By Dr. Jim Dahle, WCI Founder
There is a very strange phenomenon I've noticed among fourth-year medical students. They have this seemingly overwhelming desire to buy a house. I'm not sure if it's 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 medical 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 we would have bought when we first arrived and sold just as I finished residency before the market burst, we could have made out very well. Some of my classmates doubled their money in three years. It didn't work out so well, however, for the new interns buying houses when my classmates were selling. When the bubble burst, they were the ones who took a shellacking.
10 Reasons Why New Interns Shouldn't Purchase a House
#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 them. 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 offer 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 could potentially avoid a higher rate “jumbo” loan by putting more money down, but if you're looking at a house expensive enough to require a jumbo loan (mortgage of $726,200+ in 2023), I hope your partner makes a lot more money than a resident.
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, the more expensive your options typically will be. Doctor loans are generally your only option, and depending on your state, you may only have a handful of lenders from which to choose.
More information here:
#3 You Have Tons of Debt Already
It's not uncommon for a graduating medical student to have $250,000 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. Plus, it's 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 three 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. To make up for that 15% in transaction costs, you'll need to pay down the loan and/or the house will need to appreciate.
On a typical 30-year mortgage (6% fixed) bought with 0% down, you'll pay down 4% of the mortgage in three years (7% in five years). That means you need the home to appreciate about 4% a year during residency just to break even in three years. If it doesn't appreciate or, worse, goes down, you're going to lose money.
Even if everything works out and you spend five years in the home and it appreciates 3% a year, you're looking at a gain of only 7% of the value of the home. That's $14,000 on a $200,000 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 five years.
While it is location and time period dependent, on average I would estimate you would come out ahead owning a home for 3 years about 1/3 of the time and for 5 years about 1/2 of the time, primarily due to the transaction costs.
#5 You Can Rent a House
I always hear about how people are sick of living in an apartment and that they're delaying gratification for their entire 20s. People don't seem to realize that you can often rent a house that is just as nice as the one you can buy. Your choice isn't necessarily 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.
More information here:
#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 along with special hazard insurance like flood and earthquake insurance.
Don't forget to add in the cost of furnishing the house—drapes, rugs, and furniture. Got a lawn? Don't forget a mower, trimmer, fertilizer, and plenty of water. 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 1,400-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, and 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.
More information here:
#9 Residents Don't Get a Tax Break for Owning a Home
Lots of people think they are getting a huge tax deduction for owning their home. Most aren't. Esepcially residents. Residents likely can't afford a big enough house that the mortgage interest and property taxes are more than the standard deduction ($27,700 MFJ for 2023). If your property taxes are $5,000, your interest rate is 6%, and you have no other itemized deductions outside of the home, you would need a mortgage of at least $375,000 for any of that interest to be deductible (admittedly less if single). A married resident whose spouse isn't working likely only has a 12% marginal tax rate (may be 22% if single), 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 tax benefits. You don't really get those as a resident due to the big standard deduction.
#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 three-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.
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. And if you know you'll be in the same place for medical school, residency, fellowship, and attendinghood, that allows more years to spread the transaction costs over. 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!
[This updated post was originally published in 2013.]