Fresh out of college, rent for a year or buy cheap?

Question

I'm just finishing my master's in electrical engineering. I'll start my first job making $80,000 a year + 18% retirement in June. After putting in the minimum to get all the matching from my employer (4%) I'd like to put the rest of my investing money into real estate. My wife and I were planning on renting for a year while we save a downpayment for a Duplex house hack then move out of that a few years later. The places we've looked at renting are about $700-$850 a month.

Would it be wise, instead of renting for a year while we save up a downpayment to buy a cheap house at about $70,000-90,000 now, pay a mortgage of about $575 and save up a 20% downpayment on a new house or duplex over the next year or so? When I have a downpayment of 20% saved up after 12-18 months would I be able to qualify for a new mortgage on a modest home (about $175,000) in addition to the original mortgage without any landlord experience?

Account Closed · Answer

Account Closed

Here is a suggestion, not sure of your exact situation but there are programs for those in there last year of a doctorate possibly masters degree (need to double check on that) that will use future income to qualify if that income will start in the next 3 months. That may be a program to consider. Also, have you though of searching for a duplex that is for sale now and telling the current owner that you will pay them rent until you qualify, possibly using the program I spoke of before, and then just take the amount of rent you paid or half of the rent off the purchase price?

Account Closed · Answer

IMHO yes, buy.  FHA only needs 3% down, USDA 100% financing.  Since you are going to sell consider things like schools, transportation and the things people would pay for that aren't part of the home....you know what I mean?  The equity you build will be future money in your pocket.

Patrick Allen · Answer

Account Closed This is more or less what I did with my first investment: got into an FHA loan on a house that would make a good rental. With down payment assistance I received a $500 check at closing. House hacked that house for a year then moved a long term tenant in.

Now that it is a functional asset the next step is to refinance into an investment loan once I get 20-25% equity: hopefully this summer as the Tucson market is primed to explode over the summer.

Since you can only have one FHA loan at a time I need to refinance out of my first loan before I can buy my next property: hopefully a small multi with another FHA loan.

If you rent for a year that year will absolutely be less stressful on you, but a year from now you will wish you had started today. "The best time to plant a tree was 20 years ago. The second best time is right now" not to mention rising home prices and interest rates, etc.

Shoot me a PM if you want to talk specifics.

Jassem A. · Answer

if the cheap house in question will easily rent for double your PITI then I would say sure why not. If similar homes are only renting for 800-900 then I would look at offering less than 70k if possible.  I would also not purchase if the home is in a bad neighborhood or if home values are declining.  I typically avoid multifamily in favor of single family homes unless there's an excellent reason why multifamily would be favorable in your market.

Matthew Holderly · Answer

Good question David! If you can qualify for a mortgage/find financing, I'd say go for it! As a student in the same boat (finishing Pharmacy school in May), I'm also looking to purchase my first property soon. Based on what you said, if you haven't been working during school it will be more challenging to get traditional financing. Any outstanding student loans will also make a big difference with traditional financing. Definitely make sure you're speaking to someone qualified about financing and doing everything you need to be doing in order to qualify for financing before you make too many plans! In getting a second loan, (provided your first was backed by FHA) you could definitely get an non-FHA loan. However, if you wanted a second FHA backed loan, you would need to refinance the first loan into a traditional mortgage, as you can only have one FHA loan at a time.

Account Closed · Answer

Account Closed I'm realizing finding the correct neighborhood in Tucson, Az is tricky. Overall I think Tucson is supposed to grow quite a bit over the next few years but apparently, there are just random blocks that are bad in otherwise good neighborhoods. This makes renting for a while seem a little wiser so I can be confident in the location as I don't yet live there. I was leaning toward multifamily to house hack and be able to save for a second more permanent house sooner.

Account Closed · Answer

Here's a question to illustrate how new I am to this: If I put 20% down on the second house the loan for the second house wouldn't have to be an FHA loan right?

Account Closed · Answer

After re-reading my original post it wasn't super clear. We plan on living in this house for 12-18 months while we save 20% downpayment for a duplex, live in the duplex for 12-24 months while renting out the first house and then buy a third house that would be our long term residence while renting out the first house and the duplex.

Keeton Byerly · Answer

Afraid I can't help much - not sure of what the cost of living is in your area, nor home prices. Here in Ohio, a "cheap house" is about 5-10k (that needs a bit of work), but I'm similarly in your shoes. I personally decided to purchase a cheap house to finish college in and prepare for work. I'd recommend it. Personally, I'm using the next two years to save, invest in additional property and build my credit for a mortgage. So far, my properties have been cash purchases.

Fresh out of college, rent for a year or buy cheap?

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