If i purchase a home for my college student daughters to live in for 5-6 years should i pay cash or finance the home
@Twindad14 Rates are currently so low, it would be hard to pass up financing.
Second the financing…rates are so good right now.
I guess I am asking if putting cash into buying the house as an investment instead of the nothing you get on a CD at the bank is a good idea. Have already paid 24,000 in rent for 2 daughters for 3 years of school. They are going to med school and will be here for 5 more years. Buy the home to replace paying rent but do I make payments and get deductions or just use the cash that I ma not earning much on anyway. Seems to me that I would be earning about 3% on that money even with no appreciation in the property. Thats better than a CD.
I own rental property and can share with you some details:
- the deductions you get for interest and other expenses and also depreciation is when you have a rental, and so it’s classified as an investment property, and I think you need to show that the rent paid is market rate or somewhat close to it. So if your daughters are sharing with roommates and charge rent, it goes in this category.
- If bought as a second home just to keep within your family, you can still deduct the interest as long as it’s not officially rented. But your total itemized deductions(Interest + any other deductions you’re making) will need to exceed the 24K standard 1040 deduction, for this to be of any value.
- Much of this depends on location, and how long you will keep the property. And don’t forget to add in closing costs etc. for buying and agent commission for selling.
You may still come out ahead considering the amount of rent you’re paying. Whether to pay full cash or take out a loan - do an amortization table on the web and see how much you’d pay in interest. Much of the interest is in the first few years, so that may figure into your overall math.
Thank you for the info , I appreciate it. My plan is just to buy the house and have the kids live in it until they get out of med school. At that point we would sell it. No roommate rental or anything like that. Just a place to live until med school is over. I have the money to pay cash for the home in CD earning nothing. Paying cash and not paying any rent versus a mortgage payment. With taxes and insurance we would still be paying about $7,000 per year less than we can expect to pay in rent. That would be a $7,000 return on a 200,000 investment each year even if the property just held it’s value with no increase. Am I looking at it wrong?
You need to factor in regular maintenance as a budgeted cost. Unless your med student is the one in a thousand who has time to clean out gutters, rake leaves, shovel snow, (or whatever your climate requires) you can get an estimate from a local property manager as to how much this stuff costs and plug that in. And make sure you tell your insurer that it is not an owner occupied property- that matters in some cases.
Have they been accepted to the medical school where this house is located?
Also, you might want to consider financing the house and keeping some cash liquid assets. Unless your two daughters have already been accepted to a fully funded BS/MD program, someone is going to need to pay their medical school costs.
thanks to all for the replies!! the girls are accepted to the med school already on an early admission program. Maintenance will fall to me but I am only 60 miles away. We will have to use some student loan programs for med school expenses but the BS degrees are paid for. Just trying to decide whether to borrow for the house or use this cash that is not earning much right now.
@Twindad14 I too was wondering if your daughters have already been accepted to the med school. But assuming they are, if you plan to sell the house shortly after they finish, figure in RE agent commission of 6% or so in your total cost as well - in addition to maintenance etc. that blossom mentioned above.
If you do an all-cash buy, I am assuming you have deep enough pockets to fund the med school for the daughters without needing this money. If you finance with, say, 50% down, even with a low interest rate, you will want to run the numbers and see if it’s worthwhile.
Run the numbers to see if you would be better off to rent or buy. At some places rent is lower than the cost of ownership. Buy is not always better, and paying rent is not necessary throwing money out the door because ownership also comes with a lot of expenses and missed other investment opportunities.
Buying with cash in this environment isn’t smart, imo. Buying may not even make sense. Run the numbers.
As someone who is almost back to even after buying a house in 2006, real estate and CDs are not in the same risk class. Six years is near the edge to recoup the transaction costs.
Again, thanks to all for the input. Keep the advice coming I am loving reading all the different points of view
You’re saying you have enough cash for the house, but you’d have to use student loans for med school? Makes a lot more sense to get the mortgage and use that cash for Med school instead of student loans. Student loans generally have pretty poor terms compared to a mortgage.
Whether buying a house for this purpose makes good sense is a separate question from how it’s funded IMO.
In this area typical rents for an acceptable apartment are around 650 per kid per month. The homes I would be looking at would sell for around $200,000. So, in my mind I am paying $1200-1300 per month for 5 more years that could be replaced by a home. The payment on the home, if financed , would be about the same as the rent. (including taxes and insurance etc…) If I pay cash I am eliminating about half of that monthly payment ( taxes and insurance etc…would still add up) So, the $600 savings each month would be return on the cash investment. This would amount to over 3% annually ,which is much more than I can get at the bank. My risk averse wife is afraid of putting this money in the stock market.
Have you figured possible depreciation of the property and closing costs (both when you buy and sell)?
@oldfort if this is a rental property, won’t any capital gains be taxable also?
It’s not a rental property. OP is letting his daughters live there. When I say depreciation I meant decrease in the property value. Hard to say what the housing market will be like 5 years from now.