By Dr. James M. Dahle, WCI Founder
There is a very strange phenomenon I've noticed amongst 4th-year medical students. They have this seemingly overwhelming desire to buy a house. I'm not sure if its the delayed gratification thing rearing its ugly head, or if it is some unwritten rule that once you own a house “you've made it.” While everyone's situation is different, and rules of thumb aren't necessarily helpful, most residents probably shouldn't buy a house.
I wish my crystal ball had been working properly back when I was a new resident renting in Arizona during the housing bubble. If I would have bought when I first arrived and sold just as I finished residency before the market burst, I could have made out very well. Some of my classmates doubled their money in 3 years. It didn't work out so well, however, for the new interns buying houses when my classmates were selling and they obviously took a shellacking when the bubble burst.
10 Reasons Why New Interns Should Curb Their Housing Fever
#1 You Don't Have a Down Payment
There are five benefits to using a down payment.
Market Swing Protection
Using a down payment protects you from swings in housing prices. It costs approximately 10% of the value of a house to sell a house (6% commission, 1-2% to fix it up and 2-3% due to the house sitting empty for a couple of months.) If you put 20% down, the value of the house can drop 10% or so before you're underwater. Many people are stuck living in or renting out their homes because they literally cannot afford to sell it. You don't want to be in that situation.
Better Rates and More Options
The more money you put down, the more loan options and better interest rates you are offered. There are, of course, many lenders who do “Doctors Loans,” requiring little to no down payment, but just because someone is willing to lend you money without a down payment and without verifiable income (aside from a contract) doesn't mean that loan is actually a good deal for you.
Avoid Private Mortgage Insurance
A 20% down payment allows you to avoid private mortgage insurance (PMI) on conventional mortgages (PMI isn't required on Physician Mortgages). PMI doesn't even help you — it's insurance your lender makes you buy to protect THEM.
Avoid Jumbo Loan Rates
You may be able to avoid a higher rate “jumbo” loan by putting more money down.
Smaller Mortgage Payment
The more you put down, the smaller the principal and thus the smaller the mortgage payments, improving your future cash flow.
#2 You Don't Have Any Income
Traditionally, no one would loan you money until you had a steady job. If you're applying for a loan in April of your last year of med school, you're unable to show any income. If you were a lender, who would you offer a better deal to — someone with several months of steady income or someone who hasn't made anything in years?
Again, this constrains your loan options, and the fewer options you have, typically, the more expensive your options will be. “Doctors loans” are generally your only option, and depending on your state, you may only have a handful of lenders to choose from.
#3 You Have Tons of Debt Already
It is no longer uncommon for a graduating medical student to have $250K or more in relatively high-interest student loans. Residents usually already require a special government program like IBR to help lower their payments during residency. It really isn't a great time to be adding on even more debt, not to mention it is harder to get a loan with tons of debt hanging over your head, narrowing your choices to just “Doctor Loans.”
#4 Residency Is Only 3-5 Years Long
Even realtors, the most diehard advocates for purchasing a home early and often, admit that it's hard to break even on a home unless you're in it for at least 3 years. The main reason for this is transaction costs. Expect to spend 5% of the value of a home when you buy it, and another 10% when you sell it. This includes closing costs, the cost of fixing it up, furnishing it, realtor commissions, and a couple of months of the house sitting empty while you're selling it. In order to make up for that 15 % in transaction costs, you'll need to pay down the loan and the house will need to appreciate.
On a typical 30 year mortgage (4% fixed) bought with 0% down, you'll pay down 5.5% of the mortgage in 3 years (9.5% in 5 years.) That means you need the home to appreciate about 3% a year during residency just to break even. If it doesn't appreciate, or worse, goes down, you're going to lose money.
Even if everything works out, and you spend 5 years in the home and it appreciates 3% a year, you're looking at a gain of only 9.5% of the value of the home. That's $14K on a $150K house and assumes that your monthly costs for principal, interest, taxes, insurance, and maintenance are equal to what the equivalent rent would be. That's hardly a huge sum of money worthy of all the risks and hassle you went through for 5 years.
#5 You Can Rent a House
I always hear about how people are sick of living in an apartment and delaying gratification for their entire 20s. People don't seem to realize that you can usually rent a house that is just as nice as the one you can buy. Your choice isn't between renting a tiny apartment and buying a big house. Your choice is between renting the house you want to live in and buying the house you want to live in.
#6 New Home Buyers Underestimate the Costs of Ownership
Houses are expensive consumer items, not an investment. When the furnace or dishwasher breaks, you can't just call the landlord to replace it. Roofs, windows, flooring, carpet, and paint only last so long. New buyers are also often surprised by the cost of property taxes and homeowners insurance, not to mention special hazard insurance like flood and earthquake insurance.
Don't forget to add in the cost of furnishing the house also – drapes, rugs, and furniture. It's not a simple matter of comparing your rent payment to a mortgage payment. Play around with the NYT Rent vs Buy calculator and you'll quickly see what I mean.
#7 You Won't Want to Live in That House as an Attending
I counsel graduating residents to try to live like a resident for a while to get themselves set up on a solid financial footing, but the truth is that almost everyone upgrades their lifestyle at least a little upon residency graduation. That 1400 square foot bungalow that seemed like a mansion compared to the 500 square foot apartment you had as a med student isn't going to seem adequate when those attending-size paychecks start rolling in. For most graduating residents, staying in your residency house isn't even an option since you're starting a job (or a fellowship) in another city.
#8 Home Maintenance Costs Either Time or Money
When you rent, much of your home maintenance will be taken care of by the landlord. Fixing broken appliances, repairing leaky roofs or windows, cutting the lawn, or removing snow all costs either time or money, neither of which is abundant for a resident. The less of this you have to worry about, the more time you can spend learning medicine and the more money you can use to stabilize your financial future.
#9 Residents Don't Get a Tax Break for Owning a Home
When I originally wrote this post in 2013, I spent about $10K in mortgage interest and another $4K on property taxes, which saved me something like $5K on my taxes. Residents likely can't afford a big enough house that the mortgage interest and property taxes are more than the standard deduction [Especially, with the new higher standard deduction]. A resident likely only has a 22% marginal tax rate, decreasing the value of any deduction they would get. Remember that part of the reason that people say you should own your home is for the tax benefits. You don't really get those as a resident.
#10 Budgeting Is Easier as a Renter
Living on a tight budget isn't ever easy, but it is far easier to budget for a simple rent payment each month than it is to account for the myriad of variable expenses you'll run into as a homeowner. As an attending, you replace an appliance out of your monthly earnings. As a resident, you'd have to clean out your emergency fund to do the same thing. You can also project your housing costs upfront- exactly 36 months of rent for a 3-year residency as opposed to who knows how many repairs you'll have to do and how many months it will take you to sell when you move on to your attending job.
Now don't get me wrong. Sometimes buying a house can work out just fine. You might be in a situation where you can't find anything acceptable to rent. Buying will work out better for a longer residency than a shorter one, and if your spouse works, too, then you may even see some tax benefits from it. It also seems like a decent time to buy, in general, when there are very low-interest rates. But for these 10 reasons, the default option for a resident should be to rent, not buy.
What do you think? Do you think residents are better off buying or renting? What did you do? How did it work out? Comment below!
I began my residency in 2006 and was the lone resident in my class who didn’t purchase a house (which in hindsight was a great decision given what happened the following year). My reasons included all the ones you list above, but despite having no desire to buy a property, it was amazing how many of my friends and coworkers tried to talk me into buying a house that year. First year residents really wanted that house for some reason.
Interesting article. As a military resident I couldn’t imagine buying a home but I did know a few that did. Everyone one of them regretted that decision when it came time to move on.
My unexpected housing cost for my first home… lawn and garden. I have lived in the house less than a year but front landscaping plus mower, weedeater, and some other things ran me well over $1000 (and I did my own landscaping).
Great post. I really appreciate the resident-specific posts. You bring up a lot of strong points, but you seem to make some basic assumptions (single income, 15% tax bracket) that don’t apply to all residents. I have a spouse who makes good income and qualified for a traditional mortgage (although she has her own large pile of student loans) and a young child. I am simply not willing to risk being told that my lease will not be renewed right in the middle of residency. And I am pretty certain that I will settle here after residency to stay with my family, so buying makes a lot of sense in my personal calculations.
Absolutely. The calculations do change if your spouse is working (especially with a high salary), your residency is long, and if you expect to stay in the house after residency. Your marital status doesn’t change much (in fact it’s probably better to buy if single than if married given the higher marginal rates), it’s more about the additional income. But even with two incomes, if you’re only staying 3 years it’s unlikely you’re going to come out way ahead by buying.
I agree. I know that if we do indeed move in 3 years for fellowship it is very unlikely that we will come out way ahead. I that case, I hope we just break even. We will pay a little bit extra principle each month to build just a little more equity that would hopefully help us if we had to sell in a few years. Again, thanks WCI, finding your blog has really increased my interest in finance and I have learned quite a bit over the last 6 months.
while specifics always matter the risk on not having a lease renewed is very small. Its only large when you know you are going into a situation where it might not be renewed.
I agreed that you need to be careful, but where are you renting that you’re that worried that your lease won’t be renewed. You’re a doctor literally the perfect renter. You’ll make money pay on time and not hassle the landlord because you’re too busy. I think you’re really overestimating that risk, I had rented 7 different places from the end of college through the end of residency, the only thing I have ever heard when I told them I wasn’t wanting to renew was how sad they were to see me go. I agree something to think about but I think it is really unlikely, and not worth the risk to buy and be stuck.
Great post– I ALMOST bought as a resident in 2010, fell through after the home inspection. I am SO glad I didn’t own. I was able to rent a house in the same neighborhood for less when you combine all costs and my landlord mows my lawn. Now that I am finishing residency and am going to buy (across the country) where my new job is– I don’t have to worry about selling, or contingencies on sale of my current house. The movers are coming the end of June, we pack, load, ship, and clean– and I walk away from my house of 3 years without a single reservation that I didn’t buy. Compate that to my buddy who bought a houseband is forced to rent his place out due to depreciation and costs of selling. He will be downgrading his living situation once he becomes an attending because he cannot sell his current house and doesn’t want to be making two mortgage payments.
I’m a resident and own a home, but also have wife that earns same income and a child. We got a physician loan and our monthly payment (including taxes & homeowners) is less than renting a comparable townhouse.
-We also didn’t want to live in a townhouse community setup, and wanted a space for ourselves.
-We were lucky in that we bought at the bottom of the market.
-I think if a spouse works with good income and there are children it is a nicer lifestyle to own.
-The above poster said he spent $1000 on lawn maintenance. That is quite excessive. I bought a $100 lawn mower on garage sale that is working just fine.
i dont think children make a difference. i had two kids in residency and rented and it wasnt an issue. In fact we never owned until my oldest was 11.
if one wants to pay for something “more” even though it is unlikely to make sense from a math/risk stand point then thats up to them.
You can usually rent a house just as nice as one you can buy. $1000 isn’t that much for lawn care. If you need lawn care once a week for 8 months at $30 a piece, that’s $960 a year. You can buy the $100 mower, but you also have to push it after your 36 hour call. 🙂
Actually I said I spent a $1000 on landscaping. $300 for a mower, $150 for an edger, $50 in various supplies, and about $500 in stone and mulch. Obviously the last part was a “need” but it just shows that expenses add up. My point was that a lot of first time homebuyers fail to think about all the maintenance expenses that they will incur.
Another rising intern, heading into a 3 year residency. I chose to buy instead of rent for several reasons. No money down, no PMI, and a fixed 3.25% rate all add up to us being able to purchase a new home for $200-$250 less per month than renting an older home in a similar neighborhood. While I may have difficulty selling the property in 3 years, especially for any profit, I am more than willing to rent it out at that time until selling does become feasible. By doing this, I have given myself an extra $200/month to put toward 1 high interest 9% residency/relocation loan I took out to cover traveling for audition rotations and interviews this year. While I don’t want to belittle the trouble that may come in a few years, it is very freeing to have that extra cash flow to pay off my debt and start to build an emergency fund at double the rate I would be able to otherwise.
Your comment about renting it out will be addressed by Friday’s post. You’re certainly not the only rising intern buying a house for the reasons you state. Wednesday’s post is more positive on the experience.
Rising intern here as well. I had the similar situation, no PMI, no money down, cheap housing here in great neighborhood.
Clay, I was just going through some old posts on buying a house and read your comment. It’s been 3 years – would you mind sharing how your experience turned out? Did you sell (gain? loss?) or keep the property for rental? And, if you had it all to do over again, would you make the same decision knowing what you know?
Thanks!
I also, against my own better judgment, bought a house (twice actually). The first was as an M1 with my wife who made slightly more than a resident at the time. In the Midwest so minimal housing price fluctuations, even during ’08, cost $120k. We’re renting it out since I’ve moved for residency, it turns a decent monthly profit and has appreciated 30-40k since purchasing. However I do have to go up and work on the house periodically, but I don’t mind it much. This will turn out to be a favorable investment I believe. We bought another house to live in during residency. Time will tell whether this one was a good idea. Lifestyle creep, family planning, and increased income (my resident income and incremental increase in wife’s) means this place is about $100k more than our previous purchase. I would’ve felt more comfortable with a smaller loan, but we put 5% down and got a 2.7% mortgage w/o PMI so we’re not getting killed too badly unless the market tanks, and realistically it’s still less than 2x our combined income.
I would be open to renting this place out after residency as well.
Hope it works out for you. Obviously the longer you own them, the more years you have to spread the transaction costs over and the more likely it is to work out well for you. I don’t want to be cynical, but most people think everything is great before they sell. It’s not until they honestly run the numbers afterward that they realize they would have been better off renting.
As a 4th year student ready to enter internship, I’m planning to take your advice and rent. What percentange of a resident’s gross income do you recommend that they spend on rent? Is it the same 20% of gross income for a house? Does that include all utilities, internet, etc? I’m lucky in that my pgy 1 salary will be 54,000. . .so 20% allows $900 a month for rent/utilities for a 2 bedroom apartment for my wife and little girl. Is that correct? Sounds difficult to do for a small family relying only the residen’ts salary in an average-above average cost of living area.
Unfortunately, it may be difficult for a resident to keep housing expenses to less than 20% of his salary, especially in a high cost of living area. I generally use that guideline for attending physicians. Don’t live in a cardboard box in order to stick by that rule of thumb, but don’t take out additional loans during residency in order to keep up with the Jones’s. Moderation in all things.
Don’t do it!!! 9 months after leaving one fellowship to train in another city, we finally sold our house for a considerable loss. It was very stressful having to pay for an empty house in another city. Easily the biggest financial mistake we have made so far (hopefully the last). Got sidetracked by the “fun” of owning your own house.
Although we bought, our circumstances were somewhat unique and I would tend to agree entirely with your post. In our circumstance my wife was the resident and I was a mid-career person working for an environmental agency and switched to long distance consulting work so we sold a house in a high cost city (Juneau AK) to move to a low cost city for residency (Texas) and it was trivially easy to roll our equity over into a cheaper but twice as big and twice as nice house in TX. Neither of us had student loans at that point and we were living on my income not my wife’s residency salary. So our circumstances were quite unique. We had 3 young kids. I wanted a nice place to work out of as a home office and we wanted a specific school district which made buying make sense. 10 years later we are still here as my wife ended up working locally for her program so it all worked out, although we’ve since moved closer to town.
That said, I do see lots of residents buying and regretting it. Every June there are residents trying to either rent out their houses to incoming interns, or sell them. There is enough hassle involved with moving on, dealing with real estate just adds hassle. Finally most residents are far too busy in residency to deal with home maintenance issues. You just want a turn-key place to rent so you can focus on training and job hunting.
One thing I don’t think you’re taking into account here is overall quality of life, or just general happiness. My spouse and I wanted to be able to fix up an older home with our free time, paint the walls whatever colors we wanted, and decorate the nursery before our son was born without having to worry about getting approval from a landlord. A home can be more than a financial investment. (And if you’re viewing a home as strictly a financial investment, then you’re probably not making a very wise decision.)
Others might argue that they’d rather spend their free time not fixing up an older home I suppose.
Planning to stay in the home for a minimum of 3 years is good advice, of course longer is more advantageous. An important factor to consider when choosing between buying or renting is how much owning the home will actually cost you. It’s also known as rental equivalency, which is not just comparing the rent vs. the principal, interest, taxes, insurance and any association dues. The rental equivalency includes critical factors like the net effect from tax advantages of the interest and property tax deductions (consult your tax advisor), as well as the advantages of principal payments.
Comparing your current rent with your rental equivalency for a mortgage can give you greater insight on which will save you more in the long run.
This, as others point out, depends on life circumstances. My wife and I had several tweens (now teens) when I started residency. We also planned on expanding on our family. We were able to do residency in a mid-sized, low tax city and move a bit further afield where we could afford to purchase a 2,500+ sq ft house with my wife working. She’s stopped working now that we’ve had two more children and I’m moonlighting. Good luck renting a 4-bedroom house for less than you can buy one, especially if you move out to the burbs for better schools. We definitely itemize and have come out way ahead on our taxes for doing such.
That said, you’re right that the costs of maintenance can be more than expected. We plan on staying in this house for several years after I finish residency, making some needed repairs, upgrades and updates, paying off my student loans, and then moving to our dream destination debt-free, God willing.
They say the quickest route to a good financial start out of residency is to live like a resident for a few years, and few things reinforce this quite like living in the same house you lived in as a resident. No new furniture, no buying too large of a home, no shifts in utility costs, etc…
You’re absolutely right. Unfortunately, most of us don’t have the discipline, desire, or even opportunity to stay in the house we lived in as residents.
As a third year medical student I have this conversation with my wife quite often when deciding when and if we should buy a home in residency. I am planning on doing a 5 year residency, and we will most likely end up where the housing market is very reasonable (80-100k) for the homes we would be looking at. Would this be a good situation for a resident to bite the bullet and purchase a home, i.e. mortgage payments would be significantly less than a rent payment AND we would be in the home for 5 years?
Ask yourself- why are mortgage payments less than rent? Why doesn’t some billionaire just buy up all the houses and rent them out? He’ll make a killing, right? It’s because there are other costs to owning a house beyond a mortgage payment.
At any rate, at 5 years you’re probably in the “it doesn’t matter” range. You’ll do okay renting. You’ll do okay buying. You’re unlikely to come out way ahead either way. If there’s a big housing crash you’ll probably come out ahead renting. If there’s a big boom you’ll probably come out ahead buying. In a normal situation it’ll be fairly similar.
Good luck with your decision.
Just thought I would post a quick Followup.
We bought a home at the start of radiology training and have been in the same home through fellowship (interventional) and now my first year as staff.
Purchase price 185,000
Estimated sale price likely 250-280,000
Worked out really well in our specific case (quite honestly will probably be one of the better returns on investment I will have).
I can definitely see the reasons why not buying a home is a good financial decision. In our case we came in as the market was going up and it has continued in that way since. In more normal times we would not be this lucky.
Biggest reason for us purchasing was our young family-having stable housing and not having to deal with landlords. We thought the trade off of the headaches of home ownership would be worth it and I think it was a good decision for our family.
No surprise you’re coming out ahead after staying in the same home for 7+ years. There was obviously some risk you could have moved twice in that time period of course. Glad it worked out.
Thank you very much for all of your words of wisdom. I need some advice about buying a house or not.
1. My residency program is 5 years and i may do a fellowship at the same program for 1-2 years after.
2. I have a partner who enjoys the freedom of owning a house tremendously and he is very handy and says he will maintain the house.
3. My partner is not yet on career tract, so the only sure income is my residency paycheck, possibly as low as 46,000 first year
4. I have 100,000 medical student loan, my credit score is 760
5. I may be able to borrow 20% down for a 200,000 house
6. unless absolutely necessary, id like to stay in the same city to provide my daughter with some stability after residency/fellowship
Could you please help me analyze the pros and cons of buying a house in my particular case?
If I have 20% down but wish to buy a house April of my 4th year as a med student, would I be able to get a traditional loan with (what rate?) instead of the crazy physician loan?
Thank you so very much for sharing your wisdom!
NY Times has a great calculator to help you make this decision:
http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?abt=0002&abg=1&_r=0
My personal opinion, having bough a house in residency: Don’t do it. Stupidest thing I did in residency. Find a rental you can tolerate, wait till you’re an attending to buy.
I hear this sentiment frequently, that buying during residency is a bad idea. But I am thoroughly confused. Are there places where rent is similarly priced to a monthly mortgage? In both our med school and residency towns, this was not the case. Renting a 3 bedroom house or apartment was around $1500-2000 a month. How can this be done on a residency budget? (3+ bedrooms was non-negotiable as we will soon be parents of 3). We only found one place that had a rent of $1100, and it was in the middle of nowhere, meaning long commute on dirt roads and miles and miles to the grocery store. So we bought, used a physician loan so no down payment, no PMI, and our mortgage is $1000 a month (including taxes/insurance). Seller paid all closing costs save $500, as we asked for that in our offer. I’m honestly kind of tired of hearing it was a dumb move. It’s a large, older house that was completely newly remodeled (roof, plumbing, HVAC, plus cosmetic stuff and appliances. The house is beautiful and unlikely to need maintenance for a few years.) On the NYT calculator, it says assuming $1800 rent, we come out ahead in 2-3 years. Am I missing something? How on earth would renting have been better, when the monthly cost is that high?
Remember that all real estate is local. In your particular location and situation, buying may very well have been better (and the NYT calculator is a good way to show that). But in general, it’s pretty tough to come out very far ahead in a 3 year time period.
Remember that a mortgage SHOULD be much less than rent. That’s the natural situation. That’s because rent includes things other than a mortgage like maintenance costs, property taxes, insurance, upgrades, transaction costs, and profit for the owner. It’s hard to understand that until you’ve owned a few homes, especially an investment property.
Consider the 55% rule. That means that with a paid-off investment property your net income is about 55% of gross rents. That means 45% of rent goes toward NON-MORTGAGE items. So in your own home, you would expect the mortgage to be about 55% of applicable rent in the area in order to break even. In your example, the mortgage is $1000 a month and rent is $1500 a month, or about 66% of applicable rent. See how that’s not necessarily a good deal?
Thanks for replying! I just realized how old the post was. I just found your blog and am loving it!
I see your point about the 55/45 rule. However, it sounds like that only applies to the actual mortgage payment, am I understanding that correctly? Our mortgage is around $700, the $1000 includes the taxes/insurance. If you count $700, then we are only at 46% of what rent would cost. Not to mention, our monthly residency budget would have been severely strained if we had to pay $1500 or more in rent. And $1500 was for the junkiest of rentals around, far lower quality than what we bought (which brings up other costs–it would have cost us much more to heat and cool a low quality house than the well-insulated, well built one we bought. Our experience in rentals has included extremely high utility bills because of this, for the two months we’ve been here our bills have been much lower, even in summer heat). To rent a home similar in quality would have been in the $1800-$2000 range. Difficult rental market here, I guess. There are very few rentals even available.
Another thing that changes the equation is that if a local job offer comes after residency, we will likely stay in this house and pay down school debt before moving on. And since everything was newly remodeled/replaced, we may even luck out and hardly pay any maintenance costs during residency. We have savings just in case, but had we rented, those savings would have gone directly to the higher payment; this way, there’s a chance we’ll get to keep them.
Are there really places where there are abundant rentals that are reasonably priced? I would have been thrilled to find 3 bedrooms for around $1200 or so…
Sounds like buying is working out great for you. There certainly are places where renting is much more reasonable than buying. Take San Francisco for instance, where you can rent a $3 Million house for just $2-3000 a month. Real estate is all local.
We put 10% down on a $100k home in Rochester NY and paid just over $900/mo mortgage (half of that was taxes!!!) and although we enjoyed the home ownership experience and could afford the unexpected expenses, it was the added time of home maintenance that I consider the biggest cost. I am the type that does everything myself and the home needed some TLC. Found a leaking supply pipe the first week, a detached garage melting into the earth, and an all-pink bathroom screaming for updating. Got $27k cash in pocket upon selling, but I’m not so sure I’d do it all over again because I would have had more time for my career and my kids if I had rented.
I bought a house at the beginning of my 5 year residency and was lucky enough to find a job in the city I did my training in. My cohorts had difficulty selling their houses and took losses, but I am now able to live on a residency income with an attending salary. I find the space is enough for me and my dogs and I have avoided the trap of overly upgrading based on my attending salary. It doesn’t work for everyone, but my house has been a great home base for me for the last 8 years. Plus, I have equity and have not spent nearly 100,000 in rent in 8 years.
I’m glad it has worked out well for you.
Love the post and the site. One pet peeve of mine is the overstatement of the tax savings of home ownership. The “tax savings” is only the amount by which mortgage interest and property taxes (and other not home-related itemizable deductions) exceed the standard deduction amount, multiplied by the effective tax rate.
In reason number 9, you indicate that you itemize, are in a high tax bracket (I’ll assume 35%), pay $10,000 in mortgage interest, and $4,000 in property taxes. You conclude that you saved “something like $5k on [your] taxes.” This would be accurate if the standard deduction wasn’t available to you.
Assuming MFJ in tax year 2013 (the year of your post), the standard deduction amount was $12,200. You only had $14,000 of deductible home-related expenses. You could have taken the standard deduction, so you really only increased your tax deductions by $1,800. Multiply that by your ETR and your tax savings was most likely less than $630, not $5,000. For a single filer, the tax savings would be greater (due to lower standard deduction amount), but would still not come close to $5,000.
I agree wholeheartedly with the premise and conclusions of your post. But I have to point out this very common misconception people have when evaluating the “tax savings” of home ownership.
I have $50-60K in itemized deductions every year. Mortgage interest is a very small part of it. I think it’s safe to assume in my particular case that it is almost all fully deductible. But your point, of course, is valid, it just doesn’t apply to me.
I realize this post is old, but I’ll share my experience. Buying actually worked out quite well for us, but we got incredibly lucky with the timing and the match. My husband is doing training in the city we grew up in and we hope to stay here long term. He also did medical school here. During the 2nd year of medical school, we had our first child and our 1 bedroom duplex suddenly seemed very small. We had no intentions of buying as he would be matching in 2 short years, but when we started to look at our rental options and consider our desire to stay in the city long term, buying seemed intriguing. I had a good job and we had saved up $20k, interest rates were awesome, and we had great credit.
We ended up buying a 3 bed/2 bath 2000 sq foot home in a very desirable suburb in 2012. The schools are some of the highest ranked in the area, but the proximity to downtown (and the hospital) isn’t bad, so it has always had a high demand. We knew we were taking the risk that we would have to sell or rent it out if he didn’t match here in 2 years, but we also knew that unless the market really crashed, we wouldn’t have a problem selling. Even in 2012, homes in this town were getting multiple offers on the first day.
The next year, the market in our area went nuts. Happily, we matched here, but we would have listed the home $20k higher than what we paid for it just two years later. Last year we decided to refinance to get rid of PMI (we were FHA buyers). The appraisal came back at 30% higher than our purchase price–in less than 4 years! We’ve put ~$15k into the home in the past four years, but we are still looking at having made a hefty amount when we sell down the line.
We are the exception, but it worked out remarkably well. We now have 3 kids and we flat out couldn’t afford the rent in this area, especially given I plan to stay home soon. We’d be in a tiny apartment or in an area with bad schools–not exactly desirable with a 5 year radiology residency + inevitable 1 year fellowship. Homes in our town are averaging 15 offers on the first day of listing, most over asking price. Rentals are almost as bad. Instead of competing in that market, we have a home that meets our needs very well right now and the monthly payment is well within our budget. If we are lucky enough to stay in the area for attendinghood, we can easily stay in our current home for a few more years (though it may be a little tight!) and work hard to save a huge down payment for a bigger home.
So that’s our experience. I think the key things that helped us (besides the lucky turn in market) were the fact that I had a solid income outside of and I was very familiar with the city we lived in and the market in our desired area.
Please excuse my naivety on this matter as I am not well-versed in the realm of finances and real-estate, but I was wondering wouldn’t it still be advantageous to buy property going into residency even if you end up “losing” money when you sell? Say for example during a 5 year residency you purchase a house and sell 5 years later at a loss, when accounting for taxes, fees, closing costs, interest, etc. If you had rented for 5 years at say $1000/month, you would have spent $60,000 in rent. If the loss on your housing purchase is anything less than $60,000, aren’t you still technically ahead financially than if you had rented at $1000/month? I may be missing something here due to my lack of understanding, so I’d greatly appreciate your input! Thanks!
Yes, you are naive on this matter like most of us were. Think of it this way- just as paying rent is “throwing money away” so is paying property taxes, interest, HOA fees, maintenance costs, realtor fees etc. The only thing that counts as “building equity” is principle payments and appreciation.
Cant identify with anything you are saying here Jim, about ‘loans’.
Ive always had full academic honors scholarships for all of my education, finished college in 2.5 years. I highly recommend it!
Good for you man. I also enjoyed some significant scholarships which helped a great deal in minimizing loans.
Personally, there are plenty of other factors here. We bought at the end of medical school. We knew we had 5 years, and figured we would get our money back by buying. We bought an affordable home, I quit work to have kids, and we actually came out ahead. Our mortgage/taxes was $950 per month. Renting would have cost us $1400+. We sold 5 years later, moved on to fellowship, and made $45,000 on our home. Which basically helped pay some bills, move, and survive through fellowship with 3 kids. Defiantly depends on the area and time frame!
Lots of people who bought in 2010-2012 came out ahead. No surprise there. If the property appreciates 15%+ while you’re in it, you probably will come out ahead. But remember for everyone who bought in 2010, there was someone who bought in 2006.
I have a concern about #5 above. While it’s true that you can rent a house as nice as a purchased house, it seems to me, as I’ve been researching both rentals vs purchases, that you get much more “bang for your buck” if you end up buying. That is to say, when I compare a rental that costs $1500/month and then compare it to a home that would theoretically end up with a mortgage of $1500/month (based on those calculators), the purchased house is almost always a quite noticeably nicer home than the rental. At least that’s been my experience so far after looking at hundreds of listings.
Then, you start to look into Buy/rent ratios, which adds an additional layer of gray into statement #5. If it’s as binary as buy vs rent, you don’t account for nuances like that. In some places, (to offer two polar examples) in San Francisco, the houses are so exorbitantly expensive that you’re better off renting, while in Detroit, they are practically giving houses away. How do you take this phenomenon into account? I’d much rather pay the same amount monthly and live in a nicer home if a 0-5% down payment (through a physician loan – I won’t get into that) is the only thing separating me from it, since I’ll be there 4-5 years and likely the housing market will dictate whether or not it’s worth buying in the long run. Another way to apply this idea: if I want to live in as nice a home as I can afford (which, I assume, everyone wants), I’ll end up having to spend more monthly on a rental each month vs. a comparable purchase. So, in a way, it would seem that renting can become more expensive in the long run if I don’t want to take a hit on quality of life. What are your thoughts? Should we take that into account?
You’re making the classic mistake that rent should equal mortgage. Of course a house with a $1500 mortgage is going to be nicer than a house that rents for $1500. Think about it as an income property investor. Your only source of revenue is rent. But a mortgage is not your only expense. Plus you want a profit. The mortgage is supposed to be less (and actually much less) than rent for any given property. You’re not comparing apples to apples.
If all you care about is a monthly payment, then buy away. But what I recommend is you look at the total cost of ownership over the period of time in which you are in the house and the total cost of renting over that same period of time. Then you’re comparing apples to apples.
I agree in the long run buying often makes sense. Unfortunately, residency isn’t a long run.
Having been in the military for 15 years prior to med school, I can say this article is 99% right on. Obviously, there will be the 1% exceptions, but they are the exceptions. The same choice is made by newly minted military officers. So much money is thrown away buying when you’re not going to be in the house long term. As for renting your house when you move, it is at best a break even situation typically. Costs that come with being a landlord combined with the risk make it rocky situation. The recent housing market decline proved that to be true. One roof that has to be repaired or one toilet that breaks can wipe out any gain you were lucky enough to capture. I moved every 3 years, and I rarely saw anyone break even in less then 5 years of being in house. Renting is the best financial decision 99% of the time. If you think you’re in the 1%, I recommend looking the situation over again and again. Something else that is not mentioned in the article; typically it is recommended to live in an area for a year before you buy a house. So, in a 5 year residency, you would own for only for if you followed that advice. The reason being is it allows any transitions going on in the community to flush out and you have a better idea of the desirable neighborhoods and School districts.
There is no absolute answer to this question. One suggestion is to look at case Schiller index that compares rent vs buy. Sometimes it’s better to rent (2007) sometimes it’s better to buy(2008)
Real estate is local . Each market is different.
The problem is it is difficult to know at time of purchase whether it is a good idea to rent or buy.