Considerations for Grad Students Buying Houses

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.

 

house and money on scale

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.

 

Rorschach test - do you see a homeowner or a renter??

Rorschach test – do you see a homeowner or a renter??

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:

Money Under 30’s complete home-buying guide

Rent vs. buy widget

Buying or renting – price-to-rent ratio

Three ways to calculate how much home you can afford (detailed)

Six ways to calculate how much home you can afford

Fees that most people don’t talk about

First time home buyer mistakes

Necessary size of down payment

 

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?

 

photo 1 from Free Digital Photos; photo 2 from Free Digital Photos

 

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32 Responses to "Considerations for Grad Students Buying Houses"

  1. A good friend of mine rented a room from a girl in her department that bought a house and it was awful. The homeowner thought it’d be great to fill the house with grad students from her department, but all it did was bring problems from the department home every night and problems at home back to the department every day. She left as soon as her lease allowed and never recommended that anyone rent there.

    1. Emily says:

      Hm, that must have been a pretty toxic department to be sending problems home with students – I can better understand roommates bringing problems to work. I’ve seen groups of people from the same department live together peacefully, but I think they became friends before becoming roommates. I preferred to live with people not in my same program so that I would be able to take a break from my roommate and that worked out well. You definitely have to be careful who you choose to live with and if you’re the homeowner you’re in a tighter spot than the renter I assume.

  2. Michelle says:

    I bought when I was in my undergrad program – not my grad program, but I did do undergrad at an average of 24 credits per semester all while working full-time. Definitely decide if you plan on staying close. IF you move in 3 years of less, usually you will take a loss. Buying a house might make you feel stuck as well. We knew we were going to stay in the general area because this is where family and friends are, so we had no problem with buying then.

    1. Emily says:

      If you plan on staying in the area most of these questions become moot and the process will be very similar to that of a low-paid non-student. It was a bit different for you because you bought the house with your boyfriend, too – I assume both your names are on the mortgage?

      1. Michelle says:

        Yup both of our names are on the mortgage.

  3. Sara says:

    Recent college grads and current students are likely eligible for downpayment/first time home buyer assistance in their state. Unless you’re in a state with a very low median income, I can’t imagine a grad student not meeting the threshold. Sometimes the money is targeted at particular communities (those with lots of empty foreclosures) and sometimes it’s able to be used in any community in the state.

    1. Emily says:

      Thanks for that info! But as we learned from the housing crisis just because you can buy a house with very little down doesn’t mean you should! That’s a little bit beyond the scope of this post, though.

  4. I’d absolutely recommend getting a roommate to anyone with a spare room. For the house we are now renting, we are subletting the other two bedrooms to pay for almost half of the total rent.

    The important part, I think is to determine compatibility ahead of time. If they are a total slob and you are a neat freak, there are going to be problems.

    Oh, and thanks for the mention!

    1. Emily says:

      I’ve known students in my area who bought 3-BR townhouses and their mortgage/taxes/insurance is paid almost entirely by their roommates. That’s a sweet deal if you can get it, but you just need to be sure you can survive if you don’t.

      Post-college I’ve always lived with people I didn’t know beforehand and it’s worked out okay, but when Kyle leaves I’d prefer to have someone I know move in to our second bedroom.

  5. I would definitely go the roommate route and look into a multi-unit home so the flexibilit is there to be able to be able to rent once the person is ready to move on. Of course, you are getting all of the financial benefits of having a tenant while you are there as well.

    1. Emily says:

      A multi-unit home might be out of the price range for most grad students! I think a 2BR or 3BR house is reasonable for markets where buying is possible at all. There’s also the question of whether a student has time to be a good landlord, and that will depend on how difficult the program is and how much work the student can afford to contract out.

  6. I bought my house after grad school, but I would have considered buying it during if I’d had a better handle on my finances. I had a roommate for the first 2 years of homeownership, so I’d definitely not be opposed to that option. My roomies basically paid for all my travels! :)

    1. Emily says:

      Were you always planning to stay in the area your grad school is in? We never considered staying in our area long-term although we love it.

  7. I have classmates who have purchased houses – for a 2-year program! That’s definitely more risky a path than I’d take on, but if you know you are going to stay in the area for 5+ years, your spouse has a good salary, and you can find a job after you graduate, it might not be a bad deal. The interest rates are so low right now that if you have some down payment and you are in a low cost of living area, it’s really a great time to buy.

    1. Emily says:

      That is quite a short timeframe! I wonder if they are not planning to sell at the end of the program, either because they are staying or because they will rent them out? Definitely having a spouse’s income changes the picture.

  8. Jose says:

    I’m well past that stage in life but if I were a grad student, my decision would be based on whether I intended to stay in that area of completing my program or not. If I didn’t intend to stay I would probably just rent. But then again if you can get room mates to foot a good chunk of your expenses it might be worth considering.

    1. Emily says:

      Buying was just so not on my radar when I started school, so maybe it has to do with how sophisticated you are in your finances (thinking about roommates paying down your mortgage) or experience with buying homes. I was/had neither at the time!

  9. The duration of a Ph.D program is generally shorter than a complete economic cycle (which lasts 7-10 years, top to top or bottom to bottom).

    House prices are driven by the economic cycle more than anything else. (If you doubt that, just ask anyone who bought a house in 2007.)

    What that means is: if you happen to enter a program at or near the bottom of an economic cycle, you have a good chance of ending up with a profit when you graduate and sell the house. However, at almost any other time, the odds are stacked against you. In that case, renting is the better way to go.

    The last bottom we had in the economic cycle was 2009. that means the next recession could come as early as 2016. You can do your own math.

    Here’s the way to make the rent option work for you: If you reckon you can afford to buy, take that monthly budget (i.e. mortgage payment, property tax, maintenance… you have to be honest and include everything). Then take the rent, which should be a few hundred dollars less. Then force yourself to go with the rent option BUT PUT THE REST INTO A SAVINGS ACCOUNT. That part is important, because it requires honesty and self discipline.

    If you do this, you will end up with a guaranteed “profit” — and you won’t even have to pay realtor fees to withdraw the money. :)

    1. Emily says:

      I agree with you that making or losing money on a house is generally forced by the entire economy and more or less an accident of timing. Combine that with the relatively short PhD and you have a recipe for gambling!

      Regarding your suggestion though, why do you think renting would be less expensive than buying on a month-to-month basis? We rent our current home from an individual and we pay a healthy margin above what zillow tells me the estimated mortgage, taxes, and insurance add up to for this address.

  10. We had to borrow from my parents to get a deposit for our apartment! No way we could even think about buying so much as a condo in grad school. One of our friends almost bought a flat, with her parents doing the actual buying, but they couldn’t find anything structurally sound enough to make the investment… which is good because they avoided the big housing crash that happened the year she graduated. Someone in DH’s lab did buy a nice house, and she made a tidy profit upon selling right at the tip of the boom.

    1. Emily says:

      With such a short timeframe it’s terribly difficult to be confident that housing prices will increase enough to make buying worthwhile. It’s only apparently what should everyone should have done in retrospect. But if you don’t have savings, like you and I, you don’t have the option to buy!

      1. The heuristic is generally 5 years and you won’t lose money, but the most recent housing bubble and burst was pretty unprecedented. When you’re talking about a house that costs 800K or a condo that’s 300K, it’s a bit more risky than if you’re thinking about a 50K or even 100K house, and roommates that more than cover your mortgage. The NYTimes rent/buy calculator is important to use in any rent/buy situation.

  11. Nice post! You have pointed out some interesting differences.
    What about letting Mom and Dad participate? Maybe they could hold the house in their names and then rent it out when the graduate student moves on.

    1. Emily says:

      I think that is beyond the scope of this post since that is really asking whether a parent should invest in property and rent to their child – that isn’t specific to graduate students since the student wouldn’t be doing the buying. I don’t personally know any graduate students who live in a house owned by their parents. I think there is a way for that to be worked out reasonably, namely that the parents would own the house wholly and give the student a small rent discount for acting as the property manager. I have seen that setup suggested for college students but I’m sure it could apply to graduate students as well, especially since grad students with stipends can pay rent. As for a grad student living rent-free in a house owned by his parents, that goes against my idea that children should become financially independent from their parents when they get their first full-time jobs and/or pursue graduate degrees so I wouldn’t do it but of course there are many who would.

  12. […] from Their Health and Wealth added some great information to my post on graduate students buying houses: “Recent college grads and current students are likely eligible for downpayment/first time […]

  13. Eric says:

    I waited about 18 months after grad school to buy a home. At that point, I was nearly debt free (had paid off my car and had only a few months left on my student loans).

    But I also had a regular, full time job while in school to save up for the future down payment fund. After I graduated, it was just a matter of finding the right place at the right price.

    1. Emily says:

      Sounds like you set yourself up very nicely. We will be a few years out of grad school before we buy a home, too, but that’s because we need time to save up!

  14. […] @ Evolving Personal Finance writes Considerations for Grad Students Buying Houses – There are several additional considerations that graduate students need to take when they […]

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  16. […] Considerations for Grad Students Buying Houses […]

  17. ceecee says:

    Hi there-hoping to pick up this conversation one year later. I’m curious for those grad students who are attending need-based institutions, another important consideration would be the impact that buying a home would have on your asset profile from your school’s financial aid office. If that would seriously hurt your grant/scholarships award it may not be worth it. I’m thinking the people best suited for this type of work is a couple, preferably a couple who may as well be married but is not married yet. In that situation, the SO can have the home in his/her name and it wouldn’t be your school’s business! However for those of us who are married, I think that can really hurt you financially. Unfortunately as a newlywed I think I’m going to have to take the path most traveled and rent.

    1. Emily says:

      What a great question! It’s not one I’ve thought about before because I’m not familiar with need-based aid at the graduate student level. Can you tell me more about how it works?

      My first question would be if the grad student is even able to buy a house. If the institution is considering your need, does that mean you don’t have an income? Pretty hard to get a mortgage without a stable, decent income!

      But assuming the grad student does have the means to get a mortgage or buy a home outright, I would actually think that buying a home would increase your need in the eyes of the institution. (That is just a guess – I have done no research!) First, buying a home decreases your net worth in the short-term because of the cost of the transaction. Second, if I remember correctly, even if you had immediate equity in the home, isn’t equity in the primary residence excluded from consideration on the FAFSA? An individual university might calculate an asset profile differently, though.

      As for whether your household is legally a unit or not… Yes, I suppose staying unmarried but combining finances might trick some universities. I would never put myself in that situation, though, even to qualify for more need. It’s too precarious. And as premarital cohabitation has become the norm, I think that universities would catch on and start asking about domestic partners if they haven’t already.

      What do you think about these points? I really have no idea what I’m talking about.

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