Buying a place for 200k or renting?

Question

My husband and I need to move to Chicago for 2-3 years. Our dilemma is whether we should buy something for around $200k, or rent for the 2-3 years, rent being $2500-3000. I realize that buying may make more sense, but in the area we are looking to buy which is right by the University of Chicago, the homes that we are looking at purchasing are all around 200k, but they may not go up in value at all in 2-3 years. We would however be open to renting the place out after we move. And I know we would get at least $1500-1800/month if we rented the homes we are looking at buying. We also currently we own 5 other rental properties in Atlanta, which are being managed by my father, so having another rental property is attractive. But Chicago is somewhere where we would move away, and never come back.

We are also not sure if we should pay cash for the 200k, and later do a cash out refinance if we need the cash, or if we should get a mortgage for some of it initially. We don't need the 200k in the next few years so buying cash would not be an issue.

thank you for any advice or guidance.

We are also not sure if we should pay cash for the 200k, and later do a cash out refinance if we need the cash, or if we should get a mortgage for some of it initially. We don't need the 200k in the next few years so buying cash would not be an issue.

thank you for any advice or guidance.

Brandon Hall · Answer

@Layla Rahm You are asking a great question and I'm sure you will get varying responses.

To me, it seems like you are comparing apples to oranges. For instance, it looks like your rent budget is $2,500 - 3,000. However, you claim that a $200k property, your purchase price budget, would rent for $1,500 - 1,800.

I look at this and think the logic is flawed. The property that rents for $2,500 is likely going to be a lot nicer than the property that you buy and later rents for $1,500. Maybe they are in completely different areas.

To receive worthwhile answers on rent vs. buy, you will need to change your criteria by saying "our rental budget is $1,500 and the $200k property we are looking at buying will later rent for $1,500 once we move out." That statement means you are comparing similar properties, in a similar location, with similar amenities, and as a result you will receive better answers.

Based on the information you are providing, from a financial perspective, the answer is to buy and save tons of money as your mortgage payment will only be around $810. But I can't assure you that is the correct answer as the property that rents for $2,500 is probably worth around $340k based on the rent/price ratio. It may be a lot nicer, in a better area, etc.

Apples to oranges.

Layla Rahm · Answer

Thank you crystal. We are looking at buying around the university. My husband wants to be close to work and I like that area. It's south of the university that we are looking, and I know lots of investors buying up the multi units and renovating in the same area south.

Which areas are you referring to that are close to the university and you can make a decent appreciation in a few years. Hyde park? South loop?

Crystal Smith · Answer

I assume you're going to work near or @ the University.  Some ideas to consider:

• Since you'll be an owner occupant consider purchasing a multifamily on the higher end & house hack.  It could be a move in ready property or one you pick up, renovate, then house hack.  There's a trend on a few blocks around the University where investors are buying up inventory just for this purpose.  Some are house hacking, living in their investments, others are targeting owner occupants that will rent out the rest of the units.  Some are using strategies targeting University Students as tenants.
• If you don't need to live by the University there are some communities that are a short Uber car distance from the University where you can purchase a property w/ a mortgage of $1500 to $1800 a month & get a nice appreciation over 2 to 3 years.

Layla Rahm · Answer

Thank you all very much much for your comments.

I also believe the buying route is the best but lack of inventory is the problem. As I said a place that I could live in, in that area is about 2500-3000. again a place that I could live in is about $200k although not as spectacular as the place for $3k but it's nice and new. The same place I can rent out for $1500-$1800. So thank you for confirming that buying makes for sense than renting.

Now the fact that I can pay $200k cash for the place again makes more sense to me than saving it and borrowing the money. I have more cash just sitting in the bank. I don't really want to buy more investment properties in the next couple of years. Especially not in Chicago.

The place for $200k. If I put 20% down then in the first 2 years I would be paying $36k in finance charges. Then why not use the cash and save the 36k? And I buy the place cash and sell it in 3 years for the same price then I would save $60-100k in rent.

What do you think? Also can't I just do a cash out refinance if I ever need the cash later?

Brandon Hall · Answer

@Layla Rahm We tend to have similar issues here in DC, so I feel your pain.

I think it comes down to a question of your goals. If your goals are to be financially savvy, then buying may be the best bet. If you'd rather be able to walk to work, the grocery store, and other amenities, renting may be the best bet.

There are plenty of variables at play, but assuming you purchase a $200k property for 20% down, your monthly payments will be around $810. If it was me, I'd pursue the buying route.

Layla Rahm · Answer

Brandon - I realize the numbers seem flawed. The reason it's like this is because the units we are looking at to rent are truly $2500-3k. There is nothing to buy the size we need in the area as the rentals. We also can't find anything similar for $1500 to rent in this area.

But if we go up a couple of streets then there are a couple properties for 200k that we can purchase the same size as the ones for 3k. A few similar places rented in this area for $1500. That's why I know it would rent for at least that much later.  If there were rentals available now for $1500 in this area we would rent but there are none.

Peter MacKercher · Answer

I would buy with as little down as possible. Save your cash for things that come up or buy another rental property or 2.

Buying a place for 200k or renting?

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