We are going forward with our rental income property idea. (If you missed that post, see it HERE).
It just makes sense to us.
Searching for rental income properties was no joke. We are in kind of a weird situation. We are trying to get pre-approved for a mortgage BUT we have 1) me, who is about to change jobs/might be jobless upon moving and 2) Danny, who hasn’t worked for a million years, but has an employment contract which identifies guaranteed income per month when he starts working in a few months.
We have an income to debt ratio that might make some lenders’ hearts beat fast, but, we also have options such as income based repayment. We cannot sign up for those options until his loans go into repayment, in June when he graduates. In addition, our income is about to dramatically increase as we go from student life to working, so that will shake up our debt to income ratio.
Anyway, there is a lot of back and forth which has complicated the process of getting pre-approved for a mortgage. Just when we thought we had the green light, we would think of something else and end up at a stand still again.
I thought this photo was an appropriate metaphor. This is me literally getting pounded at Pounder’s Beach on Oahu. Have you been there? The waves break right onto the sand, pounding swimmers into the ground, hence the name. Just when you think you are safe from the beating of the waves, another one will come and knock you down again. And that is essentially how we are feeling about the beginning of our home ownership experience.
It was certainly difficult being at a distance and maintaining a full time job and full time school while we were trying to schedule looking at properties. Not to mention the cost of traveling to go look at those properties, sheesh! Many of the properties we looked at were ones that we really cannot imagine actually living in. Actually, we could live in them, but I am uncomfortable with some of the areas they were in for baby M. Our number one priority is to be in a safe area where he can play and it seems that most duplexes or multi-family units are in areas that seem a little sketchy where we are moving. (I know, you are DYING to know where we are moving. We will share our secret soon).
When people find out we are buying a house (a rental income property) AND we have nearly 600k in debt, they sometimes almost die. Sometimes it also makes me want to die. Until I think it through, for the zillionth time, and then I feel better.
Let me start by pointing out that buying a home when you still have mountains of student loan debt is absolutely NOT a good idea for everyone. I would further argue that buying a home, even if you have no debt, is not a great idea for everyone.
Here’s why it made sense to us:
(1) The cost of our mortgage + taxes + insurance costs less than renting in our area. Single family homes in the neighborhood we chose rent for about $400 more per month than what we pay for our mortgage, taxes, and insurance. Even if we moved outside of our area, rent still runs much higher than ownership. We looked at renting a single family home, condo, apartment, duplex. The cheapest place we could find that met our needs still cost $100 more than what we are paying now. Of course, if we had to drop a down payment on our home, that would have changed our analysis. Which leads me to my next point,
(2) We didn’t have to put any money down and most of our closing costs were covered. We are in a unique situation. Danny as a dentist qualifies for “physicians’ loans.” Such loans have plenty of pros and cons but the pros are that you do not have to put a down payment on a home and you do not have to pay mortgage insurance. That is really what made this process possible for us. It would not have made as much sense if we had to put a down payment on our home, instead of putting that money towards student loans. The end goal is to not only pay off student loans, but to acquire some wealth. Having to put a down payment would have set us back with our student loans, at least up front. We had to keep in mind that becoming a landlord was not the goal, paying off loans is.
(3) The cost of our mortgage is almost to the number exactly what we were paying in rent before we moved. This made purchasing a home much less scary since we still have the exact same monthly budget for our rent, now mortgage. It really feels no different than when we were renting. We have had friends who really increased their lifestyle when switching from renting an apartment to owning a home, some of them paying two to four times as much for their mortgage than they were paying in rent. Obviously, that is much more intimidating and carries with it more risk (unless of course, income also increased by four times or more). Even though our monthly numbers are the same, we definitely have more risk. For example, if the A/C goes out, that is thousands of dollars on us, that we wouldn’t be paying if we were renting.
(3) We did not buy our dream home (not even close). We bought a small single family home, in an area where homes are steadily increasing in value. The cost of our monthly payment on our home, including taxes and insurance, represents about 5% of our monthly income. Typically, a good rule of thumb is that you should not pay more than 28% of your monthly budget to housing (either a mortgage or rent). As you can see, we are well under this guideline– as we should be, given our amount of debt. We have PILES of student loans to pay off before we deserve to even consider what a dream home might look like for us.
(4) We are planning to use this property as a rental income property within the next couple of years (which will eventually help us pay more towards loans). We have a plan over the next several years to purchase several rental income properties. This will be our first one. Once we have paid a good chunk of our student loans off, we will feel more comfortable about investing in more properties.
(6) We have an exit strategy. We don’t have a crystal ball, so we do not know the future but we bought our house for about $100 a square foot. A couple months later, in our area, comparable homes are selling for $190 a square foot. That is pretty unreal. If we decide we do not want to rent this sucker out, we have an exit strategy in place. We will sell the house and hopefully walk away with a little equity. Either way, it will be better for us than if we had just rented and given our money to someone else.
I guess my point is this– think creatively about your own situation. Friends, family, and the internet will give you plenty of advice but at the end of the day you have to look at your own situation and consider if home ownership is worth it to you and how you can achieve it. Remember, it is not if you can afford a home, but how you can afford it.
Is this a risk for us? Absolutely. There are bad things that could happen. What if we can’t find renters? What if we end up hating being landlords? What if we get creepy tenants that trash the house? As we thought it through, it just made more sense for us to buy than to rent.
What do you think? Are we in over our heads? Are rental income properties worth it when you have debt?