Q. We are so excited to find your site. You have no idea! I am an attorney and my husband is about to finish fellowship in a surgical subspecialty with an offer of employment for $400k his first year. I'm not currently working because I'm home with a new baby. We have NO savings. We have my student loans ($150k), my husband has no school loans, we have $30k in credit card debt, and $20K in loans from friends and family, and a $30k personal loan.
Anyway, our question is whether we should buy a house next year when my husband starts making “real” money. We are in debt but fear “wasting” any more money in rent. Why is it better to pay rent than to put money into building equity? If we do rent, for how long should we do it? I have read your post about physician loans for homes and the comments but I am still conflicted and this is why. Can you clarify?
You're going to tell us to rent, I know it, but can you just please tell me why? It seems like if the cost of rent/mortgage are roughly the same, shouldn't we buy?
How to Transition to Attendinghood Properly
A. She was so nice, especially for an attorney! That always makes it hard to be as frank as I often need to be replying to emails like these. This is a great demonstration of the burning desire to buy a house that graduating medical students and graduating residents have. It's a very interesting phenomenon that I find fascinating. At any rate, here is my reply to her:
One piece of bad news and one piece of very good news.
First the bad, you're not in very good shape — $20K borrowed from friends, $30K borrowed from credit cards, $30K personal loan, and $150K in student loans from someone who isn't even working. Not good. Given your debt and lack of any financial reserves, there's a reasonable possibility nobody is going to loan you any more money, even via a doctor loan.
Second, the good. The two of you have a huge hole, but very soon you will have a very big shovel. If you don't increase your lifestyle, you can rapidly pay off all this debt and then move on with the rest of your life being financially successful.
How you manage your finances in the next 18-24 months is going to dictate how the rest of your life goes. Don't blow it. You two need to get together, educate yourselves, and write down a plan. Then follow it.
What About Buying that House?
The house is almost an after-thought. It's a totally minor issue compared to the above. But let's address it since that was the question you sent me.
It is possible that if the housing market goes up sharply and/or interest rates go up sharply that you will be better off buying a house earlier using a 0-10% down doctor loan rather than waiting a few months to clean up your mess first. However, I wouldn't personally do that, so I can't recommend it to you.
Here's what I would do. I assume you're going back to work again. Personally, I think if you took out $150K for your degree that you ought to work until that's gone. Being a stay-at-home mom is awesome (my wife does it) but she wouldn't have gotten to do it if there were student loans still hanging around for her two degrees.
I also don't think that someone who owes credit card debt and personal loans has the financial discipline and resources necessary to own a house. The practice you get cleaning up that mess will get you ready behaviorally to be a homeowner. Which is fine, since you don't really want to buy until you know your husband is in a stable job. That will be at least 3-6 months after beginning his new job. So that gives you 12 months to clean up your mess. It shouldn't be hard to do that on $400K + your salary.
Is Renting “Throwing Away Money”?
Renting isn't “throwing money away” any more than paying interest, property taxes, maintenance costs, transaction costs, cleaning costs, landscaping costs, repairs, utilities, etc are throwing money away. It costs money to live somewhere. Sometimes it's better to pay those costs via rent. Sometimes it's better to pay those costs via owning, which involves all those other costs mentioned above.
For you, in the next 12 months of your life, it's better to pay them as rent. After that, if the job is working out great for your husband (and you if you're still working at that point), then it will be better to own. Only a small amount of the total expense of owning a home goes toward equity. Sure, the property might also appreciate, but it might also depreciate. Trust me when I say it works both ways.
Setting Appropriate Goals
If I were in your position, my goal would be to owe nothing more than $100K of your student loans by the end of 2015, then buy a house using a doctor loan. By the end of 2016, I'd try to be totally debt-free except that mortgage. By the end of 2017, I'd try to refinance into a conventional mortgage (using a 20% down payment), assuming lower rates are still available compared to your doctor loan. If they're not, then you're stuck with the doctor loan for the long term.
Hope that helps. I may use your post (keeping everything very anonymous of course) as a future Q&A post as it is the perfect example of how docs either get into trouble or reach financial success by managing their transition to attendinghood properly.
What do you think readers? Did I get it right? What is the secret to managing that transition to attendinghood properly? What attitude toward debt should new attendings have? Is it too early for this couple to loosen the purse strings? Comment below!
Very timely post as this situation closely mirrors my own.
Wife has been working for nearly a decade now pulling in what an attorney would likely pull in
I’m in my 2nd year as an attending pulling in close to 400k
0 savings (my wife has some but I’ve chosen to exclude that sum for now) , 0 loans, and we made the decision to rent because we are working in an unfamiliar state
After year 1, we have roughly 150k in savings and 100k available for a down payment. Wife is itching for a new home and tired of renting. I’m still pushing for another year of rent because contract renegotiations (no chance of partnership here, I’m strictly an employee with contract renegotiations every two years) don’t arrive for another year. I’m afraid I’ll be bullied in the negotiations if they know I’ve purchased a home
We’ve compromised by targeting a new home under 500k which should get a nice home, get a mortgage payment less than what we would be paying for rent (20% down), and hopefully be flexible enough to sell on short notice without incurring too much of loss or to use as a rental property in case contract negotiations don’t go as smoothly as planned
Happy Wife, Happy Life. Congratulations on a very well done first year out of the gates. You’re going to be having contract negotiations every couple of years but you can certainly afford a $500K house. I’d start shopping if I were you.
Buying a house straight out of training is a risky proposition. What concerns me most about this scenario is the 30K in credit card debt. They are probably paying 15% or more to service that debt. Also, it takes a LOT of cash on hand to move into a house. Think about it: appliances, lawn mower, utility deposits, etc. And once you buy a house, you have lost some leverage at work if things aren’t turning out as they promised. I agree that this couple should rent until 1) credit card debt is paid off and 2) enough money saved for emergency fund and start up costs for buying a home. I disagree about paying down the student debt. Clearly, owning a house is what this couple values most and a token reduction in student loan debt isn’t going to alter the big picture for them.
You disagree about paying down student loans? A “token reduction” of 33% of the total in the first 6 months of work is doing very good.
If they value home ownership, they will own up to getting their financial house in order.
Most doctors’ first jobs don’t work out. Now you’re potentially 6 figures in debt, unemployed, have to move due to a restrictive covenant, and you have a house you can’t sell.
You’re not “throwing away” money by renting. You’re buying flexibility (in addition to a place to live), which is extremely valuable during the first few years out.
^ This. The debt advice is great, but I say wait 2~3 years when the partnership is secure before setting down roots. Mobility is key to chasing the best opportunities in the early phases of a career. This is doubly true this power couple.
Its hard for me to believe this was even a real question. I can understand the desire to own something but come on this was obviously a case where buying something you can’t afford is a bad idea.
It would be fun to make my email box public some time. 🙂 You might be surprised the questions I get.
That would be great. MMM did a post recently on what google searches point to his site, was enlightening, and funny.
GK,
I think you hit the nail on the head.
“You’re buying flexibility.”
I will use that comment in the future
Agree on the timeliness of the post as the residency year comes to an end. Completely agree with the next 24 months determining how the rest of your financial life will likely go. I am also in a similar situation as many others with 250K in student loans and barely a nickel to my name other than about 10K in emergency savings. First year salary is 275K with around 450K the second year. I am finding it difficult to figure out how to save much money by renting my first year since with a robust family size, rent will be 1800/month and purchasing a decent size home of that size is not much different. If I try to put a big dent in my loans (5K/month) for the first year, I will not be able to save enough for a down payment for at least 3 years. However, like everyone else, I am tired of renting! It is tough to balance the personal desire settle down and own a home with continuing a residents lifestyle when you do not have to. But I guess I will have to in order to follow the Dave Ramsey idea of “live today like no one else, so that later you can live like no one else” and your picture of ice fishing in Alaska inspires me to want to rent a shanty for 5 years so that I can do the same in the future.
When the job is stable, buying with a doctor mortgage so you can put the money toward student loans may be a wise choice. But the key is to make sure the job is stable before buying.
I second what was said about flexibility and leverage. Of it doesn’t work out, you move! If it’s working out, you have the fact you could leave in your pocket. You could even shop another job for that leverage with the one you like.
I moved back to the area where I grew up, but then wanted to move to another area that didn’t even exist when I was a kid. No problem because I was renting! Flexibility is awesome!
In addition to the flexibility mentioned by others there is a great blur in this article that discusses just how much more expensive a house is than rent.
http://awealthofcommonsense.com/pros-cons-of-a-30-year-fixed-rate-mortgage/
Good post. Before spending money on anything that others can see (house, car, boat, even a big TV), I believe you have to pay back family/friends or risk creating a big strain in the relationship. Until you pay your family/friends back, you are spending their money, not yours. Think of it this way, if you were debt free, but had no savings, would you borrow money from a friend to buy a car/house/vacation or even smaller expenses like an iPad or nice dinner?
I also agree credit card debt needs to be zero because of all of the unforeseen expenses that often come with owning a home. The best point made above was, “I also don’t think that someone who owes credit card debt and personal loans has the financial discipline and resources necessary to own a house.”
If the goal is to have a lot of material objects quickly, waiting a year or two will make those dreams become a reality quicker (based on the idea that you accumulate wealth quicker when you aren’t paying interest to others) and with much less stress due to the worry over debt.
Nailed it – though you were a bit ‘too kind’! Credit card debt? Unbelievable! Pay that off ASAP – no investment I know of is going to match that guaranteed ‘return’. Pay off friends ASAP, as well. And before I indulged in a luxury lifestyle, I’d be out of debt entirely – but I’m pretty conservative. Definitely be funding that retirement at the same time – in spite of your debt, you’re going to be in a high bracket, and will need the deductions.
It’s so easy to fall into the ‘I’ve worked so hard, now it’s time to reward myself’ mindset. Don’t do it!
For some reason, the comments are appearing in font size 8. Is that an intentional change (too small)?
Love the picture of being home in Club 49.
To your advice, it was spot on. Our two biggest financial mistakes were buying a home right out of medical school and then again right after residency. It is much better to live without any strings attached for a little while. Thank you for going right at that “wasting money” myth that we hear from everyone.
Coding issue. Fixed now.
I agree with everything except knowing that they will be stable “3-6 months” into his new job….He is not stable until he has gone through the buy in process. Until he is a partner, the other partners can totally screw him over which leaves quite a big question mark…Being an ER doc is different than other buy ins so you may lack this perspective, but being 5 years out and having just gone through the buy in process I would highly recommend waiting to buy a house until the buy in to the practice has been formalized/started.
Also, like everyone above has posted, it kills me that such highly educated people can be so stupid with money.
Thanks!
5 years is a long time to rent. It shouldn’t take that long to figure out if you like the job and to get some vibes about whether the job likes you or not. You can always be hosed. Even partners can run other partners out of a group. I wouldn’t (and didn’t) wait 5 years and bought long before my buy in was complete.
Again, you don’t have the experience of moving after getting your first job out of residency. If we could do it over, we would have waited 5 years to buy…there are so many possibilities for job promotion with that amount of job training.
I was not suggesting they wait 5 years….just would recommend waiting until the buy-in process has started which based on what you wrote would be about 2 years.
As a financial advisor, I’ll just say that nothing compromises the long-term finances of physicians like buying the wrong first house.
Jim’s post is excellent and his advice sound, as usual, so I’ll just offer a few supporting thoughts. First, a house is an expense, not an investment. Get clear on that, and your decisions will be better. Few folks over-rent, but most over-buy. Put it another way, you would not pay $5,000 per month in rent, thinking it would make you rich over time, but many (most?) physicians over-buy, and/or over-improve, based on the illusion that owning a home is the basis of building long-term wealth.
Nationwide, houses appreciate over time at the inflation rate (plus or minus) plus median income growth (plus or minus) plus household formation (plus or minus). Any higher appreciation is situational/speculative. Even with rates at 4% for a 20-year mortgage, appreciation may be lower than your cost of borrowing.
Further, the home you buy will drive all kinds of other expenses, to a degree you can’t appreciate until you’ve been in it for years. Landscaping, utilities, upkeep, what car you drive (what do the neighbors drive?), etc. etc.
Especially given that real estate prices have fully recovered from the crash, there is absolutely no reason to rush toward buying, every reason to wait for clarity about career path, etc. When you finally do buy, after all high-rate debts are paid, make sure you own less house (but in a good school district) than any of your physician peers. Then you’ll be on a path toward long-term success.
Agree 100%. Rich Dad Poor Dad was a poor book in general, but the one take-away message I got from that book is that a house is a liability, not an asset, as Jim Hemphill alluded to. Of course that doesn’t mean don’t ever buy a house, but it’s a very good mentality to have and agree it will make your decisions clearer.
Don’t forget you can always use a buy vs. rent calculator or just do the math yourself if you’re not sure.
WCI, I think you went too easy on them. 30K of credit card debt? Really? And this is from an attorney and a doctor–two of the most highly educated professionals out there? Absolutely unbelievable and shocking. If you ever run out of ideas to post on here, please do make your inbox public, you could probably give Comedy Central a run for their money.
I’m in my first year as an attending and am saving up for a down payment. All extra money beyond expenses and minimal (non-consumer except for super low rate car notes on two used cars) debt service each month goes towards the down payment fund. I’ve found this to be a good mental exercise to keep spending in check, although I’ll have to exercise mental restraint once the bolus of October bonuses hit my taxable account.
I agree with this advice in general, and it makes sense financially (especially for this couple). I do think it is always worth noting how many variations there are in people’s situations, though. The house we bought in residency was very reasonable (and much less than the bank was willing to lend) and we stayed in it for seven years, making it sound like a decent choice. We also had 2 kids, though, and lower-priced areas of town, and areas with a lot of rental options, often don’t have great public schools. We ended up paying a ton of money for private school after trying out the local option. If we were renting we would have had flexibility to move, I suppose, but the thought of that with two little kids is something dreadful. My advice is to find the good public school district and figure out how to live there.
Based off his income alone, my plan would be find a nice apartment for one year. Spend minimally while living there (except maybe a much needed vacation) and have the wife return to work if able for that same year. They should EASILY be out of most if not all of their debt in 12 months. They can use that time to educate themselves and come up with a decent savings plan.
Life is so much easier without the debt. If all my debt except my home was eliminated tomorrow it would be like me getting a $1500 a month raise….
Great post! I agree with it all except one little quibble:
” Personally, I think if you took out $150K for your degree that you ought to work until that’s gone. Being a stay-at-home mom is awesome (my wife does it) but she wouldn’t have gotten to do it if there were student loans still hanging around for her two degrees.”
I understand that money is fungible, so why not debt as well? Couldn’t this $150k debt be something that the poster could have paid off while her husband was in medical school, but instead she decided to support him so he didn’t have to take out loans? Why does it make a difference whose debt it is?
I suppose it doesn’t and of course money is fungible. Going in to debt for an education, however, is an investment. It seems reasonable to at least use that investment to at least break even financially on the education.
I agree with not buying a house now. I think the key reasons for holding off are:
(1) You may create ill will and resentment on the part of your friend(s) when they see you’ve spent money you could have repaid to them on a house.
(2) You have a lot of credit card and personal loan debt and presumably are paying a lot of interest. Don’t you feel like you’re wasting money by continuing to pay interest?
(2) As others have mentioned, buying the house doesn’t involve just buying the house. It will trigger more purchases of furniture, home decor, appliances, landscaping, etc. Can you really control your spending when you see nice things you want for the home?
(3) You really don’t know if your husband will like his new job/colleagues or if his job is truly secure. You need to give him and his colleagues time to figure all that out.
(4) You have zero emergency fund- that’s really scary to me. Build one up ASAP!
RENT. Seriously.
From another doc who is a year out of residency — pay down your loans aggressively. Rent somewhere reasonable, comfortable, and not exorbitant. Enjoy spending time together. Tell your husband to pass the boards.
Sometimes that feeling of unlanded instability sits hard. Google the “should i own or rent” question. Buying a house is not a guaranteed payoff. Play with the numbers and convince yourself that you really have to clear the debt, keep your finances as low stress as possible, and then you can save aggressively for the house.
I am finishing my residency and my annual salary will be around 250K Base. I have 150K in cash (from previous job and saving) in my hand, no loan (thank my parents) and moving to a rapidly rising housing market in the Pacific northwest.
My wife who was with me for more than 5 years and living in rent. We have 2 children so my wife is dying to buy a house. But the caveat is that I am trying to get into fellowship after 4 years when my wife finishes her school. So there is a good chance that I might be leaving the area after 4-5 years.
Our goal budget for the house would be 400K. So I am trying to get a loan of 250-300K. A lot of people tell me not to buy before living in the area for about a year.
But I think in light of current rapid rising housing market, buying a house would be economically logical. What do you think?
You have to run the numbers, but 4 years will be close for the break even point I think. You don’t want to jump in just because housing is rising quickly today, because tomorrow it could drop twice as fast. A lot can change in 4 years, but run the average numbers and see where they end up. Once you have numbers you can look at it objectively and throw the emotion into the equation at that point to throw you over to one side or the other if the numbers are close.
I personally like being able to have the flexibility, but you may be comfortable with that. Did you buy a house in med school? That was also a 4 year timeline.
Thanks for the reply. I will take it into account.
I didn’t have the 250K salary in med school to be honest 🙂
You have everything in your favor at the moment. Big cash savings and no debt. Knowing that you will almost assuredly be moving soon, you could lose substantially when it is time to go. You won’t lose renting a nice place for a few years. I would rent as long as my wife and kids were happy with the place. Why does your wife want to buy just because you have two children? That part doesn’t make sense.
My wife hates paying rent. She thinks it is a waste. To rent a house in the area, comparing to similar house value that we would be buying, I would be paying $2000 a month. With mortgage I would be paying around $1500 a month. I am well aware there are taxes and other issues attached to owning a home. Plus at the end, I would have at least some asset just by living at a place. And I am also considering just keeping the house and renting it out even at a lower rate say $1500 a month so that the mortgage can pay itself.
I agree if my purpose was to sell in 5 years I would probably rent.
With that new info, I would definitely rent. Long range landlord is rough. With rent and the mortgage being so similar it’s not worth the hassle. Then renting it for $1500 a month, when your mortgage is that amount means that you are going to be at least $500 in the hole every month once you include all the other repairs and expenses; even more if you have a property manager.
The emotions around buying a house are strong, so good luck, but go in knowing that this will not be a financial investment, but possibly a good marriage/emotional one.
“Rapidly rising real estate market” is a current trend, not an inevitable fact of nature. (How soon we all forget 2007!) If your time horizon is only four years, your downside from not buying (being permanently priced out of the market) is minimal, so by buying you are really just speculating on short-term appreciation. It is as easy to project a negative consequence to that kind of short-term home ownership as it is to project a positive. Easier, I think.
Try this scenario: Buy home for $500k, financing $400k and putting down $100k. Finance with a thirty-year conventional. In four years, market is down 15%, so sell for $425k, minus closing cost of $25k, so gross proceeds of $400k minus about $390k in remaining debt. Presto! You’ve turned $100k into $10k in four years.
Anything that can go up at a rate above inflation can go down at a similar rate. Anything.
JC, If you need a bigger space, you could rent a house. Would that solve one of the problems?
I don’t think you’ll make money in 4-5 years if you buy and sell that quickly. Consider the realtor costs (buying and selling) and the costs to furnish a place that might be different than your next house. Owning a house isn’t cheap, so the upkeep is another factor you won’t face compared to renting.
If you just want to own because you want to own, don’t let the financial part curb your desire too much. If you go that path, make sure the financial part is not your motivation since you don’t know if this is the peak or if 4-5 years from now will be the next peak.
If you really want to make the financial comparison, weigh in what a conservative return would add to your savings over the next few years. You shouldn’t estimate regular market returns because you’ll need the cash before too long and will have to invest somewhat conservatively.
I have 313K in loans on 7% interest and my husband has about 70K in loans.
I have two more years of fellowship. we would like to buy a house but are renting. Should we pay off our loans before buying a house?
It wouldn’t be the worst idea in the world, but neither would buying a house using a doctor’s loan so you could throw all available cash at those student loans. Probably ought to refinance them too.
This is a very timely question. I am graduating from ED residency and have a job at a hospital associated with the program I attended. My fiance and I love it here and are planning on staying in our current town forever. I am almost positive, based on my training that I will love the job and even if it doesn’t work out there are several other jobs in town I turned down that gave me an open offer. Combined we are ~315K in debt most with a 7% interest rate (mostly mine, **** private school). She is a school teacher (~30k/yr) and I will be making 300K/yr. Of course with getting married she is itching to buy. The physician loan we have here is fixed 3.9% interest over a 30yr loan and 3.2% 15yr. We currently rent for $950/mo (bless the south). So my question is with the interest rate of student loans being almost 2x of what the mortgage rate is and knowing we are going to stay in the current town is there really any benefit to waiting to buy? The part of town we want to live houses run ~$400K.
I think you’re making a mistake bringing student loan interest rates into this. First refinance your student loans unless you’re going to get forgiveness (sounds like you are.) But that’s totally separate from the buy vs rent question.
If I could rent a $400K house for $950 a month I would do it. But I bet that’s not your situation. Your question is should I live in a little crappy place or should I live in a big fancy $400K house? My answer is that you should grow into that $330K income as slowly as you can if you value financial independence.
Now a month and a paycheck into being an attending. Have convinced the wife to wait for a while on buying a house while we build up an bigger emergency fund, down payment, pay down loans, etc. Now we are stuck in the question of how much house to buy. We plan on having children in the next few years and are stuck between paying less for a house in a not so good school district where we could live 8-10 years or pay more for a house in a good school district we would live longer. Probably looking at 300k vs 450k. The “not good school district” is in a desirable location near downtown so I don’t foresee the housing market declining significantly.
So you’re not yet a parent? I have yet to meet someone who wants their child to go to a poor school district. Sure, there are some outliers (read: WCI’s oldest daughter) where it happens but I would give you big caution to even suggesting that idea.
But you get to pick your priorities. You seem to be planning things pretty far out. Have fun discussing what matter most with who matters most.
I didn’t mean to imply that we would send our kids to school in that district. We would plan on living there 8-10 years until kids would be school age and then move to a better district at that time. Its a little ridiculous to even be thinking about seeing as we aren’t having kids for a few years (hopefully.. knock on wood).
Not sure I get what you’re referring to. Perhaps you’re referring to her kindergarten year before we moved to the big doctor house in the nice school district?
Yes, you’ve talked about the kindergarten year when she was a minority in the dangerous living zone. That was the reference. Would you do it again?
Kindergarten was no big deal. Dangerous living zone is. So for that reason, hard to say. That said, there have been more murders (2) in my fancy-schmancy neighborhood with good schools than there were in the “dangerous living zone.” Probably a fluke though.
With that small of a difference, I might go big. It’s not like you’re weighing $200K and $1M.