The Glade 4.0

So I got into medical school (yay!) and am trying to evaluate my options with respect to my house. The basic, government subsidized student loans won't cover my full tuition and cost of living. This requires I get a Grad Plus loan, which requires a credit check. At present, I have excellent credit.

The school that accepted me is in another city, and if my first school choice takes me off wait-list, it will be a dozen states away (Arizona to Missouri, or possibly Indianapolis). Which means I have to do something about my house. I owe about $175k on it, which is just about the price it would sell for. Since my loan type is FHA, I can refinance right now (currently at 5%). But that doesn't cover commission costs and anything else. A short-sell is not an option because the credit hit would disqualify me for the Grad Plus loan. So I see my choices as:

1) Pull money from 401k. Pay down principle. Sell house.
2) Pull money from 401k. Pay down principle. Refinance to get low payment. Rent house out.
3) (Somebody told me I could) Short sell house. Pull out money from 401k to pay loan deficit and avoid credit hit.
4. Refinance house. Rent it. Have student loans cover any deficit/repairs/whatever when it comes up.
5. Short sell house. Hope I can find a family member willing to cosign my Grad Plus loan, unlikely since the only family members I have with money and decent credit are retired and have no real income.

I don't really have any other assets I can use to make up the gaps. Can anybody think of any other options and/or provide feedback on which option they feel is best? Option #2 seems the easiest, but being multiple states away makes it unattractive.

Thanks for any help.

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The Dude abides.

I'd really be wary of becoming an absentee landlord while in medical school. You won't have time to deal with any major issues. How favorable are the laws towards landlords in the state you live in? If you get problem tenants that stop paying, how hard would it be for you to evict them?

Yeah you'd have to pay someone to manage the property in your absence. Even with good tenants fuse boxes blow and stuff needs maintained. And with a not good tenant...

My folks rent a house, they live next door, and it's still a pain in their butt, and they're just covering what they owe.

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I prefer to think of them as "Fighting evil in another dimension"

Consider contracting with a maintenance/rental company.

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Ezekiel 23:19-20 

You need more information in order to assess the situation. E.g. What is the rental capacity of your current residence, how much would a rental/maintenance company cost (in Australia it’s usually around 6-9% of total rental depending on services provided), how much do you anticipate to pay for maintenance (changing a light bulb yourself is cheap, getting someone to do it is very expensive), bills and other expenses which an owner is obliged to pay for (e.g. in Aust, the owner pays for all water fees).

Once you have done your preliminary assessment, you need to figure out how much you’ll pay after refinance to a lower interest rate. Does your rental income cover your interest payments and other out goings? If not, how will you make up the difference? I imagine med school is at least 5 years, will you still be able to cover payment if your current interest goes up. Currently in the US, the interest is crazily low, if the market recovers you’re likely to experience higher interest rate, you need to have an idea of your limitations on interest rate. I.e. is it 1%, 2% or 5%. While a 5% hike is unlikely, a 1% in 5 years is likely, what preliminary safe guards will you put in place to ensure this does not happen (e.g. fixing your interest), income buffer, etc.

Another consideration of course is the value of the home. Will the value of the home increase at the same rate (or faster) than the current interest being paid. E.g. if your home increases in value by 2% per year, but you’re paying 5% in interest per year, is it still worth holding on to. Your home should minimally be increasing by the interest paid per year, plus the time you spend keeping it a viable rental.

I believe once you have all the figures the decision will make more sense and become clearer for you.

Rental companies here charge 10% or so. I could use 401k money to buy down principal and refinance, but that would likely only get me to a break-even point on monthly rental price vs. monthly mortgage cost. I can probably get my payment down to about $1000 to $1100, which is about what it would likely rent for.

Housing isn't really appreciating too rapidly here. A lot of people keep telling me to look at the house as an investment. All I see is a big box that costs me more in interest than I'll ever sell it for. I hate the idea of losing the last 7 years in payments and money from my 401k just to get free and clear. But at this point, it's seeming like my best option, especially if I end up being multiple states away.

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The Dude abides.

The value of a house is in the use you get out of it for the duration of your ownership.

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Buckle your pants or they might fall down.

Using your 401K money to buy down principle and refinance brings another layer of complexity, essentially you would be losing growth on that lump sum, which by the sound of things isn't likely to produce a positive gain given the sluggish housing growth.

Without knowing all the details, and assuming quite a few things... This is what I would explore if I was in your situation.

You stated how much you owe is close to how much the house would sell for. In the time left before you move, clean up the house as best as you could to get the best price. e.g. repainting, fixing obvious cracks, etc. Explore apartments in the new city you're moving to. Apartments are generally cheaper, have higher growth and easier to maintain. Use your 401K to put a down payment on an apartment you could afford. Afford = the amount of interest < what you would actually pay in rent, or at least close (Haggle haggle haggle... )

If you can't afford to go with an interest + principle loan, see what options you have for an interest only loan, this would bring repayments down considerably (usually 10-15%). Look for really run down apartments you can fix yourself internally (fixing increases value, so it's like you're earning money in your spare time), but it must be in a good/semi decent area, close to amenities (public transport, shops, offices and schools), this would ensure maximum growth in an unstable market and easier sale at the end of it. Extra money should be spent fixing up the apartment or paying down the principle in the loan.

At the end of your schooling, there should have been some growth in the apartment. Sell the apartment, put your 401k back into your savings account, use what you have saved/paid into principle during this time + any capital gains from the apartment as your down payment for your next place.

Your life will be hard during these years, but you should be back in the black at the end of it. (provided there's not another housing crash... check with Khross on this one as I don't know enough about the US economy to predict).

Buying another place to live isn't really on the horizon at this point. I fully expect I will be renting as my level of indebtedness for school will skyrocket over the next four years. I'm okay with renting a place for me to live in.

Renting out my current house is, more and more, looking like a huge risk that could only destabilize my future situation. Selling it will be a large, financial hit that will suck but in the end will give me the most peace of mind during a time I'll really need it. Thanks for your input, it got me thinking on a couple things I hadn't considered before.

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The Dude abides.

My pleasure sweetie, happy to help where I can.

I would still urge you to do some research on the area you're going to. I've always believed that Rent money is money you have paid to help someone else purchase a property, but each must consider their own circumstance.

I wish you all the luck in the world, life would look much rosier when you come out the other side. Just don't forget to take some time out now and then to smell the roses.

I wont have any income for the next four years so buying would be nigh impossible.

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The Dude abides.

Just out of curiosity and please excuse me if I'm over stepping my bounds.

How do you pay rent and afford living expenses if you have no income?

Student loans.

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The Dude abides.

Could you rent your current house without refinancing, pay a property management company to deal with the logistics, and just eat the loss of a few hundred bucks per month while you're in school (i.e., cover the difference with student loan proceeds)? Of course, that only makes sense if the cumulative loss of renting below cost would be less than the loss from short selling and/or pulling from your 401k, so I'm just throwing it out there for consideration, not necessarily recommending it.

That's an awful lot of money to shell out. That couple hundred in loss every month would be student loan subsidized, which means I'll be paying what, 6% interest, compounding every month? That's not even factoring in repair costs, bad tenants, and tenant gaps.

I managed to catch DFK and he dropped some math on me that basically confirmed my gut feeling that selling, even with the 401k hit, is the better play.

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The Dude abides.

Tenants are the main reason we got rid of our house in Ohio when we moved to Texas rather than rent it. If you don't get your rent on time you're stuck with a year plus of trying to evict them while still being on the hook for the mortgage.

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"Hysterical children shrieking about right-wing anything need to go sit in the corner and be quiet while the adults are talking."