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Buying during residency/fellowship - what am I missing?

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  • Buying during residency/fellowship - what am I missing?

    I know that conventional wisdom on this board is that you should never, ever buy during training. I was wondering why that message is so strong from the members here? Is it just risk mitigation, stress, bad experiences from people during the market crash a decade ago?

    We are 99% sure we are going to continue renting but I have a nagging feeling that buying is actually the better option for us. Current situation is as follows:

    • 4 years remaining in training

    • combined income  - $170,000

    • combined debt - $85,000

    • Rental Market - $1,300-$1,700 per month for a place that isn't run by a slumlord (and even some of these are in that range)

    • Income taxes in rental area - 3%

    • Housing Market - $150,000-$185,000

    • Income taxes in housing area - 1%

    • Property Taxes ~3% of sale prices (actual tax rate is ~3.4% but the assessed value of homes appears to consistently come in at ~80-85% of recent sale price)


    Obviously, this isn't a 100% apples-to-apples comparison because the "rental market" we are looking at is not the exact same we would "buy market". Rental units in the "buy market" are the same price but we would not rent there since it is farther from our jobs by ~10-15 minutes each way. Likewise, the current "rental market" is a somewhat trendy place at the moment (read: rapidly gentrifying) but it has a miserable school district. For the purposes of buying a strong school district seems like it will insulate housing prices more than a few hip bars/coffee shops.

    I feel like I must be missing something here because no matter how generous I am with the rent side of the NYT calculator (crazy buying and selling costs, great market of 8.5% investment returns, 1.5% recurring maintenance costs) it comes out to be a wash. With more realistic but cautious numbers the buy side "wins" by $100-150/month over renting.

    It isn't a no-brainer one way or the other but everyone here seems to think buying is a miserable decision. There seems to be a genuine argument on both sides of the equation and that it mostly comes down to risk tolerance. So I am genuinely confused by what I am missing here that makes the consensus "never buy in training."

  • #2
    Its not really a risk thing, though thats part of it. Its that you dont have time to be concerned about the often time consuming portions of ownership, buying/selling and maintaining. When you have to leave for a job/etc....you have to go, whether or not you sell. Any perceived buying benefit likely evaporates in the transaction on the other side or when the house is on the market longer than 2 wks.

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    • #3




      So I am genuinely confused by what I am missing here
      Click to expand...


      if you can rent for 1500 what you can buy for 150K then yes its probably a wash given the 1% rule.

      that sounds like a really high rent to me as 150K is a down payment where i am...

      if your spouse doesnt mind doing house stuff while your on call and something breaks thats fine as well.

      4 years is a little short but its not impossible to come out ahead. its just the odds are not in your favor.

      Comment


      • #4
        If you don't like some AUM fees, I doubt you'll like realtor fees.

         

        +1 to everything Zaphod said. There are so many things that can (and likely will) go wrong that it's not worth the hassle while in training. Throw in the fact that at the end of training, your spouse will be focused on studying for boards. That isn't very compatible with constantly keeping a home show worthy. Also factor in that you may not be able to fully deduct mortgage interest depending on where you live.

         

        Just rent for now

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        • #5
          You can't compare renting in one neighborhood (which along with the gentrification, is also apparently much closer to where the jobs are) with buying in another (sounds like suburban) neighborhood.

          You wouldn't rent there because it's farther from work, but you would buy there?

          In my area, proximity to downtown (the areas of which have seen considerable gentrification the past 10 years) has had a much greater effect on housing appreciation than has school districts. Yes, there are some hip coffeehouses thrown in the mix too, but it is the proximity to city center that has had the influence on appreciation, not the coffeehouses themselves.

          If it's a wash/almost wash ($150/month is a wash with a total household income of 170k) go with the option that gives you less worry/hassle + 30 min/day shorter commute (in residency that is huge!)--->rent.

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          • #6
            Again, your rent is basically your spend ceiling while your mortgage is your spend floor.

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            • #7
              How much of that time can be mitigated by a non-MD spouse? I saw a previous thread where someone mentioned that they had to neglect repairs because contractors (plumber, roofer, etc) wanted to come during their work hours and residents/fellows have 0 capability to control their schedule. I have virtually 100% control on my hours so availability for that sort of thing is certainly feasible with my schedule.

              This is probably a more philosophical question than a financial one but what are the odds of a catastrophic drop in housing prices? The absolute bottom of the market after the GFC was a 29% drop. There is absolutely no indication that housing will fall that far again. Yes, recessions are generally unpredictable but housing has been heavily regulated since it was the very entangled in the most recent crash.

              So on a $175,000 home a 29% drop would represent a new selling point of ~$125,000 so a $50,000 loss in sale price. That's a big loss but hardly ruinous, IMO. The relatively low purchase price insulates you from some portion of the downside risk, no?

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              • #8




                You can’t compare renting in one neighborhood (which along with the gentrification, is also apparently much closer to where the jobs are) with buying in another (sounds like suburban) neighborhood.

                You wouldn’t rent there because it’s farther from work, but you would buy there?

                In my area, proximity to downtown (the areas of which have seen considerable gentrification the past 10 years) has had a much greater effect on housing appreciation than has school districts. Yes, there are some hip coffeehouses thrown in the mix too, but it is the proximity to city center that has had the influence on appreciation, not the coffeehouses themselves.

                If it’s a wash/almost wash ($150/month is a wash with a total household income of 170k) go with the option that gives you less worry/hassle + 30 min/day shorter commute (in residency that is huge!)—>rent.
                Click to expand...


                Both areas would be classified as urban/suburban mix.

                Maybe this wasn't adequately explained but the biggest selling point of the neighborhood we would consider buying in is the local school district. We don't have kids so that benefit is immensely important to us. It is however important to housing price stability. I don't have data but my observation has been that neighborhoods with strong schools don't go boom and bust as much as those without. Maybe that will change as demographics change (less kids in general so school districts hold less sway on housing prices).

                To this point, the rental neighborhood has a completely failing school system but as renters we frankly do not care about this at all. Most people in this area are some combination of (a) young college students/grad students, (b) childless, or (c) extremely wealthy and send kids to private schools. Maybe the college proximity factor and extreme wealth also shield this area from a collapse but we pay a premium to live here.

                The other thing that is difficult to untangle with gentrification is the absurdly low prices at the start. Yes, the appreciation has been phenomenal but there is literally nowhere to go but up when houses were selling for under $60,000 just 8 years ago. People are listing houses in this area for $275,000-$400,000 within 3-4 years of closing at under $100,000. My estimation is that the housing appreciation in these areas from 2010-2017 is a once in a lifetime event.

                To sum up the last three paragraphs - I don't think that the cycle of rapid appreciation in these more hip/marginally more convenient areas will significantly outpace that of more established neighborhoods (10x difference in growth over the last 4-5 years).

                As far as proximity to jobs. It's not a massive difference. My commute (downtown) is going to be ~5 minutes longer (25 minutes instead of 20). My wife's commute (university area) is going to be ~15 minutes longer (25 minutes instead of 10). I definitely agree that the extra commute time could be huge for my spouse. To be honest, that seems like a bigger downside than a potential financial loss.

                Again, we will probably rent but I think there is a fair argument for buying in certain markets.

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                • #9







                  So I am genuinely confused by what I am missing here
                  Click to expand…


                  if you can rent for 1500 what you can buy for 150K then yes its probably a wash given the 1% rule.

                  that sounds like a really high rent to me as 150K is a down payment where i am…

                  if your spouse doesnt mind doing house stuff while your on call and something breaks thats fine as well.

                  4 years is a little short but its not impossible to come out ahead. its just the odds are not in your favor.
                  Click to expand...


                  Rent is very inflated by proximity to universities. Once you get away from the university rental area the availability of rental units diminishes rapidly. In non-university areas there tends to be few very small units that appear designed for low-income. Otherwise, you are renting a house that from all indicators looks to be the same monthly price as a mortgage. Which seemed confusing and why I focused on risk? It really seems the biggest benefit of renting is a combination of (a) access to trendy bars and (b) risk avoidance.

                  Since I have absolutely 0 interest in point (a) and I relatively high risk tolerance (b) I am trying to determine if there is some unknown (c) that I haven't considered.

                  Edit: You also mentioned a 1% rule. What is that exactly? I do know that when looking at housing on a $/sqft basis the rental prices are generally around 1% of the buy price. Example, a rental house we are looking at is currently priced at $1.18/sqft but a very similar home for purchase is priced at $113/sqft.

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                  • #10
                    It comes down to your risk tolerance and how much time outside of training you want to spend doing house chores/maintenance.  As CordMcNally stated above, rent is your spend ceiling while a mortgage is your spending floor.

                    If your house does not appreciate or minimally rises in value over 4 years, you'll lose overall after realtor's fees when selling (about 6% of selling price). If you rent, there's no potential loss at the end of it.  Even if home values have risen quickly over the past few years, so did Boeing stock... but it's harder to hold a house and potentially be an absentee landlord if a market has a downturn in a few years and you want to wait to sell.

                    I bought a house in residency near a university in a good school district for $165k, held it for 6 years (including renting it out for a year), and sold it for about $20k more.  My wife and I put in a bathroom ourselves (great experience but will never do it again), worked with insurer and contractors when we had over $18k in water damage, and constantly worked on the house to upgrade it.  After realtor fees we made a little, but certainly not enough to justify buying the house for profit.

                    I've heard 5 years is generally the break even point for owning a house after closing/realtor fees... true in my experience.  I don't think it's necessarily wrong to buy a house during residency, but I would emphasize reasons other than making money.  Learn basic remodeling and maintenance on a small house before a larger house in the future, less neighbor noise (depending on the neighborhood), etc.

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                    • #11
                      Buying a house with 4 years of training left means you'll likely be selling a house in 4 years when you move to greener pastures. Maybe you'll make a few grand, maybe you won't. At that price point you're debating buying, you're unlikely to have a big gain or loss...and after taxes and transaction costs on the front end and the back end, you'll likely come out in the hole relative to renting. And, if you can't sell the place after you pick up and move to your next job, you'll get to pay two mortgages for a while.

                      Buy if you want. You can afford it. Just realize you're choosing to spend more of your disposable income on the 'joys of homeownership', not making some sort of savvy financial move.

                      You're currently DINK, why don't you live somewhere with ready access to things you and your spouse enjoy doing and minimize commute time and let someone else deal with the hassles and expenses of maintaining a residence. You've got the rest of your life once you have a kid to worry about living in a good school district and being out in the 'burbs.

                       

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                      • #12
                        You sound like you really want to buy.  I agree with ZZZ that doing so will not be financially disastrous, esp at the price point you listed.  I'm assuming this is your first home purchase.  The first time you buy a house, you are only thinking of the upside--the ability to change the paint color whenever you want! No longer throwing money away on rent!  The American Dream!  You aren't thinking about what a headache selling it can potentially be at a time when you have multiple other life challenges (taking boards, starting first attending job and spouse finding new job in new area), or all the non-glamorous maintenance stuff that you have to take care of, or what to do when the neighbor from ************************ moves in next door, or how communities sometimes decide to completely change their school zoning.

                        The biggest benefit to renting is not access to trendy bars or risk avoidance.  It's hassle avoidance and flexibility.  Plain and simple.

                        The main benefit to buying a house now, at a low price point, is that you'll get some experience with the hassles of home ownership.  Before I bought my first house I looked at houses with rose colored glasses.  Now having owned a few I look at them with a critical eye of everything that can go wrong.  This may help you when you develop house fever at the attending price point, but in and of itself is not a good reason to buy--more of a side effect if you decide to go ahead and buy anyways.

                         

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                        • #13
                          I’ve posted about our experience buying in training elsewhere, so I won’t rehash it all again. In a nutshell we benefitted greatly by those historic appreciation rates, buying in a good school district, and having a 2nd income. Having a spouse (willing to help) does help. I know this because I am the spouse and I take care of it all It was a pain in the butt when I was still working though.

                          However, we’ve also put $30k into the house in 7 years and most of it was absolutely necessary. There are a lot of unseen costs with buying that will eat up that extra difference per month. We’re also in a state where insurance and property taxes have increased every year. We pay double what we did for home insurance 7 years ago and I shop it every year to keep the price low. So you may benefit, but a new A/C or furnace, paying the deductible on a new roof, etc might tip it the other direction pretty quickly.

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                          • #14




                             

                            I feel like I must be missing something here because no matter how generous I am with the rent side of the NYT calculator (crazy buying and selling costs, great market of 8.5% investment returns, 1.5% recurring maintenance costs) it comes out to be a wash. With more realistic but cautious numbers the buy side “wins” by $100-150/month over renting.

                             
                            Click to expand...


                             

                            In the grand scheme of things, would you rather have $100-$150/month extra and deal with the hassle of dealing with replacing the furnace / repairing the leak in the roof / fixing the burst pipes / dealing with showings & realtors, or would you rather have less stress and a little less money, but more quality time with your spouse?  It's the time that's the truly scarce commodity for most.  That's what would tip the balance for me.

                            That amount of "extra money" will seem fairly small once your spouse is an attending.

                            My own anecdote - spouse and I were both in residency, bought a place in a similar price range.  Had unexpected expenses during our 5 years of ownership of replacing air conditioning, replacing burst pipes in the ceiling and repairing (lovely popcorn) ceiling, and some semi-planned projects of painting, upgrading linoleum countertops, some landscaping.  Moved across country at end of training, not a buyer in sight, ended up selling house after finally getting one offer for $10k less than our purchase price, but happy to get it off our hands so we could get on with our lives.

                            Was it a terrible, terrible decision?  No.  Was it worth the stress and time suck when we were both stressed and busy?  No.

                            Good luck

                             

                             

                            Comment


                            • #15
                              OP- for me the never/ever would be if you’re coming out of school with median level debt and will make median dr salary. That’s pretty broad but a guideline I would use if advising a friend. Y’all are in quite a bit better shape (obviously).

                              If I were you I’d max 401k, rIRA, hsa, and pay off the loans over the next four years. Would leave you way ahead of the curve when income jumps.

                              That said, I think even if things go really wrong with homeownership (like need a roof in three years) it wouldn’t be the financial calamity it would be for many residents/fellows. Just realize it’s a luxury and the opportunity cost of a house can be huge.

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