Buying house, interest only loan the way to go?
 

Im currently a sophomore in college and at the begining of junior year I plan on putting a down payment on a house and renting out two rooms. I will probably be selling the house in 3-5 years since ill be out of college. I have heard that getting an interest only loan is better for short term so the money I will make will be just what the house appreciates in value. Any info or advice on this would be helpful. I still have to do a lot of research before I go further into this because I am very new to this and have recently been winning a lot of money and now want to invest it into something.

Re: Buying house, interest only loan the way to go?
 

If you can afford the monthly payment, getting a traditional mortgage is cheaper than an interest only loan because even though the monthly payment is more, the interest portion is less due to a lower rate.

Re: Buying house, interest only loan the way to go?
 

[ QUOTE ]
Im currently a sophomore in college and at the begining of junior year I plan on putting a down payment on a house and renting out two rooms. I will probably be selling the house in 3-5 years since ill be out of college. I have heard that getting an interest only loan is better for short term so the money I will make will be just what the house appreciates in value. Any info or advice on this would be helpful. I still have to do a lot of research before I go further into this because I am very new to this and have recently been winning a lot of money and now want to invest it into something.

[/ QUOTE ]

Don't get involved with a marginal property move if you're not an expert in this kind of environment. You have been warned.

Re: Buying house, interest only loan the way to go?
 

[ QUOTE ]
house appreciates in value

[/ QUOTE ] Houses are NOT a good investment in some situations.

The main reasons houses are a good investment for most people:
1) Most people hold onto them for a long time.
2) People can build equity in something they derive utility from.
3) Intrest payments on mortgages are tax deductible.

How well does each of these reasons fit your case?

Re: Buying house, interest only loan the way to go?
 

[ QUOTE ]
Im currently a sophomore in college and at the begining of junior year I plan on putting a down payment on a house and renting out two rooms. I will probably be selling the house in 3-5 years since ill be out of college. I have heard that getting an interest only loan is better for short term so the money I will make will be just what the house appreciates in value. Any info or advice on this would be helpful. I still have to do a lot of research before I go further into this because I am very new to this and have recently been winning a lot of money and now want to invest it into something.

[/ QUOTE ]

Buying a house for a short-term hold period is probably a bad idea unless you can get the house for about half of the fair market value. Also, there is no guarantee that your house will appreciate. That kind of thinking is what all the Miami, Vegas, DC, etc. speculators thought right before they went busto. Second, you haven't considered the transaction costs, which are extremely high in RE, and will eat whatever appreciation you can get in five years anyway.

Third, I don't know what your credit and reported income are like, but honestly being a sophmore in college that plays poker for a job, I doubt that you're a great candidate for a loan. You could maybe get a no doc loan, but I suspect that you'd be paying about 8.5% or more, which will likely make renting more attractive cash flow wise. Not to mention that there is basically NO WAY in hell that you'll get out of having to put 20% down. You're probably better off just putting that 20% into a mutual fund or something.

In sum, your idea probably isn't going to be very lucrative. I wouldn't suggest it at all.

Re: Buying house, interest only loan the way to go?
 

Second Spex on this one.

Unless you can find an investor to hold the loan for you (parents maybe?) I would stay away.

Re: Buying house, interest only loan the way to go?
 

Parents who have credit credit will co sign on the loan for me so i dont think getting a loan is a problem. Currently I am making just into the 6 figures a year so the monthly payments wont be a problem, plus i would be renting out some rooms to compensate some.

the other alternative is putting the money into the stock market and just renting an apartment for the next few years here. i just feel like why throw away that 550 a month when i could be building equity in a house.

Re: Buying house, interest only loan the way to go?
 

[ QUOTE ]

i just feel like why throw away that 550 a month when i could be building equity in a house.

[/ QUOTE ]

You should look at an amortization table to figure out just how much equity you'll have in the house after 60 payments. Its not too much.

I don't necessarily hate your idea. But I think that you've got a lot of stuff to think about before taking the leap. You need to figure out how much money you can make, how you think your realistically going to make money, how you're going to make money when your first idea doesn't work, how bad your going to get burned if neither of your ideas works, the amount of work its going to take to be a landlord, and then compare all that to the potential returns of other investment types. IMO, your plan is ONLY workable if you are able to buy a house for about 65% of fair market value or less. Since you don't know how to get properties for way less than FMV, I'd say that the chances of success are pretty slim.

Re: Buying house, interest only loan the way to go?
 

I don't understand the reason for getting an interest-only loan. If I remember correctly, the closing costs are a little higher and you pay interest on the principal that is not being reduced. So if a 30 year fixed has principal + interest of $250 + $750 you are paying the $750 part every month. Might as well pay the principal part too so you can reduce the interest a little every month and not have to deal with the exposure to a rate reset should you decide to keep the house as a rental property.

All that aside I still wouldn't do it because of the hassle and as mentioned the transaction fees will kill your bottom line.

Re: Buying house, interest only loan the way to go?
 

I figured the transaction costs would be too high to make this worth doing but he does have the rental income. I'd still pass though.

Also renting is not always throwing money away. I use to own but have been renting for 8 years. Looking at buying now but the more I do the math the more I realize renting is much better for me then owning.

Re: Buying house, interest only loan the way to go?
 

[ QUOTE ]
I figured the transaction costs would be too high to make this worth doing but he does have the rental income. I'd still pass though.

Also renting is not always throwing money away. I use to own but have been renting for 8 years. Looking at buying now but the more I do the math the more I realize renting is much better for me then owning.

[/ QUOTE ]

Renting is much better for me at the moment as well, mainly because I currently have a roommate so that cuts my rent and bills in half. I also have several friends who own who are willing to rent me a room cheaper than my current rent payment.

If I were to buy, just the property taxes + insurance + mortgage interest (even after tax deductions) + a low estimate on maintenance would be about twice as much as I am currently paying in rent.

Instead of buying I am going to continue to rent. Each month I invest into the stock market what would have gone towards my mortgage. So far, I my stock gains have far exceeded any increase (or possible decrease) in the average's home value in my area.

I would suggest finding a renting vs. owning calculator to help determine what makes the most sense for you.

Re: Buying house, interest only loan the way to go?
 

yeah I was also thinking about just putting it into the stock market. I figured I will have to start paying taxes now since my poker winnings have become a significant amount of money and will probably make just into the 6 figures next year, how much does owning a house cut off what i would have to pay on a 100,000 income?

Re: Buying house, interest only loan the way to go?
 

[ QUOTE ]
yeah I was also thinking about just putting it into the stock market. I figured I will have to start paying taxes now since my poker winnings have become a significant amount of money and will probably make just into the 6 figures next year, how much does owning a house cut off what i would have to pay on a 100,000 income?

[/ QUOTE ]

I don't actually own a home, so if I am wrong, someone please correct me on this. But my general understanding is that you will save $1 in taxes for every $3 you pay in mortgage interest.

So while it does reduce your tax bill, you are still paying more in interest than you are actually saving on your taxes.

The above calculation does not take into account if you will have any roommates paying you rent, so if you do, that may swing things in your favor. Also, it you feel that real estate is a better investment than stocks or other possiblities you may have, then by all means buy, but as I am sure you are aware, the outlook on real estate is that the boom is over and will remain flat at best in most areas for the next few years.

Re: Buying house, interest only loan the way to go?
 

[ QUOTE ]
interest-only loan

[/ QUOTE ]

-->

[ QUOTE ]

building equity in a house.

[/ QUOTE ]

How does that work, exactly?

Re: Buying house, interest only loan the way to go?
 

LOL

Re: Buying house, interest only loan the way to go?
 

[ QUOTE ]
[ QUOTE ]
interest-only loan

[/ QUOTE ]

-->

[ QUOTE ]

building equity in a house.

[/ QUOTE ]

How does that work, exactly?

[/ QUOTE ]

100% NO RISK!!!

Re: Buying house, interest only loan the way to go?
 

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
interest-only loan

[/ QUOTE ]

-->

[ QUOTE ]

building equity in a house.

[/ QUOTE ]

How does that work, exactly?

[/ QUOTE ]

100% NO RISK!!!

[/ QUOTE ]

They're not making anymore land ya know.

J

Re: Buying house, interest only loan the way to go?
 

[ QUOTE ]
Im currently a sophomore in college and at the begining of junior year I plan on putting a down payment on a house and renting out two rooms. I will probably be selling the house in 3-5 years since ill be out of college. I have heard that getting an interest only loan is better for short term so the money I will make will be just what the house appreciates in value. Any info or advice on this would be helpful. I still have to do a lot of research before I go further into this because I am very new to this and have recently been winning a lot of money and now want to invest it into something.

[/ QUOTE ] You are wise to choose real estate as an investment for your money. I have been doing a lot of research on it myself recently.
However this conversation is kind of useless without the numbers on the property.
How much is the house? Monthly mortgage payment with the interest and insurance? Rents you will charge?
Also how much would you be putting down? Probably 20%, lenders are getting really tight with loans right now. Post these numbers and we can try and figure your best deal.

I really like the idea of you renting out the rooms. Mainly because you live there, and own it, that gives you a better loan rate(owner occupied), plus the renters can't trash the place because you're in the home.

I would do what you suggested. Only difference is I would make it a more of a long term investment to gain the most value.
Finance the house with a fixed rate loan, using your parents as cosigners if you have to. Put the 20% down to prevent the PMI payments etc.. Run the ad for roomates, interview the applicants(important), GO.
As time passes the principal is being paid down so you're generating some equity, albeit not much yet. When you get done with school you can refinance, hopefully without your parents, and pull out the little equity you have to reinvest, or just let it ride. At this point I wouldn't sell the house, but I would run another ad to for a renter to take your spot. This is where you might generate some cashflow (aka dividends), in addition to the fact that these guys are buying you a house. Cashflow is your monthly profit after the expenses for the property are all paid. Now you have a home that you are writing off on your taxes every year, some college kids that are paying off your house, and ever increasing equity.
I'm discovering that real estate is a great way to generate long term wealth. I hear guys tell me all the time that they wish they would have done it when they were younger.
Post some numbers.

Re: Buying house, interest only loan the way to go?
 

what i had i mind was something around a 3/3 or 3/2 around 200k. I have seen some nice ones around here for that price or less. I can put 20% down and have parents who have great credit co sign the loan. im not sure what kind of interest rate i could get doing that but i know they have nearly as perfect credit as you can get. renting two rooms at probably 550 a month/utilities included.

Re: Buying house, interest only loan the way to go?
 

200k * .80% = 160k

160k @ 30yr/7% = $1065/mo

Assume tax and insurance @ 4k/yr or 335/mo

about $1400/mo PITI.
This doesn't include utilites, which you would pay anyway.

$1100/mo in rents leaving you paying $300/mo. Can you get a 4th person to rent?
In 5 yrs the principle is $150,611. Depending on appreciation you have now gained about $9k of equity on your $40k investment. Not a bad return.

Re: Buying house, interest only loan the way to go?
 

[ QUOTE ]
200k * .80% = 160k

160k @ 30yr/7% = $1065/mo

Assume tax and insurance @ 4k/yr or 335/mo

about $1400/mo PITI.
This doesn't include utilites, which you would pay anyway.

$1100/mo in rents leaving you paying $300/mo. Can you get a 4th person to rent?
In 5 yrs the principle is $150,611. Depending on appreciation you have now gained about $9k of equity on your $40k investment. Not a bad return.

[/ QUOTE ]

First off, 25% over 5 years is not great, you can get that in a savings account.

Second this is much too optimistic. There will be maintenance costs, utilities, vacancies(?). Not to mention closing costs of ~3% on each end, thats 12k right there...

You will probably be relying on appreciation to turn a profit here and thats not the safest bet right now. It's possible that this could work out in you favor, but I'd be surprised if its works out better than a variety of other investments that are lower risk and less work.

Oh and if the point of this is to build build equity, please don't take out an interest only loan [img]/images/graemlins/crazy.gif[/img]

Re: Buying house, interest only loan the way to go?
 

[ QUOTE ]
Renting is much better for me at the moment as well, mainly because I currently have a roommate so that cuts my rent and bills in half.

[/ QUOTE ]

Including the roommate in your equations is wrong. If you own a home you can also have a roommate who pays you rent and still splits the bills.

[ QUOTE ]
The above calculation does not take into account if you will have any roommates paying you rent, so if you do, that may swing things in your favor.

[/ QUOTE ]

The US Tax code is not something I'm intimately familiar with but if he has roommates paying him rent that would increase, not decrease, his tax payable since he now has a new source of taxable income.

Re: Buying house, interest only loan the way to go?
 

If slightly over 4% is 'not bad'. You can currently get a savings account that pays more than that. I'm guessing you could get a 60 month CD that would pay more than that. Sounds like a bad deal to me.

Re: Buying house, interest only loan the way to go?
 

The more I think of it I can't come up with a single positive for doing this. I did do something similar when I was in university but I was pretty much assured of at least 40% appreciation + the rental income.

You also have to think about the impact on the primary purpose of going to school which is to get an education. You'll have roommates that are also your peers and probably become somewhat friends. This has potential to cause issues since now you are their friend but also their landlord.

Re: Buying house, interest only loan the way to go?
 

Owning a home does allow for a lot of tax write offs though...However you might not be making enough money while in school for this to matter...However if you're playing poker you might be.

Re: Buying house, interest only loan the way to go?
 

[ QUOTE ]
what i had i mind was something around a 3/3 or 3/2 around 200k. I have seen some nice ones around here for that price or less. I can put 20% down and have parents who have great credit co sign the loan. im not sure what kind of interest rate i could get doing that but i know they have nearly as perfect credit as you can get. renting two rooms at probably 550 a month/utilities included.

[/ QUOTE ]

Am I reading your posts wrong? It seems to me like you are really dead-set on doing this even though everyone on this board that knows what they're talking about says its a bad idea. Look, this idea will cause you heartache and headache if you do it. This is a bad idea that you haven't thought through fully. You need to seriously rethink your idea.