[Editor's Note: Today guest post was submitted by a physician named Billy. He and his dermatologist wife bought and sold a home during residency and have a few takeaways for residents considering homeownership. Long time readers know my general recommendation for residents is to rent because more often than not, buying for just the length of a 3-5 year residency does not allow for enough appreciation to overcome the substantial transaction costs (among other reasons). The problem with that advice is that residents still sometimes come out ahead financially by buying. It's less than half the time, but it is still a significant percentage. So people see the anecdotes and forget the general rule. If you combine that with the strange burning desire new doctors (and especially their partners) have to buy a new home, I pretty much assume most residents are going to buy a home no matter what I say to them. Billy and I have no financial relationship.]
We broke an oft-cited WCI “rule” and bought a house right before my wife began residency. Here is why we did it, what we learned, and a word of caution to other medical students or residents who might be reading this.
We did not read much WCI material back in 2015 and 2016 as we approached Match Day, so I suppose we can play the ignorance card to some extent. Yet my wife and I always tended to be frugal. My parents were avid disciples of Dave Ramsey. She saved most of her money from summer jobs. We prioritized budgeting and retirement savings from early on in our marriage. We both graduated college and grad/med school without debt and we were heading to a low cost area. We resolved to buy an inexpensive house relative to our income with 20% down. PITI was 7-9% of our total monthly income. We would also maximize one 403b and two Roths, so buying did not set us back for our savings goals.
After we closed late this spring, I was reflecting on a few takeaways from buying and selling as a resident:
If You’re a Resident, Buying Most Likely isn’t for You
We as a culture often prize homeownership for its own sake. WCI has written extensively on this idea and makes several insightful points for med students to remember. For starters, student debt is a huge issue for many residents, and adding on a mortgage can quickly overwhelm someone. Home maintenance can eat up a resident’s limited, precious time. Additionally, houses in the “resident range” probably aren’t going to be a “forever home.” Many people move away after residency to a nicer area or otherwise outgrow that small condo or starter home.
As I noted above, I believe we were in a unique position with two earners, a low-cost area, and being debt free. Just because it worked for us in our unique circumstances does not mean this it is right for you! I’m sure WCI will agree with me for emphasizing this point first and foremost. In the vast majority of cases, the answer for housing during residency is to rent.
Beware of the Semi-Speculative Nature of Real Estate
Our neighborhood increased in value a lot while we lived there for four years. We bought at $160,000 and sold at $220,000. We made quite a few updates ourselves. But, more notably, older midcentury cottages would be torn down and half-million-dollar-plus custom luxury homes would go back up. Generally speaking, a house structure depreciates in value (repairs, upkeep, etc), while the land is what “appreciates.” Likewise, many assume appreciation is a given and fall into the trap of wild speculation. You’ve probably heard of the following arguments in one way or another:
This neighborhood is on the upswing, might as well get in now!
Why buy cheap, when the bank will loan you triple or quadruple that?
That’s even more money you’ll make down the road!
Note the highly emotional and speculative nature of these statements.
We truly got lucky in this regard. We simply bought where we liked. We were near a park, elementary school, and community pool. So, of course, we were pleasantly surprised that we had a good “return” on investment when we sold. Yet if we had bought in a neighborhood next to ours, we would not have seen such rapid appreciation. Real estate is a funny business. It is a mixture of consumption and investing. One obviously “consumes” a property while living in it. At the same time, real estate is an asset and can appreciate over time. Many areas generally grow in value, but that does not mean homeownership is a risk-free investment.
Maintaining and Updating a Property Will Cost You Money
I know this point sounds comically obvious, but it bears repeating again and again to prospective homeowners. Houses cost money to upkeep. Sure, we had homeowner’s insurance, but when we discovered our toilet was leaking, the repairs fell upon us to either do it ourselves or hire someone who could. As I mentioned before, we didn’t mind this kind of work. However, never forget that it will cost you in one way or another, whether money, time, or sanity! Even if you enjoy tinkering and watching HGTV, there are still many things you will likely need professional help with.
Here’s a list of a few random “emergency” expenses we had:
- $600 for a new water heater and install (our second week after moving in!)
- $750 in HVAC repair after the first cold snap of fall
- $2,250 for an electrician to fix and upgrade our breaker box
- $1,000 to repair subfloor damage in a bedroom
- $800 for materials (a DIY repair) to replace a leaky toilet, damaged subfloor, and new tile in a bathroom
And there were thousands more spent on paint, wood floors, sod, and other cosmetic items. Some homeowners might think we got off lucky with so few “emergencies!” My point in sharing this is to show that this can cause a lot of stress and financial hardship for a one-income resident with a lot in student loans. Upkeep expenses can easily deplete any resident’s emergency fund.
Professionals Can Still Make Mistakes
Whether agents, inspectors, or a handyman, professionals are only human. Our home inspector did not catch the leaky toilet or faulty water heater. When we sold, I also noticed the buyer’s inspector did not do a very thorough job on the report. “Normal wear and tear” and “appears serviceable” don’t always mean everything is good to go. Take inspections with a grain of salt, and plan for something to go wrong.
Additionally, it is imperative to do your due diligence for hiring a real estate agent. We were happy with ours, but that did not always protect us from erratic or unprofessional behavior from buyers and their agents. Our buyer’s agent did a poor job of notifying our side on appointment times for the inspection, appraisal, and survey. After closing, the agent also called us directly to complain about how the curtains and a decorative mantle were not included in the sale. Our agent, my wife, and I were absolutely shocked they did this!
Selling Will Cost You Money
Selling a home will most likely cost you several thousand dollars. I do not think many first-time homebuyers truly understand this concept. Realtor fees, though seemingly “small” in low single percentages, can amount to quite a lot. Buyers often try to negotiate with sellers to cover their own costs. And top it off with the fact that a resident isn’t building too much equity during those first few years of payments since a lot is going to interest.
Our selling process was probably more stressful than most. We accepted an offer on our house on the day our state had its first COVID-19 case. I think the power dynamic during negotiations shifted as our state shut down. We had most of it at first, being in a hot neighborhood. Then the market cooled off and offers and showings become rarer. So, when it came to repairs, we were put in a position to make concessions.
One unexpected example for us was that our appraisal came back a couple thousand lower than contract price. We learned that this was a unique issue that rapidly appreciating neighborhoods sometimes experience, where previous comps have not “caught up” to the current state of the market. So in the end, we had to lower the price. I suppose we could have sought another buyer with additional cash to bring at closing, but as I noted before, COVID-19 complicated things, and we wanted the sale to go through.
I share all of this to emphasize that transaction costs can quickly eat away at your “profit” during selling, especially if you are a resident dealing with a short 3-6 year turnaround. If your property only appreciates 1% each year, then realtor fees, repairs, or appraisal issues can make those proceeds shrink. We still got out lucky, but it was a stressful process.
Home buying worked out well for us overall. If we were four years younger, however, we most likely would not have bought, simply because of current housing prices and our desire to put at least 20% down (we would have had to look outside our neighborhood). We felt it appropriate to share our own experience, because many times someone might be tempted to think their situation is unique (i.e. “I know I’ll stay in this city!”, “My family is nearby”, or “I might as well take advantage of low interest rates!”). With real estate, however, it is so important to think rationally and develop some kind of plan. Don’t buy simply because you think it will be the next step in life. Proceed with extreme caution, especially if you’re a med student beginning residency!
What do you think? Do you think the rule of thumb should still be “Don't buy a house in residency”? Did you buy or rent in residency? Did you see enough appreciation to overcome transaction costs? Comment below!