22, but the last few years have been rough, though I have learned SO SO much and renting would have cost just about the same including the renovating I’ve done (a one bedroom or studio that’s not an absolute dive would have run me at least $600 and my mortgage a month is only 250)
It really depends on the person doesn’t it….
Sounds like you made a good choice, but I agree with you on the tough part.
I always think this: if my plumbing backed up or pipe burst and I owned the house, it would be on me to fix. If I rented, I just call my landlord. There are times when renting is just so much more appealing.
I definitely wouldn’t have considered a house in college or immediately after. But then again, I couldn’t afford it when I was in college.
I refuse to purchase a house without 20% down because I won’t pay PMI!
Good point on PMI! I think buying in a college town can be a great investment though, because there will always be a steady influx of people and usually employment.
I know that currently my fiance and I are considering buying a 2 bedroom/2 bath townhouse in the the DC area which has zero down and no closing costs at around $250k (payments of $1700 a month) with normal houses in the area being sold around $100k more. We have both been out of school for less than a year but with the cost of renting in the area ($1500 minimum for a small 1 bedroom apartment), it seems like a good option. I’m just concerned with acquiring more debt in addition to our hefty student loans and being responsible for a mortgage with both of us not being established in our careers.
Could be a great deal. Are you getting no closing costs and no down payment with a special loan program, or because your paying a higher interest rate?
Thanks for this article. My wife and I are getting out of the military and have $35k saved up. We are looking at either renting or buying in the Tucson, AZ area where we will be going to school for at least six years, and even plan on staying there permanently (we’ve had enough “world travel”, her family lives there as well). We can get a nice house for $100k or lower with a mortgage (PITI) of $550/mo, where apartments are $700/mo! We are both 23. Her dad is in HVAC, and her brother is a plumber, so we are set if any of those kind of maintenence issues arise.
I just wonder if buying in this case is an obvious choice to others as it is to me. Are we crazy, Robert?
It sounds like that could be a great deal! One thing to consider is what is the plan in 6 years, and is the home something you plan on staying in forever? If not, are you okay selling or renting later?
Now is a great time to take advantage of home ownership, but in areas like Tuscon you should be careful because you may not be able to resell easily. As such, you could end up being a landlord if you have to move for work.
I don’t know if you will still comment on this… but, my Fiance and I are looking at buying a house. He is not in college and going to be going into the military and has a steady job, and I go to college. I would not be living there for the next 2 years before we get married. The house is located in the same neighborhood as my parents (which is what we want to start a family once married) and is in a very nice area of town. But he will be living there with some roommates and they will be paying the monthly payment and know that in two years when we get married I will be moving in. The house is listed at $190,000 and is a 3 bedroom 3.5 bath with a finished basement. Even if the monthly payment is $1000 there is no way we can find a three bedroom for him and his roommates to rent for under $1000. Would this be a crazy move?
It isn’t necessarily a crazy move but having a house early on is going to be a burden on your relationship – more bills (beyond the $1,000 mortgage, you have taxes, insurance, maintenance, HOA, etc.). You’ll likely pay closer to $1,500 or $1,800 a month to own the property.
If you’re going to do it, make sure you protect yourself by having your name on the house (as well as his), and own it as Joint Tenants. That way, if you do split, you’ll have rights to your half of the property.
What I would do is put a down payment on the home and rent it out as a college student and have that pay for the mortgage and if possible even make money on it for yourself and still be apart of dorm life or a fraternity.