[Editor's Note: Happy Match Day to all the MS4s this week. I hope you all got your first choice. This is a guest post written by Mikki Ramey. WCI has partnered with Mikki (a Realtor) and John (a physician) Ramey who together run DrMoves.com to provide referrals to highly qualified real estate agents who have previously worked with a number of physicians. This is a service readers have asked for in the past so when I finally found the right people to work with, I brought them on board as paid advertisers. If you're buying or selling a home this year, I'd encourage you to use their service.]
I always get a kick out of reading posts and blogs giving absolute recommendations: “Don’t buy a house during residency” or “Don’t buy a house if you are going to own for less than 3 years.” If I would have followed this advice, then I would not have made $30,000 during medical school after owning a townhouse for 2 years or $120,000 during fellowship after owning a home for 2 years.
Over the years, I have been much more successful buying real estate than I have been with other types of investments. Most people give investment advice based on their previous gains or losses. I have worked with over 100 physicians buying homes. Here are some tips for those considering a home purchase this year.
# 1 A House Is an Investment
Look at your house as an investment, especially if you are purchasing during medical school, residency, or fellowship. You may only own this home for 2-5 years. If you are going to make this short-term purchase, buy a property that can resell easily. Usually, it is a good idea to buy the least expensive home in a more expensive neighborhood. Consider buying in a neighborhood convenient to the hospital.
# 2 Consider Buying It As an Investment From the Get-go
Consider keeping the property and renting it out after you move. Check rental rates in your area and see if the renting the property will create a positive cash flow. To analyze the cash flow, just make sure you can cover your mortgage, insurance, taxes, and home owners association costs. You also want to keep money in reserve for repairs. Renting may be the best option in a declining real estate market if your house has lost equity. I have a 40 year-old friend who began buying properties during graduate school and he now owns 250 properties. Owning rental properties can create a nice stream of somewhat passive income.
# 3 Reduce Risk By Holding Longer
A home is similar to other investments in that the less time you own the home the more risky the investment. Many financial advisors don’t recommend buying stocks unless you will own for at least 10 years because of the risk. If you decide to buy a home for a period of less than 5 years, then make sure you get a good price on the buying side. Know what the price per square foot is in a neighborhood and try to be below the average.
# 4 Significant Tax Deductions
Homes will allow you some great tax deductions. You may be able to deduct both mortgage interest and property taxes. If kept as an investment, expenses and depreciation can also be deducted.
# 5 A Home Office
If you or your spouse moonlights or has 1099 income, you may be able to set up a home office. Talk to your CPA to see if you qualify for this tax deduction. If you qualify, you will be able deduct a percentage of your home expenses based on the size of your office. [Bear in mind your use of the home office must be both regular and exclusive-ed.]
# 6 Don't Forget Often-Ignored Costs
Always calculate the total cost of home ownership. Many people forget to include the cost of taxes, insurance, maintenance, repairs, transaction costs, financing costs, and furnishings.
# 7 Consider Renting a Room
Consider renting a room. I have had several clients over the years who have rented rooms to other doctors or students. Some of these clients have been able to pay their entire mortgage with the rental income earned. You possibly can do short or long term rentals. Rotatingroom.com is a great place to advertise to students.
# 8 Consider Living In Your Investment
Consider buying a fixer upper. If you resell a primary residence after owning it 2 years, then you can avoid paying capital gains taxes. What other investments allow you to avoid paying this tax?
You may qualify for a home equity loan. Did you realize that the interest on a home equity loan is deductible on your taxes? I have had several clients take out home equity loans to pay off their student loans because the rates on home equity loans were less expensive, especially when you consider that for most attendings, student loan interest is no longer deductible.
# 10 There Is More To a Home Than an Investment
Buying a house is not for everyone. It is just like other investments in that you should study the investment and make sure it is right for you. One of my favorite investments has been our beach condo. About 5 years ago, I was trying to decide between investing in a whole life policy versus buying a beach condo. I decided to buy the condo. My financial advisor told me I was making a poor decision in buying a real estate investment. At the time, I doubted myself. However, now I consider it my best investment ever. I have netted about $20-25k on this rental property. It has also seen some nice appreciation. But most importantly, I have built 5 wonderful years of memories of spending time with my 4 children and husband at the beach. Even if I lost money on the investment, I could never buy the fun and memories we have had.
Feel free to contact me at DrMoves.com with questions. I am always happy to talk about real estate with future investors.
NYT Buy vs Rent calculator with various assumptions prior to making your decision and if it looks like buying is the right choice for you, check out Mikki's site to find a realtor and this page if you need a doctor mortgage lender.]
What do you think? When has buying a home worked out well for you? What considerations should people take when considering buying their home? Comment below!