I'm starting law school soon and am debating whether it'd be a smart decision to put some money down toward a foreclosed property, using my law school loan money toward paying myself rent to live there and rehab the place as a future investment. Anyone with any advice on the legalities of something like this and whether it would be a smart decision or not? I'm just going off the basic principle that owning>renting and to pay someone $750-1000 over 3 years ($27,000-$36,000) to rent their property would be dumb when i could put down 5-8K (of my own money not law school loan money) and purchase a foreclosed apt around $30-40K, living there and paying myself rent and almost paying it off in 3-5 years.. But then again, I know very little about how foreclosures work and/or legality of using law school loans to pay yourself rent. Advice appreciated!
If you're in law school, I should hope you'd be able to research for yourself whether you're allowed to use your loan money in that way. It probably depends a lot on the specifics of the loan and whether it has just your name on it, or your name and the school's.
I haven't yet received the loan (should get it by August, filed all paperwork) but from what I've read on the agreement, the funds are to be used for the following: 5. Use of your loan money. You may use the loan money you receive only to pay for your authorized educational expenses for attendance at the school that determined you were eligible to receive the loan. Authorized expenses include the following: Tuition Room Board Institutional fees Books Supplies Equipment Dependent child care expenses Transportation Commuting expenses Rental or purchase of a personal computer Loan fees Other documented, authorized costs That's the most detail it goes into. If I'm paying rent to myself, I still fall under "Board" i'd assume. Anything I'm missing? Has anyone gone through this process (graduate loans) before or knows anyone that has? Advice?
I suppose if they don't like your arrangement, you could still buy a place, rent it out to someone else, and then use their rent money to pay the mortgage, and use the loan money to pay your own rent.
It's commendable to think about owning rather than renting but it costs a little more than that to own. 1) You can't compare a place you rent for $750-1000 to a place you can buy for $30-40k. Deal like that is not easy to find. Typically a condo you pay $30-$40K would rent for maybe $400-$450. If you are willing to lower your lifestyle, you might as well rent a cheap place and pocket the difference right away. 2) When you buy a place, you have to maintain it. Anything breaks, you have to fix. Foreclosed properties usually require work. You have to pay property tax, insurance, maybe $200 a month. homeowner association fee, maybe $80-$100 a month. 3) Be careful about thinking that you can buy a place and rent it out and make money. What if you don't have any renter and the place stay vacant for months? What if the renters destroy you property? What is they are slow in paying?
Unless you are independently wealthy, or have parents who can bail you out, this is an insane plan. You're about to go six figures into debt on your student loans. You're considering leveraging those loans to allow you to buy a property, which I assume will also involve a large debt. You have zero idea what the future holds in a legal market where many graduates spend years before they find a decent legal job. You will have no real income in law school. After law school, you may find yourself moving at the drop of a dime to any corner of the state you are licensed in for a job. How are you going to reasonably sell a property in those conditions? You need to rent and not gamble your student loans on a risky asset. If you screw up and get foreclosed on, you won't be able to sit for the bar, or you could risk your license if it happens after you pass the bar.
You also have to calculate condo fees, repair costs and maintenance in addition to the mortgage payment. Usually with foreclosures, the homeowners stop funding maintenance and repairs before they stop making the mortgage payment. An pre-sale inspection might indicate $5k in damages. However, once you start repairs and opening up walls, you may find $10-15k damage. If it is an older condos(20+ yrs) will start running into problems with special assessments for items such as a new roof or other community property items that are in need of repair. It could easily be $10-20k per resident. Special Assessments: http://www.realestateproarticles.com/Art/7463/263/What-to-Avoid-When-Buying-a-Condo.html http://query.nytimes.com/gst/fullpage.html?res=990CEEDE123FF932A25757C0A9619C8B63 If I were to go into a condo at this point, I would stick to a newer complex as a first time buyer. I would make sure to have about $10k for unseen damages behind walls. The best deals will have already picked up by seasoned investors. You will have think about why an REO is sitting on the market for many months. High cost low reward ratio for investors? Mold issues? It could be just low profit, and you could take the deal. Most investors are using straight cash to close the deals and not mortgages, so they will always beat you. You also run the risk of your life changing and you have to move within 5 years, but you are locked into a condo that would be sold at a loss after closing charges. When you are young and not established in your career, you always run into unexpected situations that force you to move. If you are a seasoned contractor, which you are not, then repairs are nothing. Heavily damaged foreclosures will be the best deals and scare away inexperienced people. If you choose to do the repairs yourself, go to the contractor desk and see if you can get the contractor discount at Home Depot or Lowe's. Some investors will also buy discounted giftcards off the internet with a rewards credit card to get a discount before the discount on their materials. Since the materials are for a business, they can also reduce their tax liability on any profit. They may also postpone tax liability on investments with a 1038 exchange, if they are selling one property and buying another.
