For the many medical, dental, and law students who spend three or four years in Little Rock, Arkansas, renting is the default choice. But according to Jerry Larkowski, Managing Broker at ESQ. Realty Group, LLC and a licensed attorney, buying can make sense for those who expect to remain in Central Arkansas after graduation. The key, he says, is to start planning much earlier than most students think.
Larkowski is clear that not every student should buy. Someone headed to a residency or job in another state may be better off renting. For students who plan to stay, however, a house offers privacy and quiet that most apartments do not—a significant advantage when studying for boards or the bar exam. “If one knows they will remain in Central Arkansas after school, it makes sense to start early,” he says. There is also a long-term benefit: when income grows and it is time for a larger home, the first house can become a rental property rather than being sold.
For students not yet ready to buy, Larkowski suggests setting a 12-month goal and using that time to learn Little Rock. That means paying attention to different areas of town, visiting open houses on Sunday afternoons, and browsing homes currently for sale to decide which ones are worth the drive. He also recommends walking neighborhoods and spending time there as a customer—shopping at nearby stores, eating at restaurants, and talking to residents. “The best way to get to know a neighborhood is to walk it,” Larkowski says. “Drive there, park your car, and take a stroll.” Talking to lenders and realtors early is equally important.
Heavy student loans are the norm for these graduate students, and they often surprise students when they first meet with a lender. Larkowski explains that student loans affect the debt-to-income ratio just like a car loan, even when the loans are in deferment. A $0 payment on a credit report does not mean a lender will count it as $0. Under FHA guidelines, 0.5% of the outstanding balance is generally counted each month when no payment is reported, so a $200,000 balance could be treated as a $1,000 monthly payment. Fannie Mae guidelines may count a deferred loan at 1% of the balance or a fully amortizing payment. That makes one question essential before touring a house: how will the lender count my student loans? The answer can change a budget by hundreds of dollars a month. On repayment, Larkowski advises choosing the plan with the lowest monthly payment. “You will be able to ‘buy more house’ when it’s time,” he says, though a lower payment can mean more interest over the life of the loan.
Some students buy during school and rent out part of the property—a strategy known as house hacking. That might mean a duplex where the owner lives on one side and rents the other, or a house with spare bedrooms for roommates. FHA financing can be used for an owner-occupied property with up to four units. “The duplex ‘house hack’ concept looks good on paper; if you can make it work, do it,” Larkowski says. He attaches two conditions: hire a property manager and never tell the tenant next door that you own the building, and put roommates on paper with a lease, no matter how good a friend they are. Whether a student buys during school or two years after graduation, his advice on timing is the same: “You can start too late, but you can’t start too early.”
