March 27th, 2013 | 32 Comments
Many graduate students consider buying a home near their universities, especially when they are just starting a PhD program. I don’t have to tell you that the mortgage rates and home prices in many areas of the country make the prospect incredibly tempting! The problem is that most students are probably like I was when I started my PhD program – single, next to broke, and looking forward to 5-6 years of a ridiculously low income! Not exactly a recipe for a stable homeowner. But I think that if the stars were to align for a prospective grad student it’s a great idea to run the numbers and figure out if buying a home is a reasonable choice.
There is a lot of great material available on the issues that everyone needs to think over when deciding whether or not to buy a home, and I don’t want to rehash it. At the bottom of the post there are links to several wonderful articles on the general case. Here I am going to focus on the extra questions graduate students need to ask themselves. (I’ll assume that the graduate student prospective buyer is single and has never owned a home before.)
How Long Will You Be in Your Program?
The rule of thumb is that you should only buy if you’re going to be in the area for five years – but of course that’s a generalization. You can try to speculate if the break-even point is longer or shorter in your market (but no one knows the future). How likely are you to be enrolled in your program for the amount of time you need to make buying worthwhile? If you’re in a master’s program that’s likely too short to bother with buying unless you plan to stay in the area. On the other hand, an MD/PhD or a longer PhD program may give you a good chance of staying long enough to make buying worthwhile.
You need to consider 1) the average time to graduation in your program, 2) the dropout rate from your program, and 3) yourself – the possibility you will drop out or take a longer or shorter time to graduate. Really dig for the truth from your department here and examine yourself! I’ve seen several friends drop out of PhD programs, some of whom I never expected, and every time I hear the “average time to graduation” for my program it gets longer.
How Secure Is Your Position/Funding?
Assuming you want to stick around for five years or longer, is it likely that your position and/or paycheck will? Does your PI have tenure? Is there a possibility she will be poached by another university? It’s very difficult to know about these sorts of transitions before they are imminent. Both my PI and Kyle’s were tenured recent transplants to our university so we were pretty confident they wouldn’t move again during our time in grad school. Is your funding guaranteed, and if not have students in your program lost their funding? Renting would give you much more flexibility in the case of a quick move or stipend loss/reduction.
Do You Need to Have Roommates?
I hope that lending has become tight enough that you would only be issued a mortgage you are able to afford all by yourself – though a single graduate student’s low income might not be approved for a large enough mortgage to buy a decent house, depending on your area. But it is likely that you will want to have roommates if you buy more than a 1BR place to help with the expenses, and in fact with roommates owning a home can become a great investment. However, you have to anticipate the difficulties that come with being a landlord, like being able to choose a good tenant/roommate, having money on hand for immediate repairs, and being able to survive a certain amount of vacancy.
What Else Could You Do With Your Money?
Just like with the decision of whether or not to attend grad school, when you look at buying a house you have to consider your opportunity cost. Even if you project that owning will be less expensive than renting, you will need to commit a down payment and keep a much larger emergency fund on hand than you would need if you were renting. You may have months when you have to cut down your other savings and expenditures to do work on the house. All of that is money that you could have in tax-advantaged account invested in the stock market, for instance. On the other hand, if you are paid by a fellowship and don’t have access to a tax-advantaged retirement account, perhaps paying down a mortgage is your best available investment option.
What Is Your Contingency Plan for When You Leave?
Let’s say you get through your PhD and your stipend is enough to sustain your mortgage, taxes, and insurance. Upon graduation, you get a great job or postdoc in another area and have to move. You hope that you will be able to sell your house in a reasonable amount of time, but you do need to come up with a plan before you buy what you will do if you have difficulty selling. Will you become a long-distance landlord? Will you hire a property management company to rent your house for you? Will you leave the house vacant? Will you sell for a loss and if so where will the money come from?
I think the biggest sticking points for grad students considering buying houses are 1) the low stipend that likely won’t increase faster than inflation and 2) the possibility of your job moving. Also, not many recent college graduates will have enough money on hand for a down payment, closing costs, and a decent emergency fund without being gifted the money or signing up for a risky loan unless she has worked for several years prior to applying to grad school. If you can confidently get through this list of questions and pass all the normal tests of home ownership preparedness, I’d say you have a green light to get pre-approved and start investigating your market!
General home-buying resources:
Did you buy a house during your (full-time) grad program? What other questions should graduate students ask themselves? For what reasons would you prefer the flexibility of renting?
Written by Emily
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