When Does it Not Make Sense to Buy?

1 Reply

Good Evening Everyone,

I'm still relatively new to the forums and the concept of REI in general, but couldn't imagine a better forum to pose questions/solicit some feedback! My fiancee and I are getting married in October, and are weighing the pros/cons of buying vs. renting. Here are the facts:

1. We are looking in a relatively expensive area (suburban Atlanta).

2. We plan on moving to a new city within the next two years.

3. We have been pre-qualified and have enough cash to match a 20% down payment.

4. We know little to nothing about fixing up/adding value to a home, but are more than willing to learn!

5. Rentals are in high demand in the areas we are interested in.

Given the above, does it even make sense to purchase a single-family home now, then rent it out via a Property Management Company when we move?  Or should we solely be focusing on finding a property to rent for ourselves, so that we don't end up without a home come October?  

Thanks!

Dusty

Dusty, when it comes to Rentals, the numbers are almost all that matter. When you're looking for a home to live in, you get all the feels, and that emotion will play a big role in your decision making. It's a totally different game-plan walking into it. Now, if your question is between buying and renting, I always say buy! This may not be the response you get from everyone, and market conditions definitely play a role -- do your own research in the market you're in. But when your option is between your capital going towards borrowing something vs. buying something that will be increasing in value down the road (hopefully), it seems more logical to go for the buy (in my opinion).

In the scenario you outlined, I would do the math. Find a home you're prequalified for, get the estimated mortgage payments, and add up the cost of ownership as if you were renting it it out (assume rents stay the same, which they will probably increase in 2 years). Use conservative numbers, or for some help, check out the calculator here in BP. Figure out the cost of ownership of the rental (mortgage, insurance, taxes, HOA's (if applicable), property manager, any utilities you'll cover for your tenant, throw in a margin for repairs/maintenance, and vacancy... and then take that number and divide the estimated rents by the cost of ownership. For example, if your cost of ownership is $1000/ mo up against $1250 a month received in rents, 1250/1000= 1.25% this is called your DSCR, or debt service coverage ratio. Most lenders want to see a DSCR of about 1.25% to offer you a loan, so that's not a bad target. If the DSCR is anything above 1.0, the property will be cash-flowing, and it could be a great opportunity for rental down the road (October). The higher the DSCR, the better.

Remember to use CONSERVATIVE numbers. over-inflate the costs, underestimate the rents received. assume worst case scenario, and assume the market will change down the road because it will. And lastly, remember to do the math and research on each individual property. 

Congrats on the upcoming wedding! Hope this helps a bit.