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Learn from This Professor’s Nightmarish Home Ownership Journey

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In this episode, Emily interviews Dr. Kevin Jennings, a professor of Criminal Justice and Criminology at Georgia Southern University in Savannah, Georgia. Kevin and his wife bought a home in Savannah shortly after he started his position, and the house has proven to be a money pit. Kevin catalogues all that has gone wrong with the house, what he wishes he would have known as a first-time home buyer, and the lessons he’s learned the hard way. He also gives excellent insight into the academic job market for someone already on the tenure track and how his status as a homeowner has affected his career prospects.

Links Mentioned in the Episode

Further Resources

Teaser

00:00 Kevin: The one thing I might’ve done differently is look for a house with fewer of these incidental costs, right? So if I wasn’t so close to the water, I wouldn’t have to do the flood insurance. If I wasn’t outside the city limits, I wouldn’t have to pay for the extra fire and protection stuff like that. I wish I would have known about those things in order to judge where to buy and which house to buy.

Intro

00:31 Emily: Welcome to the Personal Finance for PhDs podcast, a higher education in personal finance. I’m your host, Dr. Emily Roberts. This is season six, episode seven, and today my guest is Dr. Kevin Jennings, a professor of Criminal Justice and Criminology at Georgia Southern University in Savannah, Georgia. Kevin and his wife bought a home in Savannah shortly after he started his position. And the house has proven to be a money pit. Kevin catalogs all that has gone wrong with the house, what he wishes he would have known as a first-time home buyer, and the lessons he’s learned the hard way. You won’t want to miss Kevin’s insight into how his choice to purchase this home has affected his mindset toward his academic career. Without further ado, here’s my interview with Dr. Kevin Jennings.

Will You Please Introduce Yourself Further?

01:23 Emily: I have joining me on the podcast today Dr. Kevin Jennings, and he is going to talk to us about, well, a bit of a money pit that he is currently invested in. So, we’re going to hear tons more about that. Kevin, will you please introduce yourself to the audience?

01:37 Kevin: Yeah. Hi, I’m Dr. Kevin Jennings. I’m from Austin, Texas, and I went to Texas State University–Go Bobcats! Meow–and got a PhD in Criminal Justice in 2014. I was then hired at Armstrong State University in Savannah, Georgia, and I moved there immediately after graduating for a tenure track job, which I realize how lucky I am to land a tenure track job just out of getting my PhD. And I mostly focus on cyber crime and digital forensics. So I do a lot of work with law enforcement, but also work with computer science people and tech people to kind of find evidence on digital storage devices.

02:27 Emily: What an exciting topic. We’ll hear more about that at the end of the episode, where people can learn more. So, you moved to Savannah for this position. You said that was four years ago. Is that right?

02:40 Kevin: Five years ago.

Homeownership Journey

02:41 Emily: Five years ago. Okay. And you decided when you moved there shortly after that you were going to buy a home. Can you tell us more about how you did that shortly out of graduate school and why?

02:54 Kevin: So, we moved here in 2014 and rented a house. Unfortunately, in 2015, my grandfather passed away and he was the last of my four grandparents. And he left my parents and his three siblings a fairly decent amount of money. And my parents decided to share some of that with me and my sister. So, we got this decent size chunk of money. It wasn’t a huge amount, but it was enough for a down payment on a house. And my wife and I, having so recently started our actual career jobs, feeling like we were more adulty than we really were, decided to use that as a down payment on a house. So, we shopped around the city of Savannah. We, we were leaning towards finding either a fixer-upper that we could get for cheap and put money into, or kind of a duplex or house that had something we could rent out.

04:00 Kevin: Our real estate agent showed us this house in the neighborhood we were currently living in, which is great, less than 10 minutes from campus, really nice houses. And it was neither of those things, but we both fell in love with it. It’s kind of a two and a half story, four bedroom, two bath, huge backyard, and where the backyard ends, there’s a tidal creek right behind it. It’s just swamp and woods. And it was just beautiful. And we just kind of both fell in love with it. So, even though it wasn’t what we were looking for, we decided that this was the house we really wanted.

Making the Down Payment

04:40 Emily: And with that down payment money you were able to do the purchase?

04:44 Kevin: We were able to afford the down payment, which was I believe 10% of the total purchase cost, which was listed at $160,000. And we were super, super good negotiators and talked them down to 159. So, we put, again, I want to say it was 10% down. And we got this house and we were so excited, but we sat through kind of the lecture from the bank on, “Here’s your mortgage payment and here’s what that’s going to consist of.” And we were really shocked at how little of our actual mortgage payment goes into the principal amount of the loan. I mean, so I have my latest house bill here and my monthly payment is $1,142. Of that $1,142, $233 goes to the principal, which, I mean, that’s what, 20% maybe? So, we were kind of shocked by that. And we were looking at the other kind of things that, that had to go and pay for.

Expected vs. Unexpected Costs

06:05 Kevin: And there was the stuff we were expecting, obviously interest is going to be a big deal. The interest on ours is $460 a month. So, we knew that was going to be a big deal. Taxes, of course we expected. Coming from Texas, the taxes were actually slightly lower than we thought they were going to be. Because Georgia has an income tax rather than relying on property taxes the way Texas does. But then the other things that got added in there are the stuff that really kind of shocked us. First off, because we had that beautiful tidal creek in our backyard, we were required to get flood insurance, which most homeowners insurance doesn’t cover floods. And since Savannah is a low-lying coastal city, plus we’re right up against that tidal creek, we were required by law to get flood insurance. The other thing we didn’t expect was private mortgage insurance. It’s like $200 a month for this private mortgage insurance, essentially because we’re first-time homeowners. And that will go away when we’ve paid the mortgage down to 80% of the level of the value of the house. But since we only put 10% down, getting from 90% of the value to 80% of the value is going to take years.

07:31 Kevin: And we’ve been paying for four years and we’re still, I don’t want to say nowhere close, but not nearly as close as we’d like to be to that 80% level that will allow us to take away that private mortgage insurance. So, that’s $200 a month we’re paying for essentially not having enough money. So, just all those things combined to create a mortgage payment that we really kind of weren’t expecting. Homeowners insurance, flood insurance, private mortgage insurance, all that stuff really adds so much to the monthly fee, which really hurts in the long run.

Mortgage Structure

08:11 Emily: Yeah. I just want to jump in and make a couple of comments for the listener in case they’re not that familiar with the structure of mortgages. You mentioned a couple shocking figures, like the amount of your monthly payment that actually goes towards principal is 200 some dollars. Whereas the amount that goes towards interest is 400 some, and people may not realize this, but mortgages are on an amortization schedule where the great majority of your payment in the first year goes towards interest. Very little goes towards principal. And that shifts over the course of the loan. So, in year 30, if it’s a 30 year mortgage, you’re paying a vast majority towards principal and very little towards interest and ultimately pay off the loan. So, it’s really like when you start over with new mortgages, maybe every five years or something if you move, that amortization schedule, you’re kind of always playing around in the paying mostly interest, very little in principal, part of the amortization schedule.

09:02 Emily: And that’s why it is so difficult, like in your case, to get from 10% equity up to 20%, so you can remove that private mortgage insurance. Because mostly what you’re paying, as you said, is towards interest. Plus, all these other things you had to add onto the mortgage. So, it’s really kind of, you know, people talk about the differences between the advantages of renting versus buying. But the thing is that in your case, and many others, when you have so much of your monthly mortgage payment that goes towards anything other than the principal, that’s almost like paying rent. It’s just money that’s out the door every single month that’s not really building your own net worth, your own equity in the house. It’s just stuff that has to go out the door to keep you in that house. And so I wanted to know, when you were sitting through this explanation from your bank–which actually it’s kind of cool that they gave you the explanation, honestly, like they were doing a little bit there to help educate you–how far along in the process were you, and were you ready to like run out the door or was that no longer an option?

Mortgage: A Little Extra Goes a Long Way

09:59 Kevin: It was no longer an option. But I was so ecstatic over finally owning a home that it didn’t quite hit me, what exactly it meant until I had made a couple of payments. The other thing was, it wasn’t until I think a year after we bought the house, my wife decided to go back to school. So, she helped put me through grad school. And then a year after I graduated and moved here and got this job, she decided to go back to school to become a nurse. Because what she did before, there’s really no job market for here in this part of the country. So, while she was still kind of working a semi-decent job before she went back to school, we were paying extra towards the principal every month, which I had been told was a very, very good idea. Because anything extra you can put in, especially at the beginning of a mortgage, really knocks down the long-term cost of the mortgage.

11:17 Kevin: So, we were able to put an extra, I can’t remember exactly how much, extra 50 or $60 a month towards the mortgage for the first year, maybe two years, that we were in the house. With her back in school, we really had to tighten our belts. We were not able to do that, but now she’s graduated. Just started her new job yesterday, in fact, and I’m really excited to be able to kind of go back to doing that. Putting even just a little bit extra towards that mortgage, I think, will help a lot.

Unforeseen Costs of Home Improvement

11:50 Emily: Yeah. Like you said, you get a lot of bang for your buck when you start paying down that mortgage at the beginning a little bit faster, at least until the point where you can get rid of PMI. I mean, that’s like a really big goal when you have a mortgage. To not be paying insurance on the behalf of the bank to insure against you, to not have to pay that makes a huge difference. Yeah. So, at least to get to that point. That would be amazing. So, you know, I mentioned earlier that your house has kind of turned into a little bit of a money pit, right? So, it’s not only the structure of the mortgage payment that you were learning as you got into the house, that, “Hey, not that much of this money is actually going towards principal.” But in fact, you’ve incurred a lot of other expenses that you did not really realize or factor in when you first got into the house. So, can you outline what those are, please?

12:38 Kevin: Absolutely. So, we were buying this house and we realized we wanted to do a bunch of stuff to it. So, right off the bat, as soon as we bought it, we knew we wanted to take out all the carpet because we hate carpet. And we wanted to replace a lot of the lighting fixtures because the house was built in kind of the mid-nineties. And it had those kind of classic, like little glass globe, things that were super cheap and in every house back then. So, we knew we wanted to replace those. We knew we wanted to paint a bunch of stuff. And that was when my wife and I kind of both realized that we don’t have those skills. We were both very nerdy in high school and college and we never got those, those kind of woodworking and electrician and, you know, I can barely use a screwdriver.

What You Pay is What You Get

13:29 Kevin: So, those skills are something that I really wish I would have had before I decided to buy a house. So, we rip out the carpet, and two big problems presented themselves. One, there were places where the floor was uneven and the carpet kind of hid that. But two, the stairs that we had hoped to just kind of refinish, were just kind of ugly two by fours that they had nailed down. So for the floors, we hired someone to come in and put in some vinyl flooring, which was, I was shocked at how much vinyl flooring costs. But you know, it’s still cheaper than hardwood. The stairs we replaced ourselves and the flooring was not installed properly. We just kind of found somebody on Craigslist or something and brought them in. And that was a really bad idea.

14:34 Kevin: If you’re going to hire someone to come in and work on your house, don’t go for the kind of cheap fly by night operation. Definitely, definitely try to find someone you trust or a company that has, you know, you can go on Yelp and find their reviews. Stuff like that. Then there were little expenses, like we had to replace the mailbox paint, because we wanted to paint a bunch of stuff. But yeah, when we first moved into the house, those were kind of these big expenses that we kind of sort of planned for. We had saved some money to the side that we weren’t putting into the down payment just for those improvements. But we went, I don’t want to say wildly over budget, but fairly over budget on that process.

Hurricanes and Fences and Air (Conditioning) – Oh, My!

15:30 Emily: So, you’re saying there were certain things that when you bought the house, you knew, okay, you hate carpets, you’re going to tear all those out. There were certain things that were obvious upon purchase you knew you were going to take care of, and you had prepared to some degree to do that with savings. What’s next? Were there other things that have come up in the years since then?

15:49 Kevin: So, we are in a coastal city and when we moved here we were told, “Don’t worry about hurricanes. Hurricanes never hit Savannah because we’re kind of tucked into the coast.” And then of course, since we’ve moved into the house, we’ve had two hurricanes. So, our fence, when we first moved in–and for a long time we had dogs. We are, are now dogless, unfortunately, rest in peace–but one of the reasons we liked this house is because it had a fence and a big area for the dogs to play in. But one of the hurricanes that came through kind of finished it off and knocked it down, or at least a large section of it down. So, we got our entire fence replaced which was thousands of dollars we weren’t planning on spending.

16:40 Kevin: And even though we had essentially hurricane insurance, the deductible on that is like almost $5,000, I want to say. So, it really wasn’t financially viable to use the insurance to fix that fence issue. The second problem is that the upper half of the second floor was an add-on. When they originally built the house, it was just the first floor and the main part of the second floor, the upper part was all attic space. The second owners of the house finished out that attic space and turned it into a fourth bedroom. What we didn’t know when we bought the house, and what the home inspection didn’t show, is that when they finished out that area, they had to move the indoor air conditioning unit. When they did that, instead of redoing the drain line, the way they should have, they just ran a new line from where it used to be to where it is now.

AC Repair Fiasco

17:50 Kevin: So, essentially, the drain line for the air conditioner goes from one part of the house, across the house to where the air conditioner used to be, down under the flooring of the attic, then back across the house to where the air conditioner is now to actually drain out of the house. We had no idea that had been done that way. So, we had all these problems with the air conditioner. Finally, we call in a good repair company and they come in and take a look at it. And they’re like, yeah, the drain lines are all bad. But also this air conditioner system is designed and built for a house of the old size. With the addition, you’ve added so many square feet that you really should move up, and it’s getting towards the end of its like 20-year life or whatever it was anyway.

18:45 Kevin: So, if we’re going to do all this work, it’d be a lot better in the long run to just replace the entire system. So, we said, “Okay.” So, we got a new indoor unit, a new outdoor unit. Ended up needing to rerun all of the ducts because when they had done the addition, they had messed up the duct work, new thermostats, whole nine yards. I think we spent $13,000 on essentially a $15,000 system. Then it started having problems and wouldn’t work. And we spent the next year replacing parts and getting service. And finally, finally, after a year they just replaced a huge chunk of the outdoor unit, all these things, but it took them a year in the South Georgia heat with no air conditioning before they finally figured out kind of what was wrong and how it was messing up. But essentially, we ended up with, as part of the replacements, they gave us improvements. So, essentially we got a $17,000 air conditioning system for $13,000. But that’s still $13,000 we hadn’t budgeted for, we hadn’t planned on. So, I think we got a six-year loan, interest-free, luckily, and that’s $230, $240 a month that we weren’t planning on. Which, right when my wife was in the middle of nursing school, was a very difficult financial burden to kind of take on unexpectedly.

20:31 Emily: Yeah. I was just going to ask how you actually did pay for that. I’m thinking about your mortgage payment and that whole system costs about what a year of housing cost for you. That’s I mean, a huge expense. So, glad to hear that you got some decent financing, it’s not going to cost you any extra in interest, but what a saga. And especially to live for a year without proper air conditioning, as you were describing. Are those the big things that you’ve had to lay out for the house?

21:00 Kevin: Those are kind of the big things.

Commercial

21:05 Emily: Emily here for a brief interlude. I bet you and your peers are hungry for financial information right now, especially if it’s tailored for your unique PhD experience. I offer seminars, webinars, and workshops on personal finance for early-career PhDs that can be billed as professional development or personal wellness programming. My events cover a wide range of personal finance topics, or take a deep dive into the financial topics that matter most to PhDs, like taxes, investing, career transitions, and frugality. If you’re interested in having me speak to your group or recommending me to a potential host, you can find more information and ways to contact me at pfforphds.com/speaking. We can absolutely find a way to get this great content to you and your peers, even while social distancing. Now, back to our interview.

Rule of Thumb for Annual Home Expenses

22:03 Emily: There’s a rule of thumb–and you might laugh at this, but maybe you’ve heard it before–there’s a rule of thumb that you should expect to spend on average on your home 1% of the value of the house per year. So, like average 1% of the value of the house per year on home maintenance repairs and so forth. Sounds like you probably have blown that out of the water every year you’ve lived there, right?

22:25 Kevin: Yeah. Oh yeah. So, the downside is we now have our garage doors, we have two garage doors, that need to be replaced because it’s Savannah, Georgia. Everything is wet here, constantly. I mean, it’s just moisture, moisture, moisture. It’s ridiculous. So, our garage doors are rotting out and we need to replace those. Our deck, for similar reasons. It’s not bad, but we’re anticipating that we’re going to need to replace it in the next couple of years. So, there’s more thousands of dollars of stuff that we’re kind of dreading and preparing for. The other things that have really shocked me are things like–we’re technically outside of the city limits, right? So, we have to pay for fire and EMS services directly. Instead of it being paid for through our city or County taxes, we have to pay, I want to say, it’s just under $300 a year to the fire and EMS service to come out. We have to pay for termite inspection yearly, or termite service yearly, which is hundreds of dollars a year. So, all these things have really combined. We didn’t think about it. Going from an apartment to a house you expect, you know, okay, rent, mortgage. There are going to be taxes and interest and principal. But then it seems like there are all these other fees and taxes and payments for things that you would never expect, having spent your entire life, or at least entire adult life, in apartments and renting places. It’s incredible.

Lessons Learned: Do It Right the First Time, Due Diligence

24:29 Emily: Yeah. I think a couple of the lessons that I’m hearing from this, that maybe the listener can apply. Two things. One is do the work right the first time.

24:38 Kevin: Yes.

24:39 Emily: Invest in quality from the beginning, and hopefully you won’t have problems or the replacement costs or whatever won’t come up so soon. Part of that was decisions that you’ve made, part of that was the previous homeowners’ decisions, but pay for it to be done right the first time. And the second one is–maybe, I don’t know, it sounds like you did what any reasonable person would do in terms of buying the home in that you lived in that neighborhood for a year prior to buying and you think you know where everything is, you know where are the schools, whatever you’re considering in your home-buying purchase. Just by living nearby, you’ve learned a lot of those things. But it sounds like you didn’t investigate–and why would you have?–the fact that these services were being billed directly instead of through the tax system, or all these other line items. Or, you know, maybe if you’d understood more about flood insurance, you would’ve told your real estate agent, “No, I’m not interested in anything next to a creek or whatever.”

25:37 Emily: I mean, those are not things you’re going to naturally pick up just by living somewhere. You’re learning this the very hard way. And so, I’m really pleased to be able to share your story with the listeners. Just say like, there are probably going to be more expensive than you think there will be. So, just plan for the unexpected, right? And prepare for that. But maybe do a little bit more due diligence to try to figure out what the peculiarities are of this city that you’re choosing to buy in. Like you were saying, well, people told you hurricanes never hit Savannah. Turns out, at least for the recent years, that hasn’t been the case. But I don’t know, I think you did what any reasonable person would do, so I’m not criticizing you. But I’m just really glad to hear this for anyone else who’s coming up on a home-buying purchase to do a little bit more to figure out what all these little nuanced expenses are going to be.

Do Not Skimp on Home Inspection

26:24 Kevin: Absolutely. The other thing I want to point out is home inspections. Do not skimp on the home inspection. We had a fairly decent one, but they missed a lot of these things where if they’d have been just a little bit more paying attention, a little bit more thorough, we would have known about these things in the contract negotiation process, not a year or two years or three years later. So, do not skimp out on the home inspection.

26:57 Emily: Yeah, definitely. So, I live in Seattle, so in the market here, at least in recent years, it’s been a sellers market, right? And a lot of people, as part of the bid that they enter, they waive inspections. It’s just something that no one wants to hold up the process, but even if you have to go that route based on what’s standard in the market, still do the inspection. Even if you don’t have it as part of the contingency or whatever, still do it so you know all these things upfront, like you were saying.

How Does Being an Academic Affect Homeownership?

27:28 Emily: So, I’m curious about how your position as a faculty member, as an academic, has played into these homeownership decisions or your ability to handle these things, I guess. So, it sounds like you got this tenure track position. Despite a little bit of upheaval with your university, you’ve maintained that and you bought a home where you got your tenure track position, probably what anyone would try to do, if possible soon after. So, yeah. How does being an academic affect this whole homeownership situation?

28:03 Kevin: When I was in grad school, I kind of bought into the belief that if you can find a really nice, good tenure track job you can stay at that university for a long time. Decades, if not your entire career. At the university I went to and the department I was in, there were a lot of professors that had been there for 20, 30 years. So, I was kind of expecting that kind of experience. So, when I moved here and was ready to buy the house, I was very much in this mindset of, “My family will be at this university working here for a long, long, long time.” So, in the University system of Georgia, you have an option between a pension system or a 401k.

29:01 Kevin: And if you’re going to be there longer than 10 years, the pension system is really the better option. So, that’s what I chose because I thought, “Oh, I’ll be here at least 10 years, no big deal. I’ll buy a house. I’ll be here at least the five or six years that it takes to really get enough equity in a home to make a profit when moving.” But I’ve come to kind of find out and realize that job-hopping and transferring positions is almost, or just as important in academia, as it is in private industry. Growing up in Austin, there were a lot of tech people. And tech people were all talking about, “Oh, you’ve got to move jobs every five years or every however many years.” And I thought academia was kind of exempt from that. And it comes to find out, it really isn’t. It’s depressing when you’ve been working at the same university for four or five years and they make new hires, straight out of grad school, hired at well more than you’re making. So, I wish I was able to move or at least have the possibility of moving. I wouldn’t necessarily want to leave. I love my job. I like living here. I like the university I’m at, but being so tied financially, through both the house and the pension, to this one job in this one place is something that even if I am going to stay here for the next 10 or 20 years, it’s still distressing. And it makes me feel like I don’t have options. It makes me feel like I’m stuck. Even if I want to be here, that’s still kind of a bad feeling, you know?

The Golden Handcuffs

30:55 Emily: Yeah. I definitely understand that. You know, sometimes people refer to the benefits or something that a job gives you as golden handcuffs. So, it’s like you feel, you feel tied to your job because you don’t want to lose the great compensation or the benefits, whatever. The pension is a little bit like that for you, but the house is on the other side of that. That’s not so much golden handcuffs as it is kind of an anchor. Until you get this equity up to a certain point, it’s going to be very–I mean, it’s not impossible–but you may take a loss, you may have to bring money to the table. Something, if you were to try to move without having a lot of years under your belt, paying this mortgage and getting the equity up there.

Would You Have Done Anything Differently?

31:36 Emily: So, I definitely understand what you’re saying. And I think it’s really great insight for other people who are looking to enter the job market that we think a lot of times as getting that tenure track position as like, “I’ve made it, this is it. That’s all I needed to do, and I’m going to be set for the rest of my career because I landed that one position.” And what you’re saying is, “Hey, that’s good for the first few years, but don’t think that you’re never going to apply for another job to advance in the way you want to.” That you might not have to move around, as you said, like what happens in the private sector. So, I’m really glad for that insight as well. And just, I don’t know, would you have done anything differently? I mean, knowing this. Now that you know this about your job and your feelings about it, would you still have purchased the house? Because it still kind of seems like the thing to do, right?

32:26 Kevin: Yeah, it does. It depends on what the alternative is. If the alternative was, you know, renting, I don’t think I would have. The one thing I might’ve done differently is look for a house with fewer of these incidental costs, right? So, if I wasn’t so close to the water, I wouldn’t have to do the flood insurance. If I wasn’t outside the city limits, I wouldn’t have to pay for the extra fire and protection stuff like that. I wish I would have known about those things in order to judge where to buy and which house to buy. Right? Does that make sense? So, it’s not that I regret buying a house. It’s that I regret not understanding exactly what the cost of buying this particular house are.

Best Advice for Another Early-Career PhD

33:13 Emily: Right, right. Yeah. Thanks for your insight into that. So, two questions as we wrap up here. The first is what is your best piece of advice for another early-career PhD? It could be related to the conversation we’ve been having, could be something else. What is that?

33:28 Kevin: Start putting money away as fast as you can. Start saving. It can be a 401k, it can be putting extra money towards just a stock trading account. Also, speaking of stock trading accounts, I found the Fidelity, I think it’s a bank, but it has a stock trading app thing. And they have a credit card where you get 2% cash back from every purchase that goes straight into the stock trading account. So, I put all my purchases on that and pay it off in full every month. So, I never pay a dime in interest, but I still get 2% into this longterm savings account. And then once I build up enough money from that I can purchase a stock or an exchange-traded fund or something like that. And then I never touch that. That’s all just socked away money. That’s essentially free money. As long as you’re paying off that card every month, that’s essentially free money. So, definitely do something like that. It can be a travel card that gives you miles on an airline. But make sure it’s paid off in full every month.

Where Can People Find You?

34:50 Emily: And second question, last one here, is where can people find you?

34:55 Kevin: So, I’m on Twitter with the username @CyberCrimeDoc, and I’m on YouTube with the channel name, Arresting Developments. And I actually do have a group I just started not too long ago called Americans for Election Reform. It’s a big political focused on elections and election security and making sure all Americans vote and all votes count. And that is on Facebook and Twitter.

35:29 Emily: All right. Well, thank you so much for joining me today, Kevin, and for telling us this very easy to learn from story.

35:35 Kevin: Absolutely. Thank you so much having me. I really appreciate it.

Outtro

35:38 Emily: Listeners, thank you for joining me for this episode. Pfforphds.com/podcast is the hub for the Personal Finance for PhDs podcast. There, you can find links to all the episode show notes and a form to volunteer to be interviewed. I’d love for you to check it out and get more involved. If you’ve been enjoying the podcast, please consider joining my mailing list for my behind-the-scenes commentary about each episode. Register at pfforphds.com/subscribe. See you in the next episode! And remember, you don’t have to have a PhD to succeed with personal finance, but it helps. The music is Stages of Awakening by Podington Bear from the free music archive and is shared under CC by NC. Podcast editing and show notes creation by Meryem Ok.

This Grad Student Defrayed His Housing Costs By Renting Rooms to His Peers

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On today’s episode, Emily interviews Dr. Matt Hotze, an administrative director at Rice University and co-host of the Helium podcast. When Matt moved to Durham, NC for his PhD, he immediately purchased a 3-bedroom house and rented the two extra rooms to his labmates. The rent Matt collected from his two housemates covered nearly all of his mortgage payments during his years in grad school, though he had some financial bumps in the road as well relating to house repairs and his dual relationship with his housemates. Ultimately, his decision to sell the property also hinged on his personal relationship with his tenants. Matt shares the overall effect this investment had on his finances and his three key pieces of advice for another early-career PhD considering this route.

Links Mentioned in the Show

PhD landlord

Would You Please Tell Us More About Yourself?

Matt has a PhD in environmental engineering. His advisor moved from Rice University to Duke University near the start of his PhD. He purchased a home in Durham when he moved there in 2005. After he finished his PhD in 2008, he did a postdoc in France and then another postdoc at Carnegie Mellon. Subsequently, he had a career in publishing with the American Chemical Society, serving as the managing editor for four journals, where he learned the business side of science. Currently, he works at an engineering research center at Rice with 80% of his time, and the other 20% of his time is dedicated to the Helium Podcast.

How Were You Able to Purchase a Home During Grad School?

It is no mean feat to buy a home during grad school!

Further reading: Purchasing a Home as a Graduate Student with Fellowship Income

First, Matt was “blessed” to not have any debt from undergraduate degree.

Second, when he started grad school in Houston, lived with his parents for most of his first year and banked much of the stipend. Living with his parents in the suburbs was cheaper because the distance from home to campus impeded going out and spending on entertainment. His motivation to save money was due to his upbringing; since he was able to save, why not do so? He expected there to be some use for it eventually, though he didn’t have specific plans to buy a home when he started. Saving the money wasn’t a big sacrifice as living with his parents was comfortable.

Third, in 2005-2006 the houses in Durham were not that expensive. This was after the dot com bubble burst in early 2000s and the housing crisis hadn’t hit yet. Matt hadn’t necessarily planned to buy, but he saw that the nice, recently built apartments were rather expensive to rent.

Though Matt had enough money for a 20% down payment, he still needed his parents to co-sign his mortgage because his income alone wasn’t sufficient to support the mortgage payments. He bought a modest 3BR home and rented out the other two bedrooms for below market rate. The purchase price for the home was approximately $200,000.

Further listening: How to Qualify for a Mortgage as a Graduate Student or PhD, Even with Non-W-2 Fellowship Income

Matt bought the house even before he moved to Durham, so he never rented there. He felt he was on a time clock to own the home for long enough during his PhD to make the transaction costs worthwhile. He decided he would either buy right when he arrived in Durham or he wouldn’t do it at all.

Emily had a similar thought process a few years into grad school when it might have been possible to buy, but since she was already a couple years into grad school she decided against buying due to the time clock.

Matt’s first tenants in Durham were the other grad students in his lab also moving with his advisor, which also influenced his decision to purchase right away.

What Were the Pros of Renting Out Rooms to Peers?

1) Matt had almost zero housing expenses as the rents from the two bedrooms basically covered the mortgage each month.

2) Matt’s house became the gathering spot for his grad school friends, so instead of spending money going out they would drink beer and play board games at home. (Emily had a similarly inexpensive social experience in grad school.)

3) Didn’t have any issues with the great majority of his tenants.

What Were the Cons of Renting Out Rooms to Peers?

1) Once Matt moved on from his PhD, he didn’t know his tenants quite as well. One of his tenants asked to pay his rent late a couple times. It wasn’t possible to handle this completely professionally because of the social ties between him and his tenants. This did end up working out, but it was stressful to handle this, especially from afar. Matt was especially concerned about being fair to all his tenants but not establishing a precedent that it’s OK to pay the rent late. The rental agreement between Matt and his tenants was helpful in this case, not only the legal components but also to set expectations.

2) The home inspector didn’t catch some flashing around the chimney, so a water leak developed soon after the purchase. Matt used some additional cash he had on reserve (~$500) for this repair, so it was a good thing he hadn’t used all his cash on the purchase. Another time, the water heater exploded. Thankfully replacing it didn’t cause an issue because Matt already had cash built up for these kinds of repairs. Emily references the 1% rule: You can expect to pay 1% of the home’s value in maintenance/repairs each year – but that’s only an average! It can be much higher or lower in any given year.

Why Didn’t You Sell When You Left Durham?

When Matt left Durham for his postdoc in France, it was not a difficult decision to keep the property. He still had tenants in place who would take a couple more years to finish their PhDs, and with three rooms rented out the property was now earning money above expenses. One of Matt’s friend-tenants served as the property manager so he didn’t have to hire a professional company.

At the end of grad school, Matt had a good amount of savings built up, and after the postdoc he had even more saved. This really set him up to be financially successful in subsequent stages of life. He lived in Pittsburgh for his second postdoc. When Matt married his wife and combined their finances, he was able to significantly contribute to their nest egg. It was great to not have to worry about (non-mortgage) debt.

All of this financial success came from the germ of financial parental help during college and that first year of grad school. Good financial fortune and bad financial fortune early in life do not guarantee any particular financial outcome, but certainly put momentum behind your finances one way or another.

How Did You Decide When to Sell the House?

When his friends finished their PhDs at Duke, Matt no longer felt able to hold on to the property. He didn’t have the bandwidth at the time while working in an intense postdoc position and applying for faculty positions to figure out how to hire a property management company from afar. Deciding to sell was really a trust issue. If he didn’t trust his tenants through personal relationships, he didn’t want to be a landlord any longer. It’s not always about numbers, sometimes it’s more about your feelings!

Matt ended up selling in 2009, which was pretty bad timing with respect to the national economy. He sold the house for just about the same price that he bought it for. Even without the property appreciating, the financial benefits he experienced through those years made it a good financial decision. Even though he didn’t make any money on the house, he defrayed all his housing costs when he lived there and continued to make money afterwards.

What Advice Would You Give to a Grad Student or Postdoc Who Is Considering Buying a Home and Renting Out Rooms?

1) Use a calculator to figure out whether buying and renting out rooms in a home makes sense financially in terms of the costs you will incur and the rental prices.

2) Are you OK having uncomfortable conversations with your tenants? Someone will inevitably not pay rent or break something or something stupid in the house. This will happen whether you know the renters or not!

3) Are you comfortable making basic repairs on your own? It’s expensive to outsource it all the time! Are you able to talk with vendors and negotiate? This is a needed skill.

4) What’s your gut feeling on owning rather than renting? You’ll make a good decision!

What Is the Helium Podcast?

Christine and Matt co-host the Helium Pocast. They help early-career researchers – senior grad students to early faculty – navigate the transition from grad school into first faculty position, from landing the position to navigating the position to advancing within the position. They bring on interviewees to talk about career transitions. Check them out! New episodes come out every Tuesday.

Purchasing a Home as a Graduate Student with Fellowship Income

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In this episode, Emily interviews Jonathan Sun, a second-year PhD student at Yale University. Jonathan purchased a house in New Haven after his first year in graduate school. He shares the process he used to search for and ultimately go under contract on a home, including applying for various incentive programs. But his home ownership goal was nearly derailed; his original mortgage lender pulled out because his fellowship income isn’t reported on a W-2, and he had to scramble to find another lender at the last second.

Links mentioned in episode

homeowner grad student

0:00 Introduction

1:02 Please Introduce Yourself

Jonathan Sun is a second year PhD student in Pathology at Yale University in New Haven, Connecticut. His stipend is $35,000 and it increases annually. When he moved to New Haven, he started by renting a two bedroom, one bathroom apartment with his girlfriend. He was paying about $1,500 monthly for rent.

3:10 What made you think that it would be a good idea to buy a home as a graduate student?

When he began his PhD program, Jonathan had in mind that he would want to buy a home. He thought between his first and second year would be the ideal time to buy. At this point in his PhD, he would know if he would be staying there for five or six years. Emily mentions that it’s a good idea to learn about the neighborhoods before buying a house. Jonathan agrees that it was a good idea to get to know the city and neighborhoods. He shares that if he had bought a home when he first moved to New Haven, he would have chosen a less convenient or less desirable neighborhood.

Further reading: Should I Buy a Home During Grad School?

5:11 Was your interest in buying a home specific to New Haven or anywhere you moved to for your PhD?

The idea of buying a home occurred to Jonathan when he was interviewing at Johns Hopkins. He saw that homes were affordable near Johns Hopkins. He realized that homes could be affordable even on a graduate stipend. When he chose to attend Yale, he did some housing market research on New Haven and saw he could afford homes there.

When Jonathan was interviewing for PhD positions, he met a current graduate student at Johns Hopkins who owned their house. He didn’t meet any graduate student at Yale who bought a home. Jonathan says owning a home as a graduate student is not that common in New Haven. Emily shares that when she was a PhD student at Duke University, it was fairly common for grad students to own home.

7:20 How did you prepare your finances in the months leading up to buying a home?

Jonathan worked on improving his credit. He says that good credit is definitely important. To get a mortgage at a decent rate, or even to get a mortgage at all, he had to have good credit. Jonathan also searched for incentive programs around New Haven. He says he saved about $10,000 with incentive programs. He shares that while Yale University offered incentive programs for employees, he could not qualify for them as a PhD student. He relied on incentive programs instead of savings because he was paying expensive rent in New Haven.

To research incentive programs, Jonathan talked to a real estate agent who pointed him to incentive programs. Shortly after Jonathan arrived in New Haven, he started working with an agent. Jonathan didn’t have connections to an agent when he started to process. He simply dropped into a real estate office and met an agent there.

9:54 What were the steps you went through to buy a home?

Jonathan started looking for houses with agents about three months after he moved to New Haven. He didn’t start seriously looking until six months after his move. He says that even if you don’t have intention to buy right away, it is important to familiarize yourself with the neighborhoods. He was looking at four different neighborhoods around Yale University. He got an idea of price range for homes and who are the neighbors. This process gave him a firm idea of whether he wanted to rent or buy. Most of the time, he looked at houses through private showings with his agent. He went to just a few open houses without his agent.

During Christmas break, Jonathan thought carefully about whether he should pursue buying a home or not. He talked to his friends and family, and it seemed like the right thing to do. He asked his family if they could help with his downpayent, and made sure to have open communication with his family.

Buying a home took at least two months of seriously looking. Jonathan went through some experiences of making an offer but not getting the house. He recalls three homes that he made an offer for, and there were some other situations where he almost made an offer. He didn’t want to settle for a house that he wasn’t satisfied with. However, his offers were outbid or made too late, and this added to the challenge of buying a home. Emily shares that in Seattle, she hears stories about bidding wars and people struggling to get the house they want, then they end up settling for a home that wasn’t all that they wanted.

13:54 How did you balance the process of buying a home with your first year of graduate work?

After his offers on homes were rejected multiple times, Jonathan felt demoralized. He had lowered his standards for a home. But then when he was browsing an online resource, he found a house that looked perfect. This house ended up being the one he bought. He says it was challenging to balance his graduate work with buying a home, but he was glad he did this in his first year rather than in his second year. He shares the example that on the day that he gave his offer, he was giving a presentation on a paper. He barely read the paper because he was so tired, but he still managed to give a compelling presentation. Right after he finished the presentation, he ran off to give an offer on the house. Much of the stressful part of home buying is waiting to get a response on the offer.

16:01 Tell us about the house that you ultimately purchased and live in now.

Jonathan was browsing online on the day before his presentation. He noticed the house was ten minutes away from where he was living. The house had just gone on the market that day. He pushed his agent to get a showing the very next morning. He got to meet the owner and exchanged contact information directly. The owner was a Masters student, and they had a connection. About two hours after the tour of the house, Jonathan gave an offer of $2,000 over the asking price. This was right after his presentation. He asked to receive a response in one day. The next day, someone else made an offer of $5,000 over the asking price with full cash. Jonathan raised the offer to $2,000 over the other offer. Jonathan’s offer was accepted, and he says that meeting the owner in person helped him get the house.

19:06 How was the process of getting a mortgage?

Jonathan didn’t have his mortgage ready until after his offer was accepted. He did have a pre-approval, but this didn’t work out for him. The lenders didn’t understand his financial situation as a graduate student with a stipend. The pre-approval came from a lender with connections to multiple banks. When you make an offer on a house, it is important for the seller to know that you can afford the house. For a pre-approval, the lender does a very brief credit check on you. The pre-approval shows that you can take out a loan of a certain amount. The pre-approval shows the seller that you can take out a loan for the house. Pre-approvals are very superficial, since they do not ask for a W-2. The lender asks for monthly income and proof that you reliably pay rent.

After his offer was accepted, Jonathan first explored incentive programs. He found an incentive program that stipulated if he stayed at least five years in New Haven, the program would pay at least $2,000 per year and contribute to the downpayment. The application for the incentive program took a while. Jonathan says that ideally the application should be done before submitting an offer. The seller wanted to move out three months after the sale, so this gave Jonathan the right amount of time to sort out the finances.

Jonathan qualified for two incentive programs, but he was happy to get just one because the programs were slow to respond. The incentive programs have a list of lenders that you have to use for a loan. The lenders were local banks in Connecticut. Everything seemed like it would work. He submitted all his documents, but about three weeks before closing, he got a phone call saying that they couldn’t pre-approve of his mortgage because the university wouldn’t be able to provide W-2. The university wouldn’t submit a form indicating that his stipend is guaranteed for 3 or 4 years.

Emily explains that there are different types of pay for graduate students. The W-2 is provided for assistantships and this represents a more typical employment situation. Jonathan says he doesn’t know the name of his pay. He gets the 1098-T, and he simply calls his pay a graduate stipend. Emily says that the 1098-T usually means you are funded through an award or outside fellowship. Lenders get confused by fellowship income. Jonathan says his acceptance letter from Yale says his stipend is guaranteed for several years, but the lender wanted the university to sign a form. The university was unwilling to compromise on signing that form that indicated the stipend is guaranteed. Emily says this “guarantee” of income is strange, because even with a W-2, the typical job is not guaranteed for multiple years.

28:15 How did you resolve the problems with the lender?

Jonathan was calling Yale’s financial office daily. He asked for help from the Dean. He started looking at the other banks on the incentive program’s list, because he had a feeling it wouldn’t work with this bank. There were a few banks around the university, so he went in person to the bank. He talked to a mortgage broker in person. They sat down together, and Jonathan filled out the form during the meeting with the mortgage broker at the new bank near the university. Jonathan resolved the situation because he found someone who was willing to work with him through his unique financial situation.

Jonathan said that this bank offered their own portfolio mortgage with their own requirements. It was harder to qualify for, but it came with a lower interest rates. He had little debt and good credit so he could qualify. It was a different type of mortgage than the first lender offered.

Jonathan was really caught of guard by the phone call from the first lender. It seemed fine, then suddenly he got the call, with no easy way to resolve the issue. Closing got delayed from Friday to Monday, but the closing went very smoothly with the new lender.

32:29 How does it feel to be a homeowner and to be a graduate student?

Jonathan says it feels good to come back to his own house. He can rent out some of the rooms. If he rents out two bedrooms of the three bedroom house, he can cover a good chunk of monthly mortgage. He says this is a great financial decision for him. The mortgage is less than what he paid in rent, plus he has the potential to rent out rooms. Two months after he moved in, he started renting out the rooms. He has two tenants and they are covering good fraction of mortgage payment.

Jonathan has to stay in the house for at least five years. He says that in five years, he will definitely be in a better financial situation from buying instead of renting. He bought in a very good location, in the up and coming neighborhood near Yale. He thinks the market value of the home will increase.

35:25 Have you thought about what you will do when you finish your program?

Jonathan says he has two different options after he finishes his PhD. First, if there’s a good market value to sell the home, he can sell it. Second, the location near Yale University will make it very easy to continue to rent the rooms in the house. He doesn’t see himself working in New Haven after his PhD unless it’s for an academic position.

36:24 Final Comments

Jonathan shares that he had a huge budget for his move, but he didn’t spend very much. He estimates he spent less than $1,000 to move into the house. He moved during the summer, so everyone was getting rid of furniture for free. He used his Toyota Corolla to pick up furniture, and hardly spent any money to furnish the house. He is replacing pieces over time as he saves money. He recommends overestimating expenses for a move.

38:44 BONUS INTERVIEW with Sam Hogan, mortgage industry professional.

Emily chats with her brother, Sam Hogan, who works in the mortgage industry. She asks him about solutions for graduate students and postdocs who are receiving fellowship income but want to buy a house.

Further listening: How to Qualify for a Mortgage as a Graduate Student or PhD, Even with Non-W-2 Fellowship Income

Sam Hogan is based out of Northern Virginia. He works for PrimeLending and he is licensed in all 50 states. He explains what lenders look for in the risk profile. They are looking for the ability to repay, and to see verification of history of the type of employment as well as the likelihood of employment to continue. Sam says that ten years ago, anyone could get a no document loan. This meant anyone could verbally verify their finances, but this practice led to many foreclosures. Now, lenders require written verification of employment.

Sam explains that in Jonathan’s case, the lenders sent a form for verification of employment to the university. On the form, there is a tiny check box that asks if employment is likely to continue. It is a yes/no checkbox. Universities won’t check this box because technically a PhD candidate could discontinue their PhD by going into the workforce or transferring institutions.

Sam shares that the best approach is to document likelihood of continuation of income. This may be in the fellowship offer letter. Conventional loans look for at least three years of guaranteed income. When it comes to approving loans, it is all about the presentation of the buyer. Sam says to work with someone goal-oriented like yourself, who will be able to over-document your income. For example, you can write a letter about why you got the fellowship, and include that even after your PhD you will have income. This approach ensures you have good presentation to the underwriter. Loan approval comes down to one person’s decision, a human’s opinion. He says to work with underwriters who are flexible and will give you personalized attention.

Emily recommends that PhD students and postdocs work with Sam because he understands fellowship income situations. Sam can be contacted by cell phone at 540-478-5803. He can be emailed at samuel.hogan@primelending.com. His national licensing number is 1491786. He has a Zillow profile under Sam Hogan.

46:28 Conclusion