Money-wise parents with a little foresight might do well to seriously consider expanding the back-to-school list to include a new house.
Not surprisingly, this doesn’t happen much. Purchasing a home isn’t an option that parents normally consider for their 18-year-olds. Renting is the common alternative because of the hassle involved in finding a home and the frightening $5,000 to $10,000 needed for a down payment.
Biting the bullet and laying down the cash for a house, though, is something more people are doing to save money after four years, especially as home-loan rates sink lower and rents push higher.
Around the University, average one-bedroom apartments rent for $500 per month, up 20 percent in the last six years, according to the Minneapolis Housing Authority. At this rate, it costs $24,000 to keep an apartment for four years without throwing in extras like security deposits, utility bills or renter’s insurance.
For anyone interested in saving money while in school, renting isn’t the way to go since rent checks disappear into the pocketbooks of landlords. The few who benefit from renting out costly apartments, instead of buying them, are those whose income dwarfs the meager amount they pay per month.
Yet for those in the basement of the economic high-rise, college kids don’t have that luxury. It doesn’t mean they should spend their money unwisely.
“It’s obvious that renting today, and always, is like pouring water down a rat hole,” said Daryl Stokesbary, supervisor in the Minneapolis city planning department.
With interest rates hovering at a low 7 percent, Stokesbary is considering buying a house for his daughter. He would help with the purchase, have her cover the monthly mortgage payments, and eventually sell it for a profit or pass the home on to her.
“If I could find a nice house that’s not too expensive, it’s going to appreciate,” said Stokesbary. “Why not just get it for her and let her live there?”
In the long term, buying is the way to go. But buying and then selling four years later complicates things since it narrows the window for saving money.
“Just being practical about it, going to school is a short-term purchase. Financially, it can still be done,” said Don Wilson, a realtor with Burnet who sold homes in Southeast Minneapolis for the last 16 years.
“Financially it would be a wise decision (to buy),” said Wilson, citing the steady increase in property values around the University.
Buying won’t pay off for everybody, and for the majority of renters the savings won’t be significant.
Consider a renter who wants to purchase an average house in Dinkytown for about $110,000 with a minimum down payment of $5,500 and a home loan of $104,000 at 7.5 percent. After figuring in homeowner’s insurance, maintenance, closing costs and resale costs, the prospective home buyer will come out ahead after four years only if they are paying at least $800 per month in rent.
But if a group of three people is collectively paying $1,000 in rent per month, they can go in together on the $110,000 Dinkytown home and save $10,700 when they sell it four years later.
Sue Pilarski, manager of off-campus housing at the University, argues that if students can get the money together for a down payment, it works as far as money is concerned.
Buying a home, said Pilarski, isn’t something young people think about because it isn’t part of the natural progression they go through.
“Students go from living in a residence hall to living on their own and renting.”