By Dr. James M. Dahle, WCI Founder
My ACEP NOW article from a few years ago was about buying a home. It's no secret that I was on my third home (and my eighth mortgage at the time) and that the first couple didn't work out all that well. For us.
Though we paid off the mortgage in 2017, those homes and mortgages certainly haven't been the secret to our wealth building. That said, I do think buying a home once you're in a stable job (and probably not before) is a good idea.
Here's a question to ponder when thinking about purchasing a new home and what you should think about before actually doing so:
Q. My spouse and I are interested in buying a home. However, we’re terrified to spend so much on one single item. What should we know before taking the plunge?
A. I am continually fascinated by the burning desire among graduating medical students and even residents—and particularly their spouses—to purchase a home as soon as humanly possible despite having a net worth of -$200,000 or -$300,000. For many people, owning their home is a signal to themselves and others that they have finally “made it.” Combine that signal with heavy marketing from the realty and mortgage industries, and we see far too many doctors purchasing the wrong house at the wrong time and at the wrong price. Although it is certainly possible to get lucky, there are several important financial principles doctors should understand to buy their home properly.
There are lots of great reasons to own your own home, including the fact that you can have as many pets as you like, you can paint the walls whatever color you prefer, and the landlord can never throw you out on the street. Financially speaking, there are many significant benefits of owning a home. You avoid paying rent, you get to keep any price appreciation, and you can usually deduct mortgage interest and taxes. Most mortgage payments are fixed, so as the years go by, the mortgage actually gets cheaper on an after-inflation basis rather than increasing with inflation as rent generally does. For most people, a paid-off home reduces required minimum monthly income dramatically, which further reduces the need for disability insurance, life insurance, and a larger portfolio nest egg.
However, there are time periods in life when owning your home is not such a great financial move. As a general rule, it does not make sense to purchase a home if you will not be in it for at least five years. During a housing boom, you may break even in less time, but in a housing bust, it may take two or three times that for your home to return to its purchase price, much less break even on the deal.
Rookie home buyers nearly always underestimate the non-mortgage expenses of owning a home. These include the transaction costs of buying and selling (expect a round-trip cost of 15% of the value of the home), maintenance costs (1%-4% of the value of the home each year), insurance, taxes, upgrades, furnishings, landscaping, lawn care, snow removal, and homeowner’s association fees.
More information here:
Is a Home a Good Deal for You?
Too often, prospective first-time home buyers believe real estate agents who say you should buy because “the mortgage is less than your rent” or “you don’t want to keep throwing money away, do you?” What rookie buyers don’t know, however, is well-known by real estate investors. The mortgage is supposed to be dramatically lower than rent. That’s because the landlord has to pay all those other expenses. A real estate investor expects about 45% of gross rent to go toward non-mortgage expenses. To compare apples to apples, multiply your prospective principal and interest payment on a 30-year mortgage by 1.8. If renting a comparable home is much less than that figure, there is a very good chance you will be better off renting unless you are in the home for a very long time.
Even when purchasing a home makes sense, it is critical to realize that a home purchase is mostly a consumption item, not an investment.
Given these and other economic realities, it generally does not make sense for an EM resident to purchase a home. If you think you are an exception, run the numbers using The New York Times' “Is It Better to Rent or Buy?” calculator and see how much appreciation you will have to realize just to break even, much less come out ahead. In fact, most attendings would do far better renting for 6-12 months out of residency. This allows physicians to stabilize their finances, make sure the job is working out, and provide a much more thoughtful and deliberate housing search—all of which enable a much stronger negotiating position.
More information here:
Is Renting Better Than Buying? Why We’re Financially Independent and Renting
10 Reasons Why Residents Shouldn’t Buy a House
Be a Savvy Home Buyer
Rookie home buyers usually don’t realize how good their negotiating position is. There are usually dozens of similar homes on the market at any given time (though housing markets since 2021 have dramatically favored sellers). While there are occasional seller’s markets, home buyers should understand that it’s a buyer’s market most of the time. If you can avoid falling in love with a house, you may be surprised at just how good of a deal you can get on a perfectly acceptable house.
Even when purchasing a home does make sense, it is critical to realize that a home purchase is mostly a consumption item, not an investment. Larger homes require more money to heat, cool, maintain, furnish, landscape, insure, upgrade, and clean. Try to buy a home closer to what you truly need rather than everything you could possibly want. Although a mortgage lender may approve you for a home costing 4-5 times your gross salary, you would do well to make sure your mortgage is less than two times your gross income. So, if you make $250,000, the general rule is that your loan amount should be less than $500,000.
In recent years, many lenders started offering physician mortgage loans. These are loans that banks will give to a physician that allows them to avoid private mortgage insurance (PMI). PMI protects the lender against you defaulting without your putting down a standard 20% payment. These loans usually also offer special underwriting that will allow you to close with just a contract rather than proven earnings, and they may take your student loans into special consideration.
It is important to realize that these lenders aren’t doing you a favor out of the goodness of their hearts. These physician mortgage loans have slightly higher fees and interest rates than comparable conventional mortgages. The banks are also well aware that your risk of default is very low and hope you will then use their bank for your banking, investment, and insurance needs. A physician loan can make sense but only if you are using the money you would have used for a down payment for a better financial purpose, such as paying off high-interest student loans or making retirement account contributions.
If you aren’t already using 15%–25% of your attending gross salary to build wealth (ie, saving or paying off debt), then purchasing a home, with or without a physician mortgage loan, probably isn’t a great idea—at least until you get your financial house in order.
What has your home buying experience been like? Did you feel pushed into buying too soon or into buying too much house? What mistakes have you made? Do you recognize that “burning desire to buy a home?” Comment below!
[This updated post was originally published in 2015 at ACEPNow.]
If you have a stable income and know where your position will be long term, its never too early to p;urchase a home. We might never see interest rates at this level. In 1977 I was paying 9.5 and then it skyrocketed to around 15. Its the biggest investment of your life so lots of research needs to be done on the education in the town and you need to have the home inspected by the right person. Try to see the homeowners insurance policy for claims. See if there is a sump pump and potential water problems. Know the ages of heating and AC. Try if possible to purchase without a realtor as they just want a sale and are not looking at your best interests
I must respectfully disagree that “it is never too early to buy a home”. It is always too early (imho) if you are not ready to settle in one location for at least 5 years. Too many people who have no business investing in real estate look at living quarters as an “investment”. I agree with WCI that you should look at your living space as (mostly) a consumption item, especially if you are in the first 10 years or so of your career. Career hopping is not as prevalent for doctors, but it is far more likely that you’ll change employers several times in your career than if you had been starting out 50 years ago. I personally don’t see rent as a bad thing in the early years, especially until you are ready to put down some real roots.
Agree. These conversations are always prone to reporting bias. Only the satisfied report.
I’ll report some uglies to provide balance.
Home #1: primary residence. We’ve lived in a broke-ass city for 26 years. Values dived in 2008 and continue swirling into the toilet. Our annual cost-of-ownership / value is 13%. Not kidding.
The value of our house has dwindled to only 3% of our net worth.
Looking through the retrospectroscope, what might have clued us in? 20% African American. Former manufacturing city. An abundance of private schools is an indicator of poor performing public schools.
Alas, Location, location, location was not on our radar.
Personally, I refuse to live anywhere that’s more than 5% African American.
(this comment is very sarcastic and critical of your prior assessment)
Obviously not a PC comment he made. Obviously there is correlation there between school test scores and racial breakdown of a school. Correlation is not causation and all that. But is it a smart thing to look at from an investing standpoint? According to this article, yes.
http://www.forbes.com/sites/forbesleadershipforum/2012/12/10/how-home-ownership-keeps-blacks-poorer-than-whites/
Thanks for responding. The act of responding speaks to the truth of my statement.
Interesting phenomenon I hadn’t noticed until you mentioned it. It’s really unfortunate too because it’s the non-racists who get punished. Those who are willing to live in a diverse community end up with less wealth. I wonder if at some point, as racism fades, if that will reverse and the non-racists will be rewarded as home values in diverse neighborhoods catch up. That day is probably a long ways away, of course.
What’s more interesting is peoples reaction to the neighborhood “changing” after they’ve already bought. As American moves to being a majority minority country more and more nonwhites are moving into white neighborhoods. So even you use this approach of going for less diversity, eventually diversity will find you.
Right. With those two qualifiers- stable income and long-term position, I agree.
I’m not sure I’d call it the biggest “investment” of your life. It’s definitely the biggest purchase, but it’s also the largest consumption item.
Our first house as an attending was a mess. We got a doctor loan and put 0% down. We settled on a house that was 1.5x my salary. We show up to close and start signing the 1000’s of documents and they start talking about the balloon payment. We looked at each other like wtf… no one told us about a damn balloon payment. 100k balloon in 5 years. Our stuff was on a truck coming to town so we just signed and figured we’d fix it later. It was our first job as an attending, you know how long those last. We were done in 3 years. Sold the house at a loss in 2012…
The silver lining is we found the WCI site before we bought another house. We moved to a new city, we RENTED for a year. Then we selected a house that was .75x salary, ignoring the real estate agent telling us to buy a million dollar house. We put 20% on a 15 year mortgage and couldn’t be happier, nice house in a good school district, with easy payments.
Anyway that bad experience led me here and to the bogleheads and has put me on the right path.
We bought more house than I would have liked but the timing just worked for us. Once we were out of residency, we wanted to buy, not rent because we don’t plan on moving again (at least not until we move to a retirement home). We bought more house as than we needed, but bought one to grow into so that we wouldn’t have to move, etc. As first time home buyers, we got a good FHA rate. We were a little rushed in terms of HUD deadlines, but we managed to A) lock in at the farthest out rate we could (rates were on the rise again and we got a 30yr mortgage for 3.25%… any later and it would have been higher) and we beat the deadline so that we do not owe MI for the life of the loan and it will disappear after 5 years. We didn’t put 20% down, we only paid the difference from the housing cost to the maximum loan of $275K.
We should have offered a lower price because they accepted right away. We only requested for a little less than the cost and had them pay all closing costs as well as the repairs that we wanted. We probably could have done more but we were novice buyers. We still got a great deal on a great home, and like I said, were lucky with our timing, so we felt pressure that way… get a bid in and get the rate locked in as far as possible. But other than that, I think we were successful. It is also the only tax deduction we can take. Everything else is lost due to salary… student loan interest, child credits… even the number of dependents thanks to AMT. So getting a house was definitely a good thing!
I’m envious of Adam’s $275k loan and 3.25% rate (before PMI, I’m presuming). That doesn’t buy much in Denver, at least if one wants to be in a good school district and have a reasonable commute.
I am scheduled to close in a couple of weeks on a new build, right around the 18 month point of being an attending. By virtue of being new there’ll be no “need” for a kitchen remodel, new roof/AC/other big ticket items for a very long time… in theory. It’ll also be very energy efficient, which may or may not become more of a financial issue down the road, and is under 2x gross salary in accordance with WCI’s advice.
I’m using a 90% LTV jumbo doctor’s loan from Bank of America: negative 1 point (money back at closing), no PMI, fixed 3.875% x 30 years. Given that bankrate.com has 30 year fixed jumbo money at 80% LTV at comparable if not higher rates today accounting for the negative point I’ll take my deal all day long.
As I’ve written about before I deliberately chose the 30 year fixed route to give more month to month flexibility. I’m already saving north of 25% in tax-deferred accounts and doing PSLF for my loans, so those parts of my financial house is in order. The extra money month to month will initially go towards covering the rental until we can escape the lease, then to furnishing the house (window coverings are expensive! as is everything else), adding more solar before the Dec 31, 2016 expiration of that tax credit, and finally to paying down debt prematurely in highest to lowest effective rate order.
Ah, the inability to edit: “those parts… are in order” rather. I reconstructed that sentence and didn’t finish off the whole thing.
Buying a home the moment I graduated medical school was the wisest decision I made, particularly because the market was in my favor at that time (April 2012). I bought a home that was built in 2006, sold for 230k at that time. I bought it in April 2012 for 170k with zero down (doctor’s loan). The home is now worth 225k. During the 3 years that I was in residency (2012-2015), I rented out the second bed/bath for 800/mo (my mortgage and HOA fee combined were 1250/mo); so the amount I paid monthly for my living expenses (450/mo) essentially all went right back to me as equity. I moved 600 miles away for fellowship this year, and I ended up renting the place out for 1895/mo to a professional couple; giving me an extra several hundred dollars a month in money I can use to put toward my loans.
Although my student loans are at 330k; my net worth is around 240k primarily due to the equity in my home (and some savings I’ve built up as well).
I plan on continuing to buy homes as investment properties as I gain income.
Glad it is working out for you. I’ve commented before that it might be better in some ways to buy an investment property first, and that’s essentially what you did.
This is like the guy who wins the lottery saying, “Buying that one dollar lottery ticket was the wisest decision I made”
Basically you got lucky. There is really no way to time the market. You happened to buy low. Just through random chance, some buyers will get lucky, buy low, and pat themselves on the back for their awesome decision making.
I’m happy that things are working out for you, but I fear if you discount the role that luck played, then you may be in for some disappointment when you continue “to buy homes as investment properties”.
Lets not get too carried away with the analogies. Nobody would compare a well thought out home purchase in the depths of the housing crash to the luck of winning a lottery ticket. Seeing the purchase price of the home 8 years prior to me purchasing it was enough info for me; the value had nowhere to go but up.
It can always go down more (see Detroit) but obviously you’re going to do better buying in 2010 than in 2006.
I did end up buying a home at the end of med school in the Detroit area around the same time as Seth E. The previous owner had bought it for around $120k well before everything went downhill. I’ll admit that I definitely had a strong desire to own a home, but managed to aggressively negotiate down to mid $30ks and felt in this case it made sense to go ahead and buy. I had to put about $10k into the place (and time, which after the match I had a lot of). Value is about $80k now so I feel like I came out on top (and definitely attribute this to luck). I just need to resist the urge to move into somewhere bigger too soon…
Glad to hear it worked out for you. Obviously a better buy at $30K than $120K.
Appreciation tends to be a luck factor, at least in the short term. But if you buy them at a price where the return on just the income is good enough for you, then luck has much less to do with it. (Not nothing, but less.)
Appropriate to mention the “luck factor” is short term only.
Over the course of owning a home for 40-50 years, the “lucky” appreciation is only a short term blip.
A colleague was hooked by his first home lucrative flip, and has weathered tough going in the 30 years since with depreciating rentals.
Most primary homeowners will realize only a pittance in appreciation . Those who claim otherwise, either 1) don’t know how to add their cost-of-ownership , or 2) don’t know how to divide by 60 years.
I’d say luckiest instead of wisest.
Jury is still out on my home. I’m guessing it will be neither good or bad. I was 9 years post residency at time of purchase.
Never confuse good timing with skill. You’ve learned a good lesson about valuation/price that you can apply going forward and have a nice tailwind. Fortuitously, your bank account cannot tell the difference between skill/luck.
I finished residency in 2008 and built (yes, built) the biggest house I could on my first year salary and not have to move thereafter. Things didn’t quite work out the way I envisioned with that job and 8 months later I had no income and was underwater on the mortgage due to a low down payment (5%) and the plummeting home prices that followed the 2008 crash.
I felt like a complete idiot. Luckily, I was able to find another job that allowed me to stay in my home. 7 years later my original plan is coming to fruition. I have less than 13 years left on a refinanced 15 year fixed at 2.875% and will have the house paid off by the time I turn 50. People often ask me if I am going to “move up” to another house in a more exclusive neighborhood and I politely tell them I am happy where I am.
My advice to new grads is to rent until you are either partner or in a stable employment position before you buy. Renting also gives you some leverage in that your boss will take your threats to leave more seriously than if you are wedded to a big house.
Finally, there is lots of talk on this forum about maximizing every last nickel out of asset allocation, tax allocation, tax loss harvesting, etc where it’s the big things (buying too big of a house, getting divorced, having 7 kids, etc) that makes the other stuff look very inconsequential in comparison.
I recently bought a house after renting the same apartment for about 6 years post-residency. Renting for that long allowed me to pay off all my student loans and save a significant chunk of my income for retirement. Another benefit is that I got to know my city fairly well and understood the pros and cons of certain geographic areas. Back in training, I was the only resident in my class who rented during residency (2006 to 2009), and was also the only one who graduated without having to deal with a huge housing headache. Many of them either sold at a loss or are still stuck with their properties.
What is the usual advice nowadays about how much house a person should buy in relation to income? I live in a low cost of living area, don’t want children, and have a minimalist personality, so I ended up with a house that was about half of my annual salary. One thing I noticed while house hunting was that, in this area at least, developers aren’t really building many new houses that are small and one story.
I generally recommend a mortgage smaller than 2X gross salary. But if you don’t need/want that much you’ll speed your financial independence. Some people in very expensive areas are going to have to spend a little more, but they’ll either have to make sacrifices elsewhere, or work longer before being financially independent.
I actually feel like i lucked out on my home buying experience
I felt “pushed” into it by my wife who had that burning desire to buy a home even though I wasn’t completely convinced I’d keeo my job in the area for 5 years
In the end, we were able to secure a home with a mortgage around 80% of my gross income, put down 20%, and nab an interest rate of 2.75% x 15 years
Love the mortgage. You know, it’s interesting. While I owned my previous two houses, I thought I’d gotten a pretty good deal. It wasn’t until after they were sold and everything was said and done that running the numbers showed renting would have been wiser.
Lots of interesting posts are cropping up about how houses may not be great to own period, and there is definitely some validity if you run the numbers opportunity wise. For doctors, it may be different as its another was to have some equity, but as always depends.
I bought a cheap house in a cheap place for residency and it took 2 years to unload it. Rented for 2 years + and finally bought a house that is 65% of my salary. Hoping to turn it into an income property in the next year or so. Debating whether we want to move into a 1-1.25x salary place, very doable, but the low payments are nice. After renting its amazing how expensive houses are, even when adjusting 40% down from rent. Its a never ending sink. Only going to consider a newer house (new appliances, ac, energy efficient, etc…) if we do. Otherwise thinking condo or stealth owner occupied apartment complex. Renting is liquid for sure.
I go back and forth on the house, still think prices came back to multiples in many places where the average wage does not justify it. With interest rates set to go up that may give housing a haircut, at the best buying time of the year to boot, and at least that portion of the cost is deductible.
Question for the group: I’m in fellowship and have payed off all my loans thanks to going to a public medical school, renting rather than owning, frugal living, and a spouse with a second income. I’ll be starting a private practice job in my and my wife’s hometown and have always planned to stay their indefinitely. The partnership track is three years (only one MD in the group’s history has not become a partner), but I’ll only be making about 1/3 of a partner salary my first year, with ramp-up’s to partner money over that three year period.
My question is: should I be applying the “2x your gross salary rule” to my first year salary, my eventual partner salary, or something in between?
(Of note: we could currently afford the 20% downpayment on a $600k house, so no need for PMI, but feel like that’s potentially too much house for first time homebuyers)
I used 2X my pre-partner salary when I bought. The amount left on my mortgage is about 0.3X my annual income. If you include the mortgage payoff fund I started this year, maybe 0.15X. Obviously, that’s very affordable for me and has allowed me to build a lot of wealth. But could you go 2X your partner salary without getting in much trouble? Almost surely. But I would use that as your upper limit.
As always, it depends, but I wouldn’t be in favor of counting your chickens…One of our clients joined a group in almost exactly same circumstances (except she was divorced) and got caught in the middle of the blowup of a long-term, very stable practice. Fortunately, like you, she had been very frugal and losing some of the nest egg she had invested didn’t cause permanent damage, but it was a very bitter experience.
It also depends upon the real estate market where you are buying. If you can find a decent home at a multiple of your starting salary and sell at a profit when you move up to partner in 3 or 4 years, the 5-yr rule wouldn’t apply (i.e. only buy a home if you plan to live there at least 5 years).
A point that hasn’t been addressed yet in this thread is that the sale of your home is one of the last remaining tax “loopholes” ($250k gain per spouse tax-free if your main home 2 of last 5 years). Or you could convert it to rental property if the ROI makes sense.
If you lose money, it makes sense to convert it to rental property. If you make money, it makes sense to sell it within 3 years of the time you move out to get that $250K tax-free.
my 2 cents for Tom:
RENT! Then buy in the neighborhood you REALLY want to be in when you actually make partner. Its a good strategy for a few reasons: you can feel out the area, you don’t need to worry about your initial question of which salary to multiple by 2x, and most importantly–you may not make partner or be in the job in few years!
I came to this area to join a stable practice that had been here 30 years, every single associate who joined made partner, and guys were doing well. I joined, Obamacare hit, consolidation happened….poof, its gone. practice sold to hospital. It could happen to you. statistically, job changes within 2 years happen to about 70% of folks (and I bet its higher now).
Well, you can do both, actually, but I don’t think the decision is as cut-and-dried as that. If it’s down and you’re nearing the 5-year mark, you may simply want to cut your losses and move to an investment that doesn’t call you at 3am with a leaky roof.
Your article says to multiply the mortgage payment by 1.8x and if you can rent for much less, renting is probably better. I think the 1.8x comes from dividing 1 by 55% (based on the statement that 45% of real estate investor income goes to non-mortgage expenses). However, this produces a much different answer than what the NYT calculator would suggest. Thoughts?
The NYT calculator is much more comprehensive than that rule of thumb. So I’d probably use that.
The point of that example is that rent SHOULD be much more than a mortgage. So if you’re looking at a mortgage payment on a 30 year fixed that is anywhere near what rent costs, it should cause you to pause and do a more careful analysis, such as using the NYT calculator.
On the other hand, if you can rent a home for $1000 a month, and it sells for $400,000, it’s going to be very difficult to come out ahead buying the home. A 30 year fixed mortgage on $320K at 3.5% comes out to monthly P&I of $1450. Add in all the other costs of buying the home and it’s not going to work out well.
I understand your point, but if I put in various assumptions in the NYT calculator, it gives me a very low number in the “if you can rent a similar home for less than” box. If I use the default settings and put in a $400,000 home price and $320,000 loan at 3.5%, it says to rent if you could rent for less than $1,326. Meanwhile, the mortgage payment is $1,437 and $1,437*1.8 = $2,586. Something seems off by an order of magnitude that is significant.
Do you agree the default settings are the appropriate assumptions for your situation? If so, then go with what it says. Don’t like my rule of thumb? Make up your own. It won’t hurt my feelings. Mine mostly is just looking at cash flow and doesn’t include appreciation. That’s probably your “order of magnitude” difference.
It’s not that I don’t like your rule of thumb. I’m more concerned that the calculator does not make sense. I played with a bunch of different assumptions and the calculator seems to support buying in more cases that I would expect. The only time I got an answer that it’s better to rent was when I set my term assumption to 1-2 years. Thought you might want to play around with the calculator a bit to see for yourself. I already have a house so I don’t need it personally.
It is a newer calculator than they had previously. I assumed it was just a new face on the old calculator, but perhaps not. I’ll check it out.
Hmmm…….Here’s the one I’m used to seeing:
http://www.nytimes.com/interactive/business/buy-rent-calculator.php
The other one is a little bit different.
Good article. I’ve been thinking a lot about this-we bought a few months out of residency, but we’d lived in the neighborhood 2 years (renting) and I knew I wasn’t moving out of it, ever. We’re both secure in our jobs and unless the university system (the only one in the state) collapses, that’s not changing. We got a low interest rate and the house is less than 1.5x our salary. The main “mistake” we made was that we only put 5% down and my student loans weren’t yet paid off when we bought. We finished paying the student loans off within a few months of the home purchase though. Our mortgage is our only debt. But I’m bothered now that we’re paying PMI ($150/month). We have an “extra” 50k this year and I was thinking of putting about half of it towards the mortgage to get rid of the PMI. The other option would be to invest all of it in a tax sheltered account. I just think the peace of mind of knowing I wasn’t wasting $150/month would make me feel better. But if it’s financially a lot smarter to just invest it all, then I could live with paying PMI another 2 years. What do you think?
If you haven’t yet maxed out your retirement accounts, I’d put it there before throwing it at a mortgage, even one with PMI. If you really want to get rid of the PMI, you could refinance into a doctor mortgage.
As an alternative, you could look at it as a 7%+ return on your investment of $25k over 2 years which, when added to the mortgage interest rate, is a pretty attractive ROI. Of course, since you won’t receive your $25k back at the end of 2 years, your true ROI is less when spread out over the remaining mortgage.
White coat- what do you suggest in a market where Renting is extremely high and buying is the cheaper alternative up front?
If it is cheaper FOR YOU to buy over your time period, then buy. But remember that just because the mortgage is less than the rent doesn’t mean it is cheaper.
Maybe this is a bit side topic but I’m struggling with the idea of paying my mortgage early here in FL.
My rate is also low (3.25) so wouldn’t get significant benefit after taxes if I pay it early.
One of the benefits of course would be the asset protection one but also taxable accounts here can be titled as tenants by entirety.
I don’t like having debts either but I believe I will come out ahead just maxing retirement accounts and then investing the difference in 529 and taxable accounts
Unless you dislike debt so much that you are losing sleep over it, I vote for investing. You’ve got a good rate and it’s even lower when you take the mortgage deduction into account. Statistically speaking, doctors are a lot more likely to lose a chunk of their assets in a divorce than in a lawsuit.
I rented a $600/month duplex for 2 years after residency. This, coupled with a few other areas of delayed gratification, allowed me to discharge my $150,000 student loans on a primary care salary a little over a year after residency. My wife (who, admittedly, was only in the duplex the last four months) and I then purchased a home last year with 20% down on a 15-year mortgage that was well less than 2x our annual salary.
Needless to say, I’m a fan of renting. One upside not mentioned in this excellent article is that most of us seem to be able to “make do” with less house when we rent. For example, I was content to live in a rented $600/month place but likely wouldn’t have wanted to purchase a $1080/month place (using the rent x 1.8 break-even rule of thumb in the article). So, for me, it wasn’t rent Y vs purchase 1.8Y. It was more like rent Y vs buy XY.
Y wasn’t a place to host a Christmas party for the partners, but it also didn’t cause the stress that our youngest physician is experiencing from the custom golf course house he started before his last day of residency.
Yes, some people just don’t get it do they? I was having a chat recently with a doc who couldn’t live on a resident salary (told me all about the sacrifices made like not being able to live in the nice part of town or go out to eat much) and now struggles to live on an attending salary citing a $2-3K a month student loan payment. When the doc makes partner in a year or two, he’ll probably still struggle with living on that salary.
The knowledge is important and I try to pass out plenty of it here, but the attitude and focus are even more critical. Without that, the knowledge doesn’t do much good. It doesn’t matter how you invest 2% a year of your salary, you’re not going to reach any significant goals saving that little.
Nice job paying off $150k on that salary in such a short time period. I wish I could bottle the motivation and skills you used to do that. It seems easy to you and me, but I assure you it is not for many/most.
Amen to paragraph 2. It doesn’t matter how smart you are if you don’t put your knowledge to practical use.
With Prop 13 in California, does that change the calculation at all?
No. It basically reinforces the idea behind this post–the longer you hold on to the home, the better off you are buying instead of renting.
What are your thoughts on a new attending buying a house with the current interest rates? I just finished fellowship and reread The WCI and went through your Boot Camp book as well, so was determined to wait until I have enough for a 20% down payment and not get a mortgage more than 2x my annual income, but I’m getting advice from others that now is the time to buy because of the exceptionally low interest rates, along with a concern that once COVID is over, interest rates will increase significantly, higher than they were pre pandemic, and mortgages will become unreasonable. Do you think this is likely?
People have been afraid of interest rates skyrocketing since at least 2009. So far they haven’t done it. My crystal ball is cloudy as to whether they will go up in the near future or not. Same with housing prices. Could go up, could go down, could be similar to now. Without the ability to predict the future, my best advice is buy when your personal and professional life are stable, whatever the housing prices and interest rates may be.
Note that I am not adamant about you putting 20% down if you have a better use for your money, but I do insist on you living like a resident so you can have all the options you’ll want by mid career.
When I first read your book the focus and the perspective of my life changed. I would like to thank you for that. Now, I have much more interest, knowledge and insight into personal finance.
I have started my first attending’s job 16 months ago. I rented a “cheap” apartment the first 12 months and then I rented a nice but old house in a very good neighborhood when my son started kindergarten to the best school in the area (which happens to be a public school).
I paid off all my debt in this timeframe (I was in good shape in terms of debt to begin with).
I save approx 25% of my take home income and I max out all my retirement plan contributions.
Currently I pay 16% of my take home income in rent and I feel like I am wasting money (few thousands of dollars every month).
I am not firmly convinced that this job would be a long term job. I might move in 3-4 years or I might stay for more than 10 years – “too early to judge”.
My CFA (I know I should fire him!!!) advices me to proceed with my first homeownership. He feels that if I stay here for more than 2 years with the current interest rate I would benefit from homeownership and I will build some equity.
Currently I do not have the 20% yet for down payment. Unfortunately (and fortunately) I live in the most expensive area of the state, where houses are expensive, it is a seller’s market, but the school system is the best and the houses maintain good value (this was true even in the market crash of 2008)
1) Should I buy now or continue to save for the 20% or until I decide what I would definitely do with my job (even if this decision takes 3-4 years)?
2) There are some discussions and maybe an opportunity to buy the house I am renting which most likely will sell around 1.2-1.4 x my gross salary. However, it is old and earlier or later will need a major renovation of maybe 100k or more. The renovation can wait I guess.. (“live like a resident policy”)
On the other side, there are few houses that are coming in the market that they cost 2.0 – 2.2 x my gross income but they are ready and updated (more like the doctor’s house you describe).
I am torn between sit tight, try to buy the house I am renting with the need to update things earlier or later, or buy the doctor’s house.
Please advice
thank you
@Peter, You answered your own question. You are uncertain and in a seller’s market. I’d sit that out for now.
1. I’d probably roll the dice and buy with a doctor loan (knowing I could get burned if I move in 3 years), but it wouldn’t be wrong to give it more time and save up a real down payment.
2. No reason to favor the one you’re already in unless it really is the best house for you unless they’re giving you some serious discount to buy it.
The most important thing is how much of your income is going toward building wealth right now, at least for the next few years.
Thank you for this article and all that you do!
One question:
I see that I should not expect to make money on a home during a 4-5 year residency, however, would I loose less money than renting for 4-5 years?
Let’s say I buy a house for around $300k and after closing costs I sell it for $270k, but let’s also say I had to put on a new roof for $20k ( a total loss of $50k). Wouldn’t that be less money lost than rending a home for $2,000/ month for 5 years, adding up to $120k.
Sebastian,
In your example, your math is correct. The problem is, rent usually rises and homes, while generally increase in value could crash depending on where you are (a la 2008). I believe WCIs idea is that you generally do better investing in assets than buying services. However with rent and buying a home, you usually need to live somewhere and have a downpayment for house. As a physician, you are lucky enough to have access to a 0% down loan at 300k, so it’s most likely a better deal. The 4-5 year payoff is a general rule of thumb with comparable rent/home appreciation factoring in closing costs, interest, taxes, and maintenance. YMMV.
No. I think 5 years is 50/50 whether you come out ahead buying vs renting. Either way you “lose money”, i.e. exchange it for housing. We’re not comparing to you living in a cardboard box, we’re comparing you renting and buying an equivalent place.