[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
Homeownership will cost you in one way or another, whether your own time or hiring someone else!
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.
Conclusion
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!
Great post!
The housing market can be compared to the stock market in that there can be a lot of short term volatility. Over the long run, >10 years, the market generally appreciates. Except in the most extreme circumstances, any trainee will be in residency/fellowship less than this. I did a full plastics residency and microsurgery fellowship at the same hospital and this was a mere 7 years. Relying on market appreciation over this short time is pure speculation and not a good investing strategy.
One alternative however is house hacking as a medical student or resident. Doing this, you buy a multi family property and live in one unit. You rent out the other unit and that rent covers your expenses. You can also do this in a single family home by renting our bedrooms. Then, when you move, you keep the property as a pure investment property and rent all units, keeping the net income after expenses as cash flow.
The key is that you have to buy such a property after careful analysis to make sure that rent will cover your mortgage/taxes/insurance etc or else it does not make sense. You have to buy with your head and based purely on numbers. You need to do your research.
In the end, for the grand majority of residents I still think renting makes sense.
My general real estate investing advice for physicians is here: https://prudentplasticsurgeon.com/a-physicians-guide-to-real-estate-investing/
The Prudent Plastic Surgeon
Investment properties have the same need to appreciate as an owner occupied home. Just putting a renter in does not automatically make something a good deal. If you plan to sell in just three or four years, you still need the property to appreciate enough to overcome transaction costs.
Been there, done that. Wouldn’t recommend it. Even if it seems the numbers will work out, those are just assumptions. And there’s no way to tell whether there may be a pandemic or a market crash right about when you need to sell, sending the numbers for a toss. I finished training in 2009, not the best time to sell. That turned us into accidental landlords- which, also, WCI has written about- for years, before we could sell.
Best,
PFB
TL;DR
1) Find wealthy parents to pay for college and grad /med school for both partners so you can max out retirement accounts and save 20% downpayment during med school.
2) Hire incompetent home inspector
3)Profit
One must have earned income equal to retirement account contributions. While money is fungible, gift money cannot go into retirement accounts.
My wife and I broke all the rules and it worked out—fortunately. We bought a condo in a highrise in ‘10 with 0% down (VA loan) at start of 5 year residency in DC in an area that had a lot of room to improve (murder on our block a month before we moved in and boarded up businesses). We had spent a few months learning about the area and it’s future (whole foods had plans to put in a grocery store nearby and that’s a good sign for value). At that time we bought at the bottom of the market and dc did great those years. We made a capital improvement to the bathroom that was 10K and bought a parking space for 15K. Sold for 30% above our purchase price.
First job after residency we pretty much did the same thing in a city that’s constantly at the top of ‘where to move lists in the country.’ Better neighborhood, single family house, 5 years, 30K of capital improvements and just sold for 40% above purchase price.
We moved and bought in an area that will never achieve that type of return now eventhough it’s lovely, 30 minutes from another major city and geographic arbitrage. Hopefully we’ll break even after taxes, costs, etc in 5 or so years. But because this area already had that big upswing 5-10 years ago and we purposely chose to buy in a place that already experienced that improvement based on our stage of life. It’s unrealistic to hope for a big return.
In each instance when we were successful we spent time learning the market, bought in areas of lower desire than our friends, made capital improvements to the home, moved, repainted, Cleaned/regrouted bathrooms & kitchens, etc, staged the home, and all of that really helped our chances of success. We also never would’ve tried this on a 3 year turn around in anything less than a major city that is getting great press. It was a gamble, we made calculated choices and we still had to get A little lucky. Buying AFTER the real estate crash really really helped our chances initially.
Bought in 2010. Stayed five years. Not surprised you came out ahead.
I bought a place in 2006. I did all of the same things you did (spent time learning the market, bought in areas of lower desire than our friends, made capital improvements to the home, moved, repainted, Cleaned/regrouted bathrooms & kitchens, etc, staged the home). Still lost money. After 9 years.
Don’t underestimate the amount of luck involved in the process.
You don’t want to be wasting your free time doing stuff around the house when you’re a resident. Even if I was guaranteed a good return, I still would have rented during residency. Not worth the headache, and whatever profit you potentially make with the house will be dwarfed by the money you bring in once you’re out of training.
Amen to that. The good news is your losses are also usually dwarfed by your future income so it usually works out okay even when people make the wrong decision as a resident.
Totally agree. Unless you have a spouse who stays at home or has a “normal” job. I just don’t see how a resident takes a day off work to be home to let the plumber in.
Buying a home right after medical school was one of my infamous “I made every mistake in the book” type moments.
Saddled with medical school debt I used the doctor loan to get me the money needed. I was under the impression at the time that buying a home would be financially prudent because renting is just giving money away.
I also figured I would be there for 5 years as a general surgery resident. That did not go as planned as I decided surgery was not for me after year 2 and went into radiology in a different state. I was lucky I was able to sell the home and even made a profit or around $12k. The mistake was then jumping and buying a home in my new residency location under the same premise as the first (I thought I made money on first so it reinforced the decision to do it again).
The second home was a financial drain. I did stay in it for 6 years (2nd year attending) which helped but when I moved to my current forever home I couldn’t sell it for a long time and had to carry 2 mortgages. Also had to pay higher insurance since it was not occupied. Finally sold it for a loss (probably 20k) but was glad to get that albatross off my back.
My 3rd home could have been a disaster as well as I bought it even before I had a job (bought it over a weekend trip when seeing a listing on ebay of all things). The selling point was 2 natural waterfalls steps from the home (largest about 50 ft). After I bought it did I find a practice to join. Luckily it was a perfect marriage (unlike my real one. Lol)
It turns out that property taxes, realtor fees, and mortgage interest are “just giving money away too” eh? Funny how that works.
The difference between rent and mortgage payments can be substantial in some markets – particularly those that are LCOL or less desirable.
I bought a house in fellowship with a doctor’s loan (0% down and 102% of house value) and my monthly payment (including escrow for taxes/insurance) is $450. Renting a similar property would have been well over $1000.
When I moved in with my future wife, we bought a second house (again with a doctor’s loan) and I’m now renting out the first (it’s bringing in $600+/month cashflow after paying mortgage, taxes and insurance).
The first house isn’t going to appreciate very much because of it’s location, but the rental income is phenomenal – and since it was purchased with 0% down, it’s essentially an infinite return on investment.
I’d agree buying a house is risky if you’re expecting appreciation to make it a good investment – but if the rent vs. mortgage difference is substantial, it can be worth it. The NYTimes has a good calculator for exactly this decision.
That’s a pretty unique situation to put $0 down and have a cash flowing property. Nice find.
thank you for sharing your experience. I would extend the “don’t buy a home” advice to your first 1-2 years of attending-hood. I believe WCI feels the same way.
The first year or two of attending life is like another “residency” of sorts. You are still learning the job. The clinical work you’ve seen before, but the specifics of where you work are what you need to evaluate. Do you like your colleagues, staff, and the organization/institution? Do you like the location? What if you buy in an area that is less than ideal?
I bought a home almost as fast as the signature of my first contract was dried, The house suited us ok. It was further away from work than I wanted to be as I had to take home-call. We stayed at the home for 7 years before moving for another opportunity. We sold the home for the same price as we paid. So we lost money!
We are currently renting in this new job. Funny thing about renting your primary residence: I haven’t experienced any difficulty increasing my net worth. It seems that you’re net worth tends to climbs so long as you are investing reasonably, whether you own the home you live in or not.
Thanks,
Psy-FI MD
One of the best parts of renting for a year or two as an attending is that you are in such a dramatically better financial position you make different decisions about housing. You often end up with a nicer place you love more long term.
Rented only during residency. In a time when lots of co-residents bought due to a favorable market, and all of them made money on it (dont know one that didnt, you really couldnt lose buying at that time), I have no regrets on renting. I would do it again.
Guy that made the most in my class (as a percent) got a 250,000 house and sold it for 100,000 more as the market went up and he picked a good neighborhood to buy in. He, like the others, also spent 5 years doing yardwork, house repairs, dealing with leaks, repair-men scheduling (with no spouse to let said person in and talk to them) painting…sorry but especially when I was on an ICU rotation, there is nothing better than sending a note or calling the main office and just going “this is broken, please fix” and having it done and taken care of by the time I got home. The amount of money you can potentially get from it is just not worth the headaches IMO.
Also many forget that you have to subtract property taxes, mortgage insurance, etc from your “profit”.
We waited to purchase a newly constructed town home until the end of my first year as an attending using a physician loan, 0% down. Three months later, a hurricane hit our city, exposing tremendous builder’s defects (our roof was leaking so badly we used plastic bins to catch the rain and throw off the balcony). The builder refused to make proper repairs, and insurance company paid out less than 5% of damages. Three years and $30,000+ in repairs later, we are still having problems with the home, but can’t afford to sell at a loss. Everyday I wish we’d just kept renting. The amount of money we would’ve spent renting pales in comparison to what we’ve spent on repairs, insurance, and property taxes.
I’m sorry to hear of your misfortune. I wish your story were not so common.