You can figure out by whether whether you should buy or by using a spreadsheet.
Cost of buying:
Closing costs (legal, pts on mortgage, fees)
Downpayment (20%)
If you are buying a 500K condo, downpayment would be 100K. If you didn’t buy the condo, you could be investing 100K stocks/bonds/CD. The closing costs could be 10k+
Your monthly payments would be mortgage P&I, real estate tax, insurance and maintenance. With the new tax law a lot of tax deductions have gone away.
When you want to sell your real estate, you would need to pay:
6% real estate agent fee
Closing costs
You may not be able to sell it when you want to and the value of your house could go down.
My older daughter is living in a 2 bedroom apartment now. Her rent is 4500/mon. To buy a compatible apartment it would be 1.5mill. She would need to put down 300K and her monthly payment would be 7500/mon with maintenance and real estate taxes. She would lose out on 300K investment income and not able to deduct most of 7500/mon payment. If she only plan on living in the new apartment for 5 years then she is really better off in renting. She worked it out on her spreadsheet.
No, buying is not always the best strategy. It really depends on where you live and the real estate market. It is not to say if she were to see a good deal she wouldn’t pick it up, but she doesn’t think owning is the only way to go.
One thing I would also like to add is when you are a junior person, it is not very likely a company would be willing to pay for your buying/selling house as part of your moving package. You could be stuck in having to pay for 2 places if you have to relocate.
I also think you should live in a new area before you buy.
Our S has been renting in DC for a number of years. He can afford a hefty down payment and mortgage payments but is uncertain of whether he wants to relocate. He also loves his one bedroom place living alone but may want something larger if he gets more serious with his partner, marries, etc.
His GF did buy and then sold a house. She had tenant room mates but found it was a lot of work and prefers just renting an apartment for now.
We would never have globetrotted had we bought a house in the first few locations. All our moves, buys and sales have been company relo's, I would not like to be footing the bill for that over and over. What is the job outlook like, let alone personal aspirations?
If you want to build equity as a recent college graduate, contribute enough to your 401k to get the maximum employer match.
Rent the first year and see how you like the job, the commute, entertainment/restaurants/travel/hobbies, and learn how much it really costs to be a self-supporting adult. That may change your perspective on how much house/condo you can really afford.
If grad school is even a remote idea, don’t buy yet.
You may want to rent at first given you are moving to a new city and just starting a job out of college. Homeownership comes with a lot of responsibility. Adjust first, learn your city, see if you like your job.
Buying instead of renting for a grad student is very different than when in a new job. Fixed location works for that, not when changing circumstances as you have, OP. Tell your parents you need to wait a year. Then you may have changed your mind about location and will have reserves to buy a place more suited for your situation.
I’m not sure the Chicago area is a very good bet for home buying. The Chicago area, including the suburbs is losing population. So the supply of homes may be more than the demand resulting in no increase in your home’s value and difficulty in selling it.
Years ago, H and I made a nice return on our home in the Chicago area but that was many years ago. We have bought and sold three homes and have made money each time. Luck or sense, I don’t know.
@TatinG I don’t know anything about Chicago specifically, but I agree with your point. A worst case scenario would be needing to get rid of an underwater property and not have the savings to take the loss. I would rent just to not have to deal with this possibility, never mind the other factors.
For what it’s worth, my mom has repeatedly advised me (30) not to buy a house, and my parents have been homeowners for over 30 years and made money (once fairly substantially) on their houses both times they sold to relocate. She says that homeownership is a “money pit” and that the maintenance/remodeling needed to keep a house in good condition plus the cost and hassle of unexpected repairs make it not worth it.
I think many if us are reacting to OP being a new grad. Of course, if done right, one can make money. But that needs savvy. And a willingness to put in the work. And luck.
If Chi is losing population, it could mean buying someone else’s low priced deal. But you’d need a sense of how and when the market might spring back. And where/which neighborhoods. I think a component of what we’re saying is: it’s not a rookie’s game.
Imo, you want something large enough to get a roommate, not speculating on a studio condo or one bedroom. In a neighborhood that attracts roommates, near their work or transpo, fun things to do. But affordable enough to manage costs, if you lose the rommate(s.) That’s often tougher in a big city, where the most affordable may be less desirable and the more desirable can be out of your price range.
Not all homes are a money pit. But a newbie likely doesn’t know how to evaluate what a money pit even is. With a house, you can DIY paint inside, do minimal upgrades, plant flowers, whatever. But do you know how to assess whether a boiler will go, the risks with an older roof, sewer or septic, what’s older wiring, what’s rot vs just worn paint? The latter are big $$. Your income might allow enough to pay, but you need that money set aside.
Plus, I think many of us LIKE the idea a new grad with a good job offer can afford rent and fun, still set aside the downpayment, before locking in. A good RE agent is gold. But right now, you haven’t been there long enough for a sense of which agencies, who’s on your side.
To make money on RE, one really needs to either put a lot of elbow grease in it or be very lucky to come across an underpriced property. The former requires skill and time. A new graduate would be much better off spending her energy on building a career. There is a good reason our first house was new construction.
My D bought a house but rented quite awhile before making the decision to buy. It takes time to scout out areas, see if you like your job, do research on taxes etc to really find your bottom line. It’s not easy. She has solid tenants (and friends) which has made it very affordable and a decent investment for her. Tenants can be a pain—don’t plan on getting just anyone if that’s your plan.
Condos can be a dime a dozen and possibly harder to sell when you want.
Bottom line is rent for awhile. And then only buy if you think you’re in it for five years or more.
And yes a great realtor is gold.
Very good financial decision. My son with our help purchased condo right out of college. He didn’t have any student loans but was not able to get mortgage in his name only so my husband and son co-own that condo together. Now years later the price of that condo is almost doubled. We hope our DD will be able to purchase her first condo right out of college . But she probably will end up in a very high cost area so we should see how it will play.
RE prices took a slight nosedive in Seattle. A 2 bedroom t’house that sold for $800k last June can now be purchased for $750k based on the recent comps.
So long ago I purchased a house the year I graduated from college. I have the same job that I had at that time and I purchased in a known area. It is also an area that is easily accessible to multiple job market areas. It was not in my hometown but it was close to the area where I grew up so I had an idea of the neighborhoods. It turned out to be a great choice.I was in a steady relationship (later married him) and he had a job within driving distance, although not particularly close. I lived there, then my DH and I lived there as a young married couple, and then we moved up after we had our first child. We did not make a killing but we did sell for a nice profit and did not pay rent for those years. I was in our forever home before I turned 30 with a down payment financed by the sale of that home. It would not have been possible if I had been paying rent all those years instead of building equity. It was a home we could have stayed in for much longer if the markets were down or if we had to.
I would advise my own children to take the same route if they are in the same situation - known location, stable job in stable industry, close to transportation/highways for other job markets, and if they could grow into the house if needed.
Without those variables I would be wary of recommending it just out of school. I would not move to an unknown city without first renting. I would not purchase if I was unsure of my long term employment.
@yikesyikesyikes Your parents are wise. Buy and start building equity. Why pay the mortgage of the owner? Pride of ownership supersedes living with and around other renters. Find a good property manager as a caretaker if you have to move. Accumulate real estate as opposed to renting and leasing it. Purchase the lot in the best neighborhood you can afford, not the best house in an average one. Single family residences preferred over condos. HOAs are a money pit.
@higgins2013 has excellent info about Chicago area. Chicago and Illinois in general is in a huge financial mess. People and companies are moving out of the area because of taxes and other factors. They’re talking about raising taxes again this year. We live in NE Indiana and people commute from this area into Chicago. DD has a friend who lives in Chicago and just moved from Texas and works for a major company. She is planning on leaving in a year because of the weather. As a young person, I would rent for a while and get to know the area before buying. You might not like the area or your job so get a feel for your new location before you buy something so permanent.
I am not sure how wise OP’s parents are on telling him to buy (without a lot of other information).
I will use the example I had before.
Let’s assume OP were to buy a 500,000 condo (let’s not debate if this is too much)
He would put down 20%, 100,000
mortgage P&I =$ 1990 @ 4%.
Out of 1990, about 1330 would go toward interest and 660 would go toward principal payment. If we are to assume the market is to stay flat for the duration of time OP is to live there, then only 660 would go toward building up equity - $7920/yr.(yes, principal portion would go up over time)
If OP were to take 100,000 and invest in VOO, S&P 500 index, 5 yr return 10%, 3 yr return is 15%, 1 year 3.25% - $3250-$15,000/yr.
If you take insurance, property taxes, maintenance into consideration then cost of ownership would be a lot higher. You would also compare that with your rental price to see what you would be better off in doing.
As I posted before, you could create a spreadsheet and run through few scenarios - real estate market stays flat and ± 10-20%, and assumes stock/bond market stays flat and ±10%. to see if you should buy or rent.
In NYC when buying a coop at a nice building they would often want to see 24 months liquidity (24 months of housing payments). Now, that may be excessive, but it is not unreasonable to have 6 months of housing payments in savings just in case of job uncertainty. The question is, as a new college graduate, would you be able to buy a house and still have 6 months liquidity.