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:
How to Buy a House the Right Way
How Expensive of a House Can I Afford?
#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:
Is Renting Better Than Buying? Why We’re Financially Independent and Renting
#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:
From Fourth Year to the Real World: An $80,000 Wedding Causes a Downward Spiral
#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.]
Interesting post. But what if you buy a multifamily while you live in one unit and rent out the others? You can hire a property manager to manage it and even keep it as a rental after you move. I think that’s worth it and different than buying a single family house.
Depends on the performance of the investment property. So if you’re going to do this, look at it as an investment (i.e. run the numbers) rather than choosing it based on consumption type characteristics.
Right, shouldn’t the title be buying a house based on consumption type characteristics instead of being so general?
You think I should have titled the article “10 Reasons Why Residents Shouldn’t buy a House Based on Consumption Type Characteristics”? Really? If I had done that you probably wouldn’t have read it and complained about it. If nobody reads my articles, I can’t help anyone. Thus, I have to write titles that cause people to click on the article or email. I certainly don’t think this is a particularly misleading title, especially since most residents are buying based on “consumption type characteristics.”
via email:
For some reason at my medical school (Loyola in Chicago) they had a realtor come in at the end of 4th year and give us a huge speech/PowerPoint on why we should buy a house when we started residency. My mom talked me out of it for the reasons you mentioned (#1 “you don’t have any money for a DP” which was true I only had 200k in med school debt 😂 now gone thank goodness)
Anyways it might explain the phenomena of the 4th year being so excited to buy a home. I had never thought of it until I heard the lecture which made it sound like a great investment. She said she had a “network” of realtors all over the country to help us as well. So crazy in hindsight.
Just FYI!
I found your blog a couple years after we had started residency…and had already bought a house With a doctor loan. 😂 We were very lucky that we bought in Mid-2011 and sold at the end of 2014 with $60k in appreciation (33%) so we came out well ahead by buying since real estate was on an upward recovery after the earlier collapse. But if we were to do it again in today’s market…Probably not. Obviously hindsight is 20/20 and you never know what is going to happen for each individual circumstance, but you raise some good points to consider!
I purchased a house with the intent to turn in into a long-term rental property after residency. I’m trying to turn real estate into a side hustle a la passiveincomeMD/semiretired MD. To that end, my wife is studying for her real estate license so she can obtain real estate professional status. I’m sure there will be difficulties, such as having to manage it from long-distance should we move, but I’m rationalizing that as part of the learning experience. I’m also hoping I can have a steady stream of residents to rent to, who will hopefully be reliable tenants.
I’m confident you will have a learning experience. 🙂
Hope it works out well. Sometimes it does.
Great post
As with anything there are exceptions. If your home/condo as a resident is in a great rental area, and projected rent would cover your costs, buying as a resident and transitioning to landlord as attending is an option. It worked out tremendously well for me, but bought in 2004 when rent ~ mortgage. Individual markets vary dramatically, and it meant having to scrimp and save twice for downpayment (condo as resident then house as attending). In the long term, 15-20y later, it has paid off
Okay, if you’re willing to keep it for 15-20 years, it’ll probably work out okay. I think that’s a pretty tiny percentage of residents looking to buy and most of those don’t buy the condo by looking at investment criteria, they buy it using consumption criteria.
What has your return been over that time period on this condo as an investment? How would that compare to buying a different property, investing in the Vanguard REIT fund, or just in a total market fund?
What are your thoughts on buying after residency, but during fellowship?
I matched into two one year fellowships (back to back) in the city my wife and I plan to stay in long term, and where my job prospects seem promising (in my field, should make at least $280-350K/y in academic medicine or $400K+ in PP). We have about 70K in savings (excluding our IRAs) and another year to save before the fellowship begins.
It’s a pretty high cost of living area; “starter homes” (think older bungalows) range from $350-470K to buy (or $1700-2500 to rent) while a slightly newer, larger house that would suit us long term seem to run $480-600K. Based on the rent vs buy calculators we’ve run, buying often seems to win out, but we don’t know if we should rent 1-2 years first just to be cautious.
Thoughts on purchasing a home (with 20% down) in the current market for a 5-year military residency in an area where rent is 3x the cost of a mortgage (and almost double our housing allowance)?
5 years should be long enough to have a 50/50 shot of coming out ahead in most places. If you really want to own for some reason, that’s long enough to give it a try I think. Just realize it really is something like 50/50.
It’s not about rent vs mortgage payment though and has nothing to do with your housing allowance. It’s about all the costs of owning (including transaction costs) and all the costs of renting.
Try the NY Times buy vs rent calculator to confirm your suspicions. It’ll take a lot into consideration than you seem to be thinking about.
How much would you let your personal appraisal of the market affect your decision?
For instance, I’m heading into a 3-4 year residency in San Fran right now. The market (for both buying and renting) in this major city is down (20% and 27% respectively), which makes me more excited to buy. There’s no guarantee it bounces back to what it was, but it’s hard to expect it not to go up at all…
We are also lucky in that my partner has an actual income so #1,2,3, and 9 don’t necessarily apply. We are mostly stuck on the short length of the residency and the probability that we are underestimating the cost of home ownership.
That’s just speculation. You could win, you could lose. Without a functioning crystal ball, I wouldn’t let it affect the decision much.
Fair enough – thanks for responding so quickly
I have a hard time with a lot of your advice on home buying as a resident because while many of the arguments made are sound advice, many are comparing apples to oranges. For example you harp on this idea of living as a resident for a few years even when you have an attending level income but then also say attendings won’t live in the same house you bought as a resident. There is no consistency between these two thoughts. There is also the possibility of keeping the house you bought in residency as a rental or airBnB to get a jump start on your real estate profile. Considering many residency locations are in college towns this can prove especially valuable and is what I personally have done. Also most of the time you say if you only live in the house for 3 years as a resident it is not worth the time/money. To my knowledge the only residency that is 3 years is family medicine. Most fields are requiring at least 4 years + fellowship or further sub-specialization like IM to cardio. Most surgical fields (ortho, neuro, plastics, vascular), radiology, IM with fellowship, and many more are all looking at 6 years, which you have commented that the longer the residency the more buying a house is worth it. There was also a previous comment about how much lawn maintenance should cost, and 1k being expensive vs. buying your own lawnmower for 100$ and doing it yourself. Again, it seems that the live like a resident argument is only applied when convenient. Truly living like a resident would mean getting outside and mowing your own lawn, not hiring people to do it routinely. So I have a hard time following many of these contradicting viewpoints.
Well, let’s see if I can help you reconcile those two pieces of seemingly contradictory advice. Remember also that it’s your money and your life. You can do whatever you want with both and don’t need my permission.
The general principle of house buying is that the longer you stay, the more likely it is to appreciate enough to overcome the transaction costs. Everything else is just window dressing and rules of thumb.
Now, the reconciliation. Most docs won’t live like a resident at all after residency. They’ll be buying that attending house before they even leave residency. That’s one point I’m making. The second is that even for those who live like a resident, they’ll typically only do it for 2 or 3 years or so before they’ll be sick of it and go get an attending house. So one shouldn’t look at a house they buy in residency as something they’ll be in for 10 or 15 years, much less forever.
I generally agree with all of these points, especially with the cost of living today. We are in a unique position. We bought our house at the beginning of residency in 1996 with the intention of living in it for 3-5 years. Admittedly not the best plan, except we never left. 27 years later, we still live in the same starter house in a very nice neighborhood. The mortgage was paid off several years ago. The house has appreciated significantly (it is ridiculous) and we expect to at least double our original investment when we sell it later this year. I don’t thinkI would make the same decisions as a resident today.
Yea, if you stay there 27 years, you’re highly likely to come out ahead.
I bought a house as an intern because I discovered I would qualify for a 3% loan with $3000 down (on a $115000 house). That meant my monthly payment was half what the rent would cost. I watched my co-residents struggle trying to pay rent while I was paying half what they paid. Now, 7 years later I own the house outright. I have regular renters and pocket $700 a month (after saving the rest for expenses for the home). The home value has more than doubled. I plan to use the home as my retirement home. It has been an excellent investment for me.
You stayed 7 years. Buying for a 7 year time period usually makes sense.
Note that the mortgage SHOULD be much less than rent. Consider a real estate investor. That person expects 45% of rent to go to non-mortgage expenses. The other 55% covers profit and the mortgage.
It’s a pretty rare doctor who wants to live in a $115K home they could afford as an intern. That makes you pretty unique too.
Everyone can always come up with some sort of exception to a rule of thumb. That doesn’t change the fact that there is a rule of thumb.
I generally agree with this post, but this is a much more nuanced discussion than just the standard advice would indicate. In fact, I think in many times, buying it may be the right move for some people. As a student/resident, we rented for 2 years, and then bought a home. Fortunately, I stayed at the same academic center for medical school and residency for a total of 6 years. For many, the standard advice has a bunch of assumptions that don’t always hold up. These assumptions are:
1. The person has no income, and tons of debt.
2. Renting is cheaper
3. Medical students and residents have no time for anything other than studying and work
4. Rentals are just as nice as homes you may buy
5. Maintenance is easier/cheaper when renting
Each of these assumptions has lots of problems, and in some cases (5) probably isnt true at all. Granted, I was a med student/resident from 2006-2014. We bought in 2009, and the market had already crashed when we purchased, full disclosure. Maybe this is hindsight bias.
1. Many residents/medical students have partners, children etc, and may have a partner with a decent income and overall marginal debt load. For example, as a medical student, my family of 3 (then 4) had minimal debt, a working spouse *75k/year, and small children. The only debt we had was for actually paying state medical school tuition.
2. Renting is definitely not always cheaper. This has been especially true in recent times of very low interest rates. In our area, most of the rentals were 1-2 bedroom apartments located near the hospital (academic center in a midsize town). Rent for a 2 bedroom was approximately 1250$/month plus utilities. We were able to buy a new build (1400 sq ft) home 10 miles away for a mortgage payment of 1100, with no down payment on a 30 year mortgage. Not much different than rent, but some of each payment is obviously principal.
3. As a medical student and resident, I was obviously busy, but mowing the lawn or occasionally shoveling a little snow wasn’t exactly all that onerous. An added perk of home ownership is that it connects you to the real world. Anyone who has done residency knows that it can become all encompassing, and sometimes “home stuff” is a nice distraction from the burn-out inducing flames of medical school/residency.
4. I’d love to see any example of this being true. Most aren’t even comparable. Most rentals are exactly that, “rentals”. Finding a rental that is truly nice, with great landlords and prompt service…. good luck.
5. People always complain that maintenance is super expensive on a house. It can be, but not always. It’s true that this risk is somewhat tempered by renting, but that is largely a fallacy. Maintenance cost risk in renting is similar to buying insurance. Insurance companies sell insurance to make money, the same is true for rental maintenance. Landlords rent houses to make money. If they know what they are doing, they have already passed the maintenance cost on to …. you (the renter). The only real decrease in costs the landlord has is due to economies of scale (cheaper maintenance per unit).
An added perk is that most home maintenance things are often times easy to fix with a basic tool set and some time on YouTube. You will learn a lot doing some basic maintenance for yourself (MMM style). Unfortunately, lots of doctors never learn anything about these things, and are subsequently a sitting duck for contractors, tradesman, etc to overcharge when you eventually purchase a home. I now have a lot of attending colleagues who farm everything out at monstrous rates because they lack the confidence to do basic home tasks themselves.
I’m amazed that you think maintenance of a rental is somehow more expensive than maintenance of a home. That’s a pretty unusual assertion. Just this week I’ve had someone in the house working on the refrigerator and a different crew working on water lines in the front yard. Neither of those would be my expense if I were renting.
Nobody is asserting that “rent is cheaper than a mortgage.” In fact, the opposite should usually be true. Because a mortgage is only part of the cost of housing.
I have neighbors down the street who rent their home. Same size as mine. Same neighborhood. Happens all the time. They have great landlords and get great service (I know because I rented from the same landlord for 7 months while renovating my house.)
At any rate, easy to find exceptions to the rule of thumb. Doesn’t change the rule of thumb.
Admittedly a personal oddity as well, but I also purchased a house when starting school.
2009/10. Rent was through the roof given the previous housing situation. I was able to qualify for first time home owners tax credit. I did have help with a down payment to avoid PMI and didn’t mind the work of owning a home or doing some of my own maintenance or upkeep that I was capable of doing. In many instances, I looked forward to it.
Ended up there for 9 years. Med school and Orthopaedic residency. Sold it for nearly twice what it was purchased for in a red hot market when I moved away for fellowship and unlikely returning to that area for work. Naturally my rent at that point was about 5x my mortgage and missed that house every day from a financial standpoint.
Owning is not for everyone and the current climate would not allow for me to make those same financial decisions again. There was an opportunity at that point. It was a gamble, but presented with the same situation again I’d make the same decision.
Thanks for all you do. What you do is appreciated.
Yup, 9 years is likely to work out well. So does buying in 2010 and in some areas, 2009.
Not such a gamble at that point.
Thanks for the response. In general, I agree with the overall advice that you give in the article, and I thank you for all your work over the years. I’m richer and more content for all your articles, books and podcasts. Thanks for what you do!
You have a PRO/CON on whole life, why not one on this topic. My apologies if it already exists.
Regarding the maintenance issue. Most people think about 2 issues with maintenance – hassle and cost.
Hassle is subjective and will depend on the situation. Your hassle for installing new waterlines is obviously higher than if you rented. Thats also a significant, but not terribly useful example as I doubt most homeowners are tearing out water lines at any time during their time of home ownership. If you have a massive, episodic expense during the time of home ownership, it’s likely not going to work out in your favor. However, this has more to do with liability than it is does with cost. The place you rent from doesn’t have better waterlines or longer lasting roofs.
For many issues, hassle could actually be higher when renting. As a former renter, and with any number of other people’s examples I could post links to, getting a landlord to fix even basic problems would be way more hassle than either fixing it yourself or hiring a trusted contractor to do it (I agree on refrigerators, apparently they don’t make them like they used to).
Regarding cost – I don’t believe that rentals are necessarily MORE costly than buying, but I DO believe that the difference is not nearly as big as it is portrayed to be. This may be an unusual assertion, but I believe it’s true. In fact, I’m actually amazed that people believe maintenance is less expensive when renting. Why would it be? Take the neighbors renting down the street from you. Their expected maintenance cost is simply wrapped up in their rent, unless the landlord has a very generous heart and plans to run it at a loss. If you took your exact home and put it there as a rental, would it be somehow cheaper to maintain?
Landlords may save due to economies of scale, and having contractors for multiple properties, but those waterlines, roofs, refrigerators, and everything else all eventually have to come out of one thing … rent. In fact, most of the rental properties I’ve seen (both long and short) will incur higher costs due to the fact that they take an absolute beating from renters. This is especially true in the areas most medical students and residents would be renting, which tend to be apartments/townhomes located close to the hospital or school, and with significant throughput. In general, people are going to protect and make efforts to prevent damage to the things they own more than the ones they rent. I’m pretty sure Enterprise, Alamo and most AirBNB owners would agree!
I’m definitely not advocating everyone buy a house, and I especially agree with your point #6. If we assume it is true that maintenance (and margin for the landlord) is already baked into rent, we are absolutely underestimating home ownership cost when comparing rent to mortgage, (especially if we remove principal from mortage payment). As you said, that is true for many other costs as well when buying.
Unfortunately, accurately estimating home maintenance is just about impossible for any given specific property and will have massive variability. Some of these are controllable (kitchen reno, new bathroom, or having a super lawn and landscape), and many aren’t (waterlines, roofs, flooding). I would not consider most controllable costs to be “maintenance”. Liability is certainly higher when owning (repairs are 100% you, especially the big ones); however, I’m not so sure on overall maintenance cost across a population of people. As you have written, this is the reason why insurance companies can make money selling home/renter/health/life insurance. We pay them a premium to assume liability, but overall cost has to be higher for us or they couldn’t make a profit. We largely do the same when renting, swapping certainty of cost for a premium.
Again, thanks for what you do! The physician community owes you a debt of gratitude for the impact you’ve had!
Most graduating medical students don’t need a “Pro” piece. They’re already on fire to go buy a house ASAP. I just want them to consider another option.
With interest rates now at 7+%, buying is now way more expensive than renting in most areas. Would be difficult to come out ahead with high monthly expenses of owning. For example, a mortgage with insurance/taxes can be roughly 5K/month, where you could rent a similar house for 3k/month.
3 years ago, the mortgage payment would likely be significantly less than renting. Now the opposite is true. Not sure how it would make financial sense to buy in this market, unless you own for 10+ years. Even then, difference invested (2k/month) would likely be significantly more, then the appreciation from owning.
Yeah buying a house may lead you to many smaller expenses and yet in start if you don’t have income than its too much difficult for you to tackle the mini expenses, insurance and alot of small stuff happening to maintain the building
Just realized this is a repost with really old comments. But I will add my two cents. I bought shortly after intern year in a HCOL area. I was able to secure residency and work in the area for 10 solid years.
House appreciated from 400k purchase, to about 1.2M now. I have been renting it for the last 5 years because work moved me across the country, but it clears about 1k a month now after expenses.