[Editor's Note: The following post is from one of my recent columns for ACEPNow and teaches basic principles of investing through exploring the question of purchasing a home while still in residency.]
The questions of whether to buy a house during residency and whether to pay off a mortgage or student loans first have both a short and a long answer. The short answer is, “no and neither.” The long answer is a great discussion of some principles of personal finance and investing.
Inexperienced and first-time homeowners often make two mistakes that lead them to buy a home inappropriately. It isn’t entirely their fault. There are entire industries—home builders, real estate agents, lenders, and title agents, to name a few—that are highly incentivized to encourage physicians and others to buy homes early and often, regardless of the financial consequences.
3 Principles of Home Ownership
1) Don’t Get Sucked in by Homeownership Myths
The first mistake is the assumption that if the monthly mortgage payment is less than rent, then it is a good idea to buy a home. The second mistake is the assumption that if you sell a home for more than you paid for it (ie, that you made money), then you made a good financial decision in buying it. Unfortunately, neither of these is true. However, myths like these, combined with a seemingly odd but nearly universal burning desire to acquire a home by residents (and perhaps their significant others), have led many doctors to lose a lot of time, effort, and money due to their decision to purchase their residence during residency.
2) There is a Right Time For Homeownership
Physicians don’t always lose money buying a residency home. I figure that during a three-year residency, they end up coming out ahead about one-third of the time. That likely climbs to 50 percent of the time with a five-year residency. I am a big fan of long-term homeownership for societal, social, and financial reasons. However, the general rule should be to buy a home only when both your social and professional situations are stable. Since residency is, by its very nature, an unstable professional situation (and often an unstable social situation), most residents would be well-served by renting a home throughout their entire residency. They are likely to come out ahead financially, and even if they don’t, they are unlikely to come out very far behind.
3) Home Ownership for the Long-Term
They say time heals all wounds, and this is also the case with homeownership. The longer you own a home, the more years the substantial round-trip transaction costs (typically about 15 percent of the purchase price) can be spread over. If you need a home to appreciate 15 percent to cover your transaction costs (real estate agent fees, title insurance, loan costs, upgrades, mortgage payments after vacating, etc.) but a home only appreciates at 3 percent per year, it is easy to see why it typically requires about five years for homeownership to have been a good financial decision. There is a sense that you throw away money on rent but build equity by paying a mortgage. Nobody ever stops to think that you also throw money away on real estate agent fees, title insurance, property taxes, mortgage interest, lawn maintenance, and a new roof.
3 Things to Consider If You Do Buy a Home During Residency
1) Use disposable income to contribute to tax-advantaged retirement funds
If you have decided that you are one of the few who should disregard the above advice and are now wrestling with the question of whether to pay down the mortgage or pay off student loans, bear in mind that the right decision of what to do with disposable income may very well be neither. The first financial priority for disposable income for a resident is often obtaining the match in the hospital 401(k) or 403(b). In addition, investing in a Roth IRA or your employer’s Roth 401(k) or Roth 403(b) is also an excellent use of disposable income. Paying off consumer debt like credit cards and car loans and building up an emergency fund of three months of expenses are also excellent uses of disposable income. At any rate, you are certainly not limited to paying down debt.
2) Pay down student loan debt
Of course, don’t pay down debt that you expect someone else to pay off for you. If you anticipate being directly employed by a 501(c)3 (nonprofit) employer after residency, then enroll in and start making payments in an approved income-driven repayment program, like REPAYE, to maximize the amount you may be able to have forgiven, tax-free, through the Public Service Loan Forgiveness program. Private employers may also be willing to pay off some or all of your debt. If you anticipate paying off your loans yourself, then making extra payments is certainly a good use of disposable income. The decision of whether to invest or pay down debt, barring a few extreme situations, has no correct answer—only a correct answer for you. Given the limited disposable income and all the great uses of it for the typical resident, it seems unlikely the best use would be to pay down mortgage debt.
3) Develop a written financial plan
The most important financial task for residents, at least after acquiring basic insurance policies like disability insurance and, if someone else depends on their income, term life insurance, is to develop a written financial plan for what they will do with their first 12 monthly paychecks after residency. The habits put in place during this most important year of a physician’s financial life will largely determine the financial pathway for their remaining five to seven decades.
Having a well thought out, written financial plan will save you from mistakes that put “The Squeeze” on you.
While your primary focus during residency should be learning to become a compassionate and competent emergency physician while maintaining your wellness and that of your colleagues, it is also the time to begin laying the foundations of financial success. You can do this by becoming financially literate and making smart decisions about housing, spending, saving, and investing.
Did you buy a home during residency? Would you recommend homeownership to residents or would you warn against it? Do you agree with my recommendation to buy a home when your social and professional situation is stable? Comment below!
I fell for the buy a house during residency trap not once but twice (bought Two homes during residency) and I consider it one of my biggest mistakes (which I chronicled in my “I Made Every Mistake in the Book Series on my blog (https://xrayvsn.com/2018/05/08/i-have-pretty-much-made-every-mistake-in-the-book-part-iii/)
I was given the myth that I needed to purchase a home because,” why pay money for rent and lose it when you can pay down a mortgage instead?” Because of buying a home, I had to be further away from my residency (to “afford” it)) which also increased commute time and travel cost.
The 2nd home I bought I got stuck with when I moved and couldn’t sell and ended up paying for 2 mortgages at one time when I bought my forever attending home. Plus I had to pay for increased insurance as it was considered vacant and higher risk. Luckily I ended up selling it months later after the move (at a loss).
My advice is to never buy a home as a resident, regardless of how long your residency is.
We bought a home during residency in a great real estate market. It was a brand new home. We bought it for 168k and sold it for 200k three years later. My husband is an electrical engineer and good at fixing things, so for us it was worth it and have no regrets. We put 20% down so no PMI. We had a mortgage and had to pay property taxes and closing costs on a sale, but I still think we came out ahead vs renting.
You might be surprised if you run the numbers. Typical round trip transaction costs are 15%, or $30K on a $200K home, which is about what your property appreciated even in a “great real estate market.” Throw in a few thousand dollars of unexpected upgrades/maintenance items and you could have very well come out behind. At any rate, it certainly wasn’t a huge financial boon in your life.
I mostly agree with the sentiment about not buying a house in residency, mostly for time / headache advantages.
I don’t seem to fully understand the financial downside though. Let’s say you are in a typical East or West Coast city (or some Midwest cities even) and you pay $1800/mo for a 2 bedroom apartment. Let’s say there are no increases in rent for a minimum 3 year residency. That is still $64,000 that you have nothing tangible to show for at the end of residency. Coming out $30k behind doesn’t sound so bad from buying a house.
You’re not counting the transaction costs or the interest costs. Most of the costs of owning are “throwing money away” just like paying rent.
Everyone uses $0 as the come out ahead mark when it should be what – X years of rent is in that home. Sure that may have come out at a few thousand dollars loss overall but that’s probably 30k ahead if they had rented!
I had the luck of the market on my side. Bought a condo in residency in 2012 for 200k and sold it in 2017 for 350k. Even if that wasn’t the case, my plan was to stay in the condo until my student loans were paid off (which I did) and then upgrade to a house. So for me buying in residency (since I knew I wouldn’t be moving after finishing) was basically buying below my means as an attending to allow more money for paying off student loans.
That worked out nicely. It might not have worked out if you had ended up doing a fellowship or changing cities for a job after residency. So it really depends on knowing what you’re really going to want (and be able to do) years from now as to whether you’ll be in it long enough for it to work out well.
I purchased a home in medical school and have been in it ever since (10 years later). Looking back, buying was a financial mistake at the time, but I didn’t know anything about this money back then.
I agree that for most people renting is the way to go during training. There are some exceptions to this, of course, by and large the rule should be to rent first. The most important part of this is comparing apples to apples and not just looking at monthly rent payment versus monthly mortgage payments as a way to compare the two. The cost of selling a home (10-12% of the home price) must be considered as should repairs, up keep cost, and taxes. All of that makes that “lower” monthly mortgage payment look worse.
This is a common topic for conversation. Glad you are discussing it on an educational level at ACEP!
TPP
That’s a pretty rare situation to be happy as an attending in a home you could afford as a resident.
It’s all about contentment.
We will move when the loans are paid off. That is our reward for being disciplined during that time.
We live in such a high cost of living city that home ownership during residency was a laughable proposition. In some ways I’m glad for that. The cult of home ownership is unnaturally persuasive and we would have easily taken for it during residency if things weren’t so crazy expensive.
Since graduating we’ve been dutifully saving for a 20% down payment now which has kept a significant portion of our assets out of the market for the past 3 years! There is a huge opportunity cost to saving for and then putting a down payment on a house if you are in a high COLA.
It seems like some homes might be good investments (but maybe it takes a little know-how to reliably find those) but mostly they are nice places to live and confusing the two gets a lot of us in trouble.
Yes, it can be a double whammy if both the stock market and the housing market are climbing quickly while you’re trying to save up a down payment. That’s part of the reason I’m really not against 0% down doctor loans like some (such as Dave Ramsey) especially if you have better uses for your money. Saving up 20% IS a great way to build financial muscles, but the math sometimes works against you. My general advice is when you’re in a steady social situation AND a steady professional situation it’s time to buy a house.
Will the time demands of residency, I wouldn’t want the responsibility of a house even if it did make financial sense. Who wants to be dealing with even minor housing issues during the very limited amount of free time one has as a resident?
I got lucky and was the only person in my residency class who didn’t buy a house as a first year resident. In 2006. Everyone believed they were going to make money by the time they finished, and it did not work out well for them.
I totally agree. I was single as a resident and when something needed repair in my apartment I just notified the management office and it was taken care of while I was at work. Cost: $0 and zero of my time.
We bought our first house at the start of residency and made a lot of mistakes in the process. We had essentially no money for a down payment (VA Loan), actually negotiated a $5000 increase in the purchase price in exchange for the seller paying that $5000 towards closing, bought a recently redone house that was in the top 10% of homes in the neighborhood for cost, had a mortgage payment that was at the top end of our budget (just one income budget) and moved in 6 months pregnant.
We then spent 60% of our total savings on a new HVAC system.
We did a 5 year ortho residency in San Diego. At the end of residency we sold our house for 30% more than we paid for it including all fees on both ends, the HVAC and all fixes required to sell it.
We definitely got lucky and did very well despite ourselves, but with a long residency in a growing housing market, it’s certainly repeatable. Just make sure you avoid any housing market crashes or any other unavoidable unpredictable disasters.
If I had to do it all over again, I’d probably rent just because the odds of it working out as well as it did is is far from a guarantee.
The 5 year residency and the housing boom certainly played a part in your success. It was a pretty big risk though. Interesting that even those who it worked out for are recommending renting!
I definitely hit the housing market just right. Had I bought 5 years earlier I’d still probably be underwater!
Knowledge changes the way you view your experi news for sure! Until a year ago, I thought it turned out well because I was so smart and made the right decisions.
Doing it over again, I’d rent at a cheaper place, save the extra money for a down payment down the road.
bought a small home after residency, paid it off. moved to a little bigger, put 1st on rent and paid the 2nd one off and moved to 3 rd and 2nd one on rent paying for the 3rd one. never buy big, hive urself a couple of years and you will know what you want. No one talks about home insurance, property taxes, , lawn maintenance which itself is a big expense
I tried to buy a home during residency and got out bid. That turned out to be a blessing. I was so glad to be able to just turn in my keys at the end of residency as the housing market was not hot by then. I would have been stuck with the house and lost considerable money. I discussed this issue and the many other reasons to not buy a house too soon in my book, The Doctors Guide to Starting Your Practice Right. If you lucked out and made money on the deal, good for you. But don’t confuse luck with smart financial decision making. Never buy a house as a resident, or when you move to your first job. Wait until you know you will be staying.
Dr. Cory S. Fawcett
Prescription for Financial Success
Most people I know bought right before the crash and were stuck selling at a loss or becoming long distance landlords for several years before they were able to sell. I was certainly happy to be renting when the water heater burst and all I had to do was call my landlord.
i wouldn’t recommend this, but i built my house in residency. We bought a view lot figuring a view lot will always be in demand as nature just doesn’t make more ocean & mountains….. We lived in it 15 years. The worst part was our 30 year jumbo construction loan with no downpayment in 1998 was 8% interest. After a year we refinanced to 15 years at 7.25%….after we moved we rented for 4 years….I really enjoyed the no hassle renting, particularly in some of our highest earning years really able to stash some money away without all the homeowner expenses……
It’s interesting how it’s a social norm to congratulate people when they buy a place, and a faux pas to ask them if it really was the right decision. Seems that you can only truly discuss pros and cons sensibly with someone when they are NOT in the market.
The lost returns on money in the market is a major underrated “cost” of homeownership. Wish we had considered a 0% or 5% loan for that reason.
I bought a condo as I finished Med school for a five year residency. 28 months in, my wife and I moved out for a bigger place.
I had the darndest time managing renters; I was the epitome of an “unintentional landlord.” Problems came up at the worst time. Even found new renters at the worst time. Dealing with it remotely was the biggest hassle.
Every time I was asked about the condo, I’d say I never should have done it.
Then a development company came from New Jersey and wanted to buy all the units at an above-market price with reduced fees and title costs. Nothing short of a miracle, but it was just dumb luck. I’d never want to go through 11 years of that (2 living there and 9 renting it out) again.
I think I read a WCI post once where he said just to invest your down payment and then rent. Even though I had like a 30-45% return on the condo because of all those favorable factors, I could have doubled my investment with my down payment dollar cost averaged into the market (s&p500) from 2006-2010.
I bought my first house during my first year of medical school in 2011 at the bottom of the market for 200k. It was relatively new (built in 2005) and needed very little maintenance other than the pool, which we thoroughly enjoyed but was a lot of work to maintain. The house was similar in price to all the other homes in the neighborhood. I had no problem selling it at the end of medical school for 315k. Overall, it was a great experience. We loved the house, the neighborhood, and it was close to work/school.
Because of that experience, I attempted to duplicate that in residency. In 2015 I used a doctors loan with nothing down to purchase another home for 435k. Even though I had the 20% down-payment from the previous home sale, I chose to go with the doctor loan as the interest rate was the same and there were minimal fees as well as no PMI. I used the home sale money to pay off consumer debt, student loans, fund Roth IRAs for the wife and I for 2 years, create an emergency fund, etc. I bought the house thinking I would be completing my entire 5 year residency in that location however I ended up only completing my internship there and then moving states. When we moved at the end of the first year, we listed the home for sale on the mls and got offers for 450k but after the 6% realtor commissions and associated costs we would have lost about 20k. We decided to rent it out instead. We hired a property management company for $100/mo who found us a tenant very quickly and we were fortunate to have no vacant months. They are the middle man between us and the tenants for repair requests, exchange of money, etc which lessens the burden on us. The monthly rent the tenants pay covers our P and I, escrow, HOA fee, and monthly pool service and leaves about $150 extra a month for maintenance. So far we have averaged about $800 a year in maintenance costs, and have realized a rental house with a pool is not ideal due to necessary maintenance and cost of repairs. Because of the associated risk of the pool we have taken out a $1 million umbrella policy. We have had the same tenants since we moved. After the first year we had to increase the rent $150/mo as we lost the homestead tax exemption causing our mortgage payment to increase. Each year before renewing the lease we have half heartedly tested the sale waters by listing it for sale by owner (not on mls) and not doing any showings since we arent local and a couple months ago we were offered $485k with no realtor fees. We decided since our tenants wanted to renew and havent had any issues making the monthly payments, to hold on to the house and continue renting it and develop more equity. Their payments create about $8,000/yr in equity. We have another year and a half or so of residency and likely 1 year of fellowship to go. We will see if holding on to it was a good decision or not. We are currently renting a house in our new residency location.
Bought a home during residency and 100% believe it was right for my family. We had zero debt going into residency, 45k in savings, two kids, and no plans to leave the area. The house was reasonable at $225k, within a good school district, and only 25 mins from the hospital. We went with a zero down 3.5% physician loan. I know others in a similar situation as mine so its not unique although it might be uncommon.
Let us know how it works out in the end. Lots of residents think they made the right decision until it comes time to sell. But even then, SOME people come out ahead, just not most of them.
We’ve had what I would consider to be excellent results with buying rather than renting. We purchased a brand new home in medical school (right across the street from the med school), at $163k and sold it three years later for $225k … sold to spend a year doing traveling auditions for residency. We spent almost nothing in repairs since the home was new, and recovered the minor amount we spent in upgrades. Upon matching, we purchased our second home for $199k, and sold it a year later for $313k (had not intended to sell, but a friend of a neighbor made us the offer and we couldn’t refuse). For that home, we did not utilize a realtor to buy, nor to sell…so our costs were quite low. We also used the doctor’s loan, so we put no money down and paid no PMI. We’re now in our third home, which we bought for $271k and plan to sell for ~$315k in two years upon completion of residency. Again, we used the doctor’s loan with no money down and no PMI.
Sure, we could have rented and avoided some of the homeowner headaches. That said, in the areas we have lived in, our rental costs would have been at least 20% more than what our mortgage + repairs ended up being. I realize it’s not always the case, but more often than not I have been able to buy for far less than what rent would cost (even after factoring in transaction fees, repairs, etc.). In addition, some areas simply do not have a large number of rentals available…so you end up having to compromise on location in order to rent.
Long story short, I absolutely feel that we have come out ahead…perhaps not a great deal in terms of finances, but certainly in terms of quality of life. We’ve been able to buy or build the home that we want, where we want…and do so for less than what our rental expenditures would have been. There’s a certain level of satisfaction I get in owning my home rather than being a tenant tied to a landlord…and that has a value that is difficult to monetize.
Yes, if your home appreciates by over 50% a year you’ll come out ahead buying as a resident. How often do you suppose that happens to residents?