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Today’s article is a guest post from our part-time radiologist friend, The Happy Philosopher. Read on as he regales his tale of home ownership during and after residency. Enjoy! -PoF]
Should I Buy a House as a Resident?
When my wife and I started residency we thought no differently. Buying a house for the five years we would be training seemed like a no brainer. It worked out pretty well for us as you will see, but is it really the best financial decision for the majority of new physicians?
I’m going to deconstruct our purchase and subsequent sale of the house we lived in throughout residency, and then take it a step further by following two other imaginary residents that bought the same house after me.
Mr. and Mrs. Happy Philosopher
It was early in my journey and the year was 1999. It was quite a year. I was wondering if Y2K would destroy the world, which tech stocks to put in my IRA and why on earth it took this long for someone to make a movie as cool as The Matrix. My wife and I were bright and bushy tailed interns preparing to do battle with sickness and disease.
We started renting a tiny house close to the hospital where I worked. This was temporary, as after my internship our rental would be far from both our hospitals. We did not even consider renting long term because real estate always went up in value; especially over a five year period (radiology is one of the longer residencies). Just as water is wet and the sun sets in the west, everyone knew this to be true.
We spent every ounce of our free time roaming around town with a realtor for the next several weekends when we had breaks from the hospital. We eventually found the perfect house. Actually it was not perfect, but it was $110,000 which happened to fit nicely into our naturally frugal lifestyle. It had three bedrooms, a basement, a two car garage and big yard – everything two busy residents needed! (Sarcasm intended)
It also had the world’s ugliest and smallest kitchen with industrial grade brown carpeting and wallpaper with apple trees (groovy), but hey, did I mention the price?
We took out a ‘doctor loan’ from a mortgage broker I saw in the newspaper. Looking back it was a slightly shady operation. The fees and interest rates were a little high and opaque in retrospect, but more importantly it was zero money down loan.
We actually refinanced that mortgage into a five-year balloon product (yes, the same ones that caused the world economy to collapse a few years later) as interest rates fell. We knew we would sell the house before the note became due.
As the old saying goes ‘they can’t stop time’. Eventually, our residencies came to an end. We called up another realtor and put the house on the market. This was 2004 and the housing market was HOT.
We had an open house on what was probably the most beautiful day of my five year residency and within a day had three solid offers on the house, two of which wanted to pay us more than we asked for. Final selling price $165,000, a 50% increase in about 4.5 years. Holy &$*T!!! We were kicking ourselves for not buying a MORE expensive house. We could have afforded it and in our conservative stupidity we left money on the table. What idiots we were! Incidentally, even with this modest little house we just made $12,222/yr (55k/4.5 years) of pure profit.
Right?
Doing the Real Math
Well, not really. Most people think of it this way. I thought of it this way, but the calculation is more complicated. First we put a lot of time and money into the house.
- We spent countless hours tearing off wallpaper and repainting. (There was wallpaper in EVERY room.)
- We retiled the kitchen and hallways.
- We tore up carpet and refinished the hardwood floors.
- We had to do a complete tear off of the roof and replace most of the underlying rotting plywood (not cheap).
- We bought a new stove, refrigerator, washer and dryer (assuming a rental would come with these).
- Other odds and ends maintenance like AC and garage door repair.
- About $10,700 in realtor fees, title, and transfer fees, etc. when we sold.
- Hours of time (and some money) maintaining a rather sizable lawn.
We made money. In fact, we did great. When we sold we generated a nice nest egg that we used a year later to put a down payment on our next house. But this was not because of great skill on my part. Our timing could not have been any better with respect to buying and selling.
I was lucky.
I didn’t keep complete enough records so I can’t really know what my true cost was, but I think renting and buying would have a similar monthly outlay. At the end of the day I estimate we were 30k richer for our decision.
Pure. Dumb. Luck.
Don’t get me wrong. We put a lot of sweat equity into that house. It was fun and I would do it all over again. I learned a lot about home renovation, but there was an opportunity cost to my time. In residency, free time is a limited, valuable commodity. Owning a house, especially one that needs work, takes a lot of time. Unless you really enjoy this stuff you are much better served letting someone else deal with the headaches.
From time to time I wondered what happened to that little house. Did it sell again? What’s it worth now?
Read on.
I’m going to assume each couple does a 4 year residency (yeah I know there are single residents, but I can’t really figure out why a single person would buy a three bedroom house in residency).
Resident couple #1:
Its 2004 and everything is booming. What better time to buy a house and catch the wave. Heck, the way the market is going they may be priced out forever. Our resident power couple buys my house for $165,000, snatching it from other greedy home buyers looking to buy this goldmine.
They had to pay more than they wanted, but feel incredibly lucky as the other two houses they bid on were lost to others in spite of them offering full asking price. They were getting desperate as their residency director frowned upon homelessness.
Nothing major goes wrong with the place, just the routine maintenance. They get job offers in another state shortly before finishing residency and they put it on the market in 2008.
2008 is a different animal than 2004. The paper value of the house has fallen quite a bit from its peak of $205,000, but they still think they can break even or make a little money. In spite of a very soft regional housing market, the neighborhood is still desirable as it is close to the hospital and overall a nice place to live. The house sits on the market for a few months but finally sells for $173,000.
Countless hours were spent over the phone with the realtor and various contractors to fix a few issues that came up in the inspection. They soon realized trying to sell a house from another state while starting high stress jobs was suboptimal. Many nights they had dreams they were renting instead and just handed the landlord the keys moments before they boarded a plane to their new city.
Overall they lost about $5,000 after selling costs were factored in. They feel fortunate as they got ready to close on their $970,000 McMansion that was selling for 1.2 million a year ago. This time they are going to make a killing!
Resident couple #2:
Our next couple is feeling great. Housing prices have come down significantly from the peak, and they had their pick of the litter. $173,000 is a great price for this house and in 4 years should provide a nice little chunk of money to get started in life.
(Cue dark ominous tones)
First though, some renovations are in order. The kitchen is decent but doesn’t even have a dishwasher? Who were these people that lived here before us? Barbarians!? And while they were at it, they decided to finish the basement and update the bathrooms which required liberation from the horrendous pink circa 1950’s ceramic tile.
Our couple recently received a sizable inheritance of $40,000 and they poured this into the house. Every spare weekend and vacation was spent on the house that first year, and the hard work paid off. The place looked fantastic.
They had to forgo some trips they wanted to go on, and they didn’t quite have as much money as they wanted when the baby came along and their dog needed an expensive surgery. Oh well, that’s what credit cards are for. They were genuinely happy, and would make it up when they sold the house.
Fast forward to the end of residency. It’s 2012. Although housing is starting to plateau from its free fall, the housing market is absolutely terrible. No one is buying, and those that are want deals. After lowering the price a few thousand dollars several times our couple finally gets a lowball offer.
They thought about renting it out, but being a landlord sounds like a nightmare to them, and who knows how much more the house will continue to fall in value. After much negotiation they sell it for $155,000, requiring $25,000 out of pocket after realtor fees and lost equity. They borrow this money from their parents and vow to pay it back quickly with their signing bonuses and new found high-income.
They decide to rent a modest two bedroom condo in their new city and are quite angry at all the ‘renting is just throwing away money’ articles they read over the past 10 years. They are even angrier 4 years later in 2016 when they realize had they just invested the original $40,000 in an S&P 500 index fund and rented instead they would have doubled their money even after adjusting for inflation.
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Resident couple #3:
Our last couple moves into their beautifully renovated house in 2012. They researched price to rent ratios in the city before deciding to buy. Even if the house did not appreciate in value they calculated it would be more expensive to rent in almost all scenarios. They needed the extra space as they had two kids, a dog, a cat and an iguana named Fred.
Their parents lived in the city and they knew they would like to stay here long term if they could. The house was located close to several possible places of employment, and immediately after buying they started networking with physicians in their community for potential jobs after they finished residency and fellowship. They had to replace the water heater and a few minor things, but no major renovations or other big costs.
In 2016, they decided to stay in the house in spite of the fact that they could afford a much larger place with their income. The house was close to their work and they loved the neighbors. They had no desire to uproot the kids and felt they could always do an addition on the house should they decide they needed more room. The house was valued at $166,000, so they would probably just about break even if they sold.
What really happened to the house?
I know what you are thinking. Anyone can just make up stories and cherry-pick dates and circumstances to tell whatever story they want. You are correct. So I’ll tell you what really happened.
I was sitting in a theatre waiting for the musical to start. I’m not normally a musical guy, but my wife really wanted to go. It was Mary Poppins I believe, and actually quite enjoyable. For some reason, at that exact moment I wondered what happened to our house from residency.
I hadn’t thought about that house for years. Why it popped into my head on that day is still a mystery to me. To this day I still don’t know why. I jumped on Zillow and looked it up.
I was surprised to see that the house just sold (this was 2014) and there were tons of pictures. Most of the renovations I talked about above did happen. The kitchen was completely remodeled with beautiful new countertops and cabinets. There were intricate ceramic tile backsplashes and all new appliances. The lighting was updated and a new dishwasher installed. Every room was repainted and the basement was now completely refinished. There were new windows and water heater.
I would be shocked if they got all of this done for $40,000. I’m probably massively underestimating the true cost unless they did everything themselves.
Sale price in 2014: $144,000.
Purchase price in 2004: $165,000.
Realtor fees assuming 6%: $8640.
Approximate mortgage balance: $130,000.
Net ‘profit’ after 10 years: $5,360.
In reality there was no profit. These people lost money. A lot of money. Those renovations cost a boat load. The repairs and maintenance are excluded. The true cost of the house is not just the mortgage; it is also the other expenses that seem to come at you at the most inopportune time. They are asymmetric and easy to forget about.
Not only did they pour a ton of equity in an asset that they never saw a return on, there was massive opportunity cost as that money could have presumably been invested elsewhere.
The S&P 500 had roughly an inflation adjusted return of 5.7% per year from mid-2004 to mid-2014. Historically these are below average returns.
Note that their financial opportunity cost would be much greater if they put 20% down as is traditional. This would be additional money tied up in a depreciating asset. They would have lower monthly payments and maybe a lower interest rate, but there is still a cost to be had.
Financially this decision cost them tens of thousands of dollars, maybe 6 figures when all is said and done. The projections and math get a little squishy when making assumptions and not having all the hard data.
Renting would probably have been much cheaper for them as I estimate the price-to-rent ratio was probably about 20-25 when they bought.
Price-to-what ratio?
The price-to-rent ratio is simply the purchase price/annual rent. The higher the ratio the worse it is for buyers, and better it is for renters. Land lords use this as a rule of thumb to decide if a property is worth buying from an investment standpoint. If you want The Happy Philosopher rule of thumb, if the P/R is under 10 buy, P/R over 25 rent. If it is between 10 and 25 you need to do math.
I can’t know for certain what my ratio was, but I’m guessing it would have been somewhere between 10 to 15. This is buy territory. Buying kind of made sense for us, and as you can see it worked out.
I know.
Math sucks.
I hate it, too.
[PoF: What?!? Math rocks!]
But before you plunk down 6 or even 7 figures on a questionable highly leveraged asset that you will be relentlessly taxed on, will require costly insurance and continuous maintenance and produce no cash flow, you probably owe it to yourself to spend some time learning math! Financial education is mandatory around here. If you have not done so please read this article from Afford Anything. It is an excellent framework for the rent vs. buy decision.
Renting is simple. You cannot compare the monthly cost of renting with the monthly cost of a mortgage. Buying will always artificially look better as it excludes all the maintenance, repair and other expenses. This is a more accurate picture.
| Costs of Renting | Costs of Buying |
| Rent | Mortgage |
| Closing costs, realtor fees, title, tax and transfer fees | |
| Property taxes | |
| HOA (maybe) | |
| Repairs and maintenance | |
| Renovations | |
| Homeowners insurance |
There are non-financial benefits of both renting and buying. These are more difficult to value and are probably the main reasons why people make the decisions they do. It’s not right or wrong, but these decisions have a financial cost, and when we make emotional decisions without considering the financial and opportunity cost we may and up regretting our decisions. Here is how I would approach the rent vs. buy decision.
| Renting | Owning |
| Flexibility. Move when lease expires. Upsize or downsize easily. | Stability. No landlord to evict you or raise your rent. |
| Known costs. Maintenance and upkeep responsibility of landlord. | Unknown costs. Major repairs or housing crash can be financially destructive. |
| No upside appreciation. | Can make good money in a hot housing market (or lose it in a bad market). |
| Much less time managing property. | You are now the property manager. |
| Limited ability to alter property/renovate. | Great flexibility in renovation/remodeling. |
| No tax advantage. | Possible tax advantage. |
Using an investment analogy, renting is like owning a bond until maturity. Your return is known. Owning a house is like owning a volatile stock that you buy from an expensive broker. You may make a lot of money, but you may also lose a lot if you need to sell when the market is down, and chances are you are going to pay a high commission for the privilege.
There are many online rent vs. buy calculators that will help you decide, and if you are buying a house without consulting one or more of these you are doing yourself a great financial disservice.
Buying a house in a market with an above average price-to-rent ratio for a time period of 3-5 years is a risky and speculative leveraged bet on further appreciation of residential real estate. In many markets it is impossible to break even in less than 5 years. Most residents do not need to be taking more financial risks. More importantly, you probably have better things to do with your free time than dealing with the headaches of home ownership.
There are three kinds of residents I know that purchased houses.
- Those that bought in a reasonable market at the right time and got lucky (me).
- Those that made a poor financial decision, but think they did well because they suck at math.
- Those that bought in an unreasonable market or at the wrong time and got screwed. They either took a big loss or became unintentional and unprofitable landlords.
In aggregate we don’t accumulate wealth by purchasing residential real estate and holding it for less than 5 years. Historically it appreciates at the level of inflation, which means at the end of the day you may break even. Some people win (San Francisco) and others lose (Detroit), but unless you are extremely lucky or skilled you are going to probably lose financially by buying a house and selling it 4 years later.
| Lean Towards Renting | Lean Towards Buying |
| Short residency (4 years or less) | Long residency (5 years or more) |
| Price/rent ratio >15 | Price/rent ratio <15 |
| Few attachments to city | Strong attachments to city (family, kids) |
| Didn’t know screw drivers come in different varieties | Like to work on home projects and maintenance |
| Hate the idea of being a landlord | Wouldn’t mind being a landlord some day |
| Freedom is being able to spend your free time any way you want | Freedom is the ability to change your living environment any way you want |
| Wouldn’t be caught dead in a house like this once I start making real money | Planning on living in the house after residency as an attending |
| Would be embarrassed if seen using a lawnmower | Enjoy yard work and landscaping |
| Wouldn’t phase me if I had to move | I don’t want to move in residency at all costs |
Buying a house in residency is probably not the worst financial decision you can make. Certainly going into consumer debt or living beyond your means is more disastrous as it establishes terrible financial habits. Some will decide to purchase a house anyways. If you have strong non-financial reasons to buy a house I’m not going to try and stop you, but don’t walk blindly into residency and buy a house because everyone else is doing it.
If you buy, this is how I would approach it, knowing what I know now.
Do the math and if it makes more sense to buy in your market and you accept both the risks and time commitment to owning, go for it. Pretend you are a landlord buying a property you will be renting to yourself.
Run the numbers and try not to allow emotions trump logic. If the numbers don’t work seriously consider renting. If you still insist on buying, just realize there will probably be a financial cost associated. Be sure the noneconomic reasons are worth it.
[PoF: Thanks for the detailed and thoughtful post, Happy Philosopher. Readers, did you buy a home straight out of med school / grad school / when you landed your first job? How did it work out financially? Be honest!]
60 thoughts on “Renting versus Buying a Home: The Happy Philosopher’s Experience”
This is perfect. Great article. Take some time to check out my blogs. https://nautisideboatrentals.com/blogs/
worldoffuninthewater.com
I’ve recently done my take on the rent vs buy calculation by comparison the ROI from buying vs renting on the same time horizon. Without surprises renting nearly always beats buying short term (7-15 years). From purely financial point of view the buying make sense short term just if your property market sees 6-10% of the prices growth yearly but it’s rare nowadays. Keeping in ming the total cost of ownership (that’s hugely overseen) plus opportunity cost of down payment and opportunity cost of extra-payments (that you will convince yourself to make) renting is just no brainer for every FIRE. And yes, if you really need to buy a house for some “life” purpose, you could always could do that with all the cash/savings you’ll have. You could run your rent vs buy numbers from FIRE/ROI perspective on this web site I’ve created: https://www.rentvsbuy.app.
Thanks for sharing the info. keep up the good work going…. I really enjoyed exploring your site. good resource…
Thank you for this post… Really appreciate your writing skills. What an informative and needful post indeed. A typical answer on Google, provided by people who promote buying homes, is to buy 3-4 times your income. And people don’t factor in all the other expenses you mention.
Always surprised when I hear people talk about their home as an asset. I got a big dog and wanted a yard. I swapped the townhouse in a deal with a build for another house.
I bought in 2009. At the time thought it was great. There was a tax credit at the time and the market had already dropped. Turned out to be the worst decision we have ever made. Could not sell when we moved. Had to become a long distance landlord. It became too difficult and we had to hire a property manager. We had an eviction. Now the renters pay on time and we lose a little each month. The home is in a high tax area and about half of our mortgage goes to taxes and insurance. Also on an ARM. (Probably should refinance soon). For now as long as we have decent renters we will wait. Will probably sell when they move. I am sure some people have done well but they were just lucky. I was dumb and I get to pay for it each month.
Being an accidental landlord is concentrated risk. I think people under-appreciate this fact. Having 10 rentals is pretty safe. Having 1 rental and a bad tenant can be a financial nightmare.
Having a cash flow negative rental is probably something I would be looking to get out of ASAP.
Very nice elaboration!
That number – 15 times the rent, combined with no more than 2 times your income, will save save so many people form catastrophes.
A typical answer on Google, provided by people who promote buying homes, is to buy 3-4 times your income. And people don’t factor in all the other expenses you mention.
I think, people overbuy homes – we did. And home needs change with time – kinda developmental in our lives and as family changes. If you think like that, home buying starts to make less and less sense.
One caveat – lack of availability of appropriate home for rental can be a problem though and one may decide to spend more money consciously and with full awareness at that time.
That is a great point, and something to definitely consider. When I did my fellowship it was a bit of a scramble to find a something acceptable to rent on relatively short notice in a tight rental market. In general there is a bigger pool of houses for sale than for rent. Thanks for the comment.
Always surprised when I hear people talk about their home as an asset. I don’t think of mine that way. In my mind they are liabilities. Doesn’t mean you shouldn’t own one, but you should know what you are getting into before you buy.
Totally agreement.
I agree. Simple distinction – assets earn income, liabilities cost money.
Great post. I never even thought about buying a house as a resident. I got suckered into buying one after residency with the mantra of you will need the tax deduction. As I think about it the guy who kept telling me this was the brother of the realtor who sold me the house. I did OK I think with that one a townhouse. I got a big dog and wanted a yard. I swapped the townhouse in a deal with builder for another house. The problem was I became increasing dissatisfied with my job and quit with a newly purchased house. I found a new job in my home town And luckily sold house 2 in 2 weeks. I sold it for 320k and paid 306. I lost on commissions and a few things I added to the house. I had been in that practice 4.5 years. House 3 was 13 years old in a lower cost town (239000) but 1 mile from the hospital. I am still here 25 years later.It is paid for now. It zillows at about 350k. I have done lots of stuff to it so it is at best break even. Homes do not return like stocks and are illiquid.
Thank you. A house should be primarily purchased because it makes you happier to own than to rent. There is a certain freedom in the flexibility of renting, but also a level of stability in buying. Buying is about lifestyle, not finances.
Good experience, HP. You don’t have to have a Resident’s constraints to appreciate the benefits of renting over buying. I see a lot of parallels to my experiemce in what was called a “no brainer” buyer’s market in Washington DC: http://tenfactorialrocks.com/buying-vs-renting-a-capital-tale/
And though all my apartments I stayed in came with dishwashers, it was more a pain to use them rather than do dishes as and when they fill into the sink. So, if it is barbaric to not use to dishwasher, call me Conan also, as Vigilante said.
Washing dishes could be considered a form of meditation 🙂
http://thehappyphilosopher.com/meditation/
Thanks for this post! I chose to rent through medical school and residency because 1) I didn’t need a lot of space for myself and my cats and 2) I liked the convenience of having the rental company looking after everything for me. The only thing I didn’t like was people telling me that I was “throwing my money” away by renting. It’s nice to have some support for my decision!
Thank you SD!
I’ve found that cats don’t take a lot of room either, but whether you have 400 or 4000 square feet they will use all of it and think they own the place 😉
I’m one of those examples that got extremely lucky in the other direction: in our entire residency class, I was the only one who rented. Everyone else bought either a house or condo. We started in 2006 and graduated in 2009. I was the only one who left residency without losing a significant amount of cash.
Being upside down in a house and having to move is a terrible feeling. I’ve known many people in this situation and it is incredibly stressful. Thankfully most docs are entering a very high paying job and can absorb the expenses.
Great summary. We bought in residency because: a. We were going to be there longer then 5 yrs, b. It was a great time for buyers (2009), c. We got the homebuyers tax credit ($8000), d. it was a very low cost of living area, e. The area we bought the home was expanding and became a sought after area for new homebuyers after we bought. In the end we “made” $10000 on our sale price but after factoring in closing costs (we sold it ourselves without a realtor) and maintenance/upkeep we really broke even. Still came out ahead overall with the tax credit and also the mortgage interest tax deductions we got over the years.
In retrospect I would definitely do it all over again if presented the same circumstances for all the same reasons listed above, but like the happy philosopher, we got lucky. No large, major repairs or breakdowns in 7 years in a house is a bit lucky. When we moved to a new place we rented, despite the fact our income was quadrupled. This was also a smart decision.
I’m not as hard core as some of the “you should never buy a home ever!” crowd. I think it usually doesn’t make sense in residency, but many times it works out, specially if people do a thoughtful analysis before they buy. I’ve been pretty lucky with many big decisions, but I have also made some really dumb decisions. Fortunately my mistakes are usually lower impact.
POF or WCI should do a formal survey/study about buying versus renting. I predict that about 2/3 would be ahead or even with buying. Here’s my story.
We moved to Washington, DC in June 2009 for a 5 year residency. My wife is an attorney and found a job on the Hill (which she wanted to do, hence why we moved there. . . ) My residency salary was around 45k and her salary was only 35k. We borrowed 15k from her parents for the FHA 5% down in order to buy a 600 square foot condo for $315k.
Rents are very high in DC and we didn’t want to “throw away” $2k a month for 60 months. Even after that, I don’t know how on earth we thought we could buy something about 4 times our annual income. (Fortunately, my wife advanced quickly on the Hill and was even making 6 figures when we left in Aug 2015.) Our condo fees were around 400 dollars per month (not per year like her dad asked). We were planning on staying there for 5 years, but after my wife became pregnant, decided to move and rent a 2 bedroom place. I said, “babies are really small”, but my wife said no to staying in 600 square feet.
We sold our condo for $346k in about 48 hours in Nov 2013. We “netted” around $46k after realtor’s fees (and promptly paid her parents back). We put up a wall for around $1200 and added hardwood floors for around 3k.
Soooo, we were very very lucky. I just noticed that our condo sold again for 341k in July 2015.
Now we are in Nebraska and have a 5 bedroom, 4 bath house for about what we paid monthly for our 600 square foot place including condo fees and for less than we paid in monthly rent for the 2 bed 2 bath condo rental.
Nebraska: the original “Good Life”. http://journalstar.com/business/local/the-good-life-again-nebraska-s-new-state-brand-brings/article_a92d622e-87e7-5561-9370-953a053605de.html
Sounds like you purchased at a great time, but this would have been a disaster in other years. It is a little like using the 4% rule in retirement. When the rule is stressed, everyone who retires in that particular year is affected.
We can probably look at the location and year purchased/sold and predict with high accuracy how the person did. My guess if that anyone who purchased in 2006 or 2007 was really wishing they rented 🙂
Pretty amazing how much house you can buy in some of those flyover states!
I’m not a doc, but I think the same when it comes to my own house. We have owned our only house since 2008, with no plans or desire for selling. We skipped the starter house altogether and moved on to our 2900 square foot McMansion in the suburbs.
I once read that it takes a full 10 years of owning a house, just to break even in a sale, when you factor in mortgage interest, selling costs, and other expenses. There is, one could say, a rent savings that one obtains when purchasing house. However, as a wealth vehicle, houses are terribly awful investments. They do, however, provide a nice place to live.
Fact: Warren Buffett, arguably the world’s best long term investor, has owned the SAME house in Omaha since 1958. He’s lived there continuously, never sold. What does this guy know that most of America doesn’t? Buying and selling houses only makes the realtors rich.
For my own net worth, my house doesn’t go into the R calculation (retirement). Our home equity is mostly listed as a footnote, and I also list that equity as net of 7% in closing costs (6% realtor fees plus 1% for anything else I might have to pay to sell). Although I will live in my house at the beginning of early retirement (41), unless I take out a HELOC, I can’t cash in on the equity to live off, anyway.
I work for a small EHR, and I was told once here that most physicians, out of med school, only work at their first practice for 3 years and leave. That should be a good reason not to buy a house right away, until you are somewhere you know you want to be for the long term.
That is a good point. Just because you are out of residency doesn’t mean you will stay put for the long haul. The more I read through the comments and think about it, it is probably wise to rent for a year or so and make sure there is a high likelihood the attending job will be a long term relationship. Math doesn’t suddenly change when residency ends.
My wife and I bought a new house at the beginning of a four year residency in 2011 for 190k in a Midwestern college town. We did a couple of minor improvements ourselves, including installing a tile backsplash in the kitchen and doing some basic landscaping. We also spent about 5k to finish part of the basement.
We sold it in 2015 for 249k after it was on the market for only 2 weeks… Sometimes it is better to be lucky! After becoming a fan of PoF and WCI over the last year, I probably would rent or purchase a small condo if I was going through residency again.
I did find the landscaping and minor upgrades/maintenance to be an enjoyable break from the grind of residency, so perhaps I would have missed that aspect if we had rented.
Sounds like your timing was as good as mine 🙂
As they say, it’s better to be lucky that good!
very good summary. There is a thread going on WCI about this and this consolidates it nicely and adds more. Perhaps you read it as resident couple 3 sounds strangely familiar to my post. Each year the incoming residents ask about this at interviews, I’ll now be directing them here.
Thank you, much appreciated.
🙂
I assure you this post was written long before the WCI forum thread was started.
It just so happens that a lot of people ended up in the same boat as resident couple #3.
Best,
-PoF
Luck undoubtedly plays a factor in how things turn out. I was lucky, but not smart, passing on a good opportunity to lock in gains on my residency home purchase.
I bought a 1-bedroom condo in 2002 and it appreciated by 50% in value over four years. I thought it would be best to keep the place as a home base while we traveled the country doing locums. A few years later when I was ready to sell, that 50% increased equity had pretty much vanished.
I finally sold the residency condo in 2014 after having 2 good renters in seven years after we moved out. The selling price was 20% higher than what I paid 12 years earlier. That’s a paltry return, but at least I had renters covering the mortgage and condo fees when I was no longer living there.
It’s funny (well not really) how quickly leverage can change the financial viability of a real estate investment. When things are rising it feels amazing, but when things crash there is just no way to safely get out.
PS: Thanks for lending me your blog for a few days. I had fun writing this article 🙂
Amen brutha. I’d tweet this to my followers, but I already did.
I had another incoming resident email me this morning about buying a house. I don’t think I talked her out of it either. It’s almost impossible to talk someone out of buying until they have lost money on a home. Sometimes twice (like me.)
Everyone thinks they are the exception to the rule 😉
I actually sat down recently with a good friend of mine just before she left for residency (she was smart enough to ask me for advice on a number of things). She was single, wanted to travel on her time off and was wondering if she should buy. I think I talked her out of it.
This myth of home ownership is deeply ingrained in people.
Great article! I did the same path, bought a home for residency, and have come to a similar conclusion – if I come out ahead it’ll be pure luck. Right now it’s maybe 10k advantage, and probably not worth the man hours and headaches of ownership. Rent, don’t buy – for residency!!
I wonder what percentage of residents end up renting? Most people I knew did not rent.
What was the approximate price to rent ratio for your area when you bought?
$175,000 / (1600×12=$19,200) = 9.1 P/R
Of course when I bought, I didn’t know those numbers or even what they meant, ha!
I see similar, I bet >50% buy regardless of Residency length or math!
My wife and I bought a house for residency in the spring of 2008 and sold it 5 years later for 10% less. Prior to selling we put another 10 or 15% of the original purchase into the house for upgrades/repairs to sell the house as we were moving out of state and there were a lot of houses sitting on the market and not selling well at that point. It worked and our house sold quickly, but we obviously lost quite a lot of money. I also spent countless hours (actually weeks) on yard maintenance and improvements over the 5 years we lived there. That place looked awesome when we sold it! But in retrospect we should have rented and my free time in residency probably would have been better spent learning about personal finance. Well at least I enjoy yard work…
Looking back on it my wife and I regret not renting. We actually considered it prior to buying a home, but we were worried that the landlord might decide to sell the house forcing us to move, which we really didn’t want to do again with 2 small kids. Having the landlord sell the house actually was something we worried about in the spring of 2008 b/c housing prices were quite high, but that seems laughable in retrospect. I just looked and the Zestimate for our old house has finally returned to the price we bought it for 9 year ago so it has appreciated (according to zillow) 10% since we sold 4 years ago. Clearly we gave too much weight to the concern that the landlord would sell the house. We even did consider some of the metrics on renting vs buying, although not the price-to-rent ratio.
There are huge cohorts of residents in your exact situation. It’s not the end of the world, but it can be a pretty big financial hit. Not really ideal to start your career further in the hole. Student loans these days are enough!
yes I agree that student loans are enough. We actually did consider renting the house out, but even though that could have mitigated our losses I’m glad we haven’t been worrying about being an out-of-state landlord the past 4 years since moving.
Thanks for this great analysis Happy Philosopher. You hit the nail on the head. I’ve always cautioned new residents against buying a house unless they were going into something insanely lengthy like neurosurgery. Even then, the time and effort required of managing your own property may not be worth the financial gain. I’ve been renting since I left med school and don’t plan to buy until I’m at least 1 year into my first “real” job.
Thanks. That is another pretty good point. If I had it to do all over again I probably would have tried to rent for a year or two after residency so I could get to know the area better before I bought. Although I really like my current house, I probably would have bought something a little different had I waited a year or two.
Not a Dr and in same location for a long time. First purchase in 1996. Many people in our area lost their homes because of miscalculated property taxes. I did my own math and made the mortgage company adjust our payments. Don’t forget about the property taxes.
In 1998, the prices of the home dropped. In 1999/2000 prices started to rise. We sold in 2003 (7-years) for a nice “profit” (didn’t do all of the math). We put all of the proceeds from the sale into a bigger home/nicer street in the same city. Prices continued to rise until around 2005/2006. Prices fell considerably.
Finally, last year, we were back in the black (not necessarily after including all costs of ownership). The point, timing the real estate market is just as difficult as the stock market. We are considering moving again, but as we will likely stay in the same area, we don’t really gain much as what we make will be put into the new home.
If you are going to be in the same area for a long, long time, buying probably makes sense. The primary residence probably shouldn’t be thought of as an investment at all, though. It is your home.
cd :O)
Primary residence should definitely not be looked at as an investment. It is a cost. No one in their right mind thinks of a car or microwave as an investment. These are consumable items.
Ayuuuup. We bought our house because, on paper, it looked like a better deal than renting. But I agree that so many things will pop up (especially if you renovate like we did) and cost money or your time.
Great presentation of the numbers; math doesn’t lie! I wonder how many residents (and others) do a deep analasis prior to purchasing a home. It’s so important to think beyond affording the mortgage payment. I’m glad you made out well with your home purchase. I think the groovy apple trees would have persuaded me too!
I can tell you from experience that the number of residents that run a proper financial analysis is close to zero. I’ll have to dig and see if I have a picture of that wallpaper. If I find it I’ll use it in a future blog post 😉
Send it to me! I’ll gladly insert it here.
Very thoughtful analysis. For these reasons I don’t really look at my primary residence as an investment. At best it’s a stored value on average. This is our current house at the moment, At worst and just as likely it’s another expense to consider along side rent as you have done here. This was our first house. I’ve twice decided to buy because I prefer a single family home and privacy. That being said I’m not sure the next time it comes to move that we won’t simply rent a single family home. We’ll have to run the numbers.
Running the numbers is key. The vast majority of people I know ‘run the numbers’ by comparing the mortgage payment to the rent payment without looking at all the other costs.
That is really interesting that you followed your first house via Zillow.
My husband and I bought a super cute little house during my doctoral program that ended up being a great experience, but a less than optimal financial decision. Just like your house, we did end up selling ours (after some major remodels) for a “profit”, but considering all the time and money we put into the house, I would be surprised if we broke even.
I some ways I kick myself for having funded that house rather than a retirement account, but since you can’t go back and change anything, we tried to learn from our mistakes when we bought our second, which we haven’t done much work to but through pure luck, has appreciated all on its own! So we are now looking to possibly sell our current home in another a year or two and if our plans go well, we will be moving to a lower cost area and looking to use the profit from this house to buy something outright.
From my own experience, I definitely agree that buying a house is definitely a risky decision that shouldn’t come before funding an emergency fund or retirement. Especially as you mention, when you consider the time investment required to own and operate your own home.
Luckily I was in a very low cost housing area, so no matter what happened I was limited in what I would gain or lose. In high cost areas this becomes a pretty risky short term bet.
If it is barbarism to live without a dishwasher, call me Conan. Prior to 2016, I had lived a decade without a dishwasher. (Except a brief 2-year stint where I did have one, but did not use it because it was old, small, expensive to run, and I lived alone, so didn’t amass a crazy amount of dishes too often.)
Really great post! I just purchased my first home in the beginning of 2016…guess we’ll have to see how that plays out over time. I feel very confident in our decision, though, because in our market the costs of renting in a reasonable location for us results in almost exactly the same cost as the home, all things considered – even closing costs. And with a decent margin for repairs/replacements, especially considering we actually bought new.
Funny thing is, although we originally intended to stay here for life, we may actually be buying a new home within the next 2-3 years or so…but not moving for 4 or 5. Why? Because we just found out that a developer who we know personally is preparing to build homes right next to where I work, our favorite grocery store, our pharmacy, our beer and liquor stores, a dollar store, Mrs. Vigilante’s bank, and even our dentists. Basically, 90% of what we need would be within walking/biking distance. If we can get a home at the right price, we’d love to buy one of the first homes, let the builder rent it from us to use as the model, and move when they’re done. This home has already appreciated in value due to development around us, so we could either rent this out (still allowed by HOA rules, for now) or sell it most likely for a profit that more than covers the closing costs. Not bad, if we get that lucky!
Actually life without a dishwasher wasn’t that bad in residency. We had no kids, ate many meals at the hospital and didn’t do much real cooking anyways. I’m pretty happy we have one now though 🙂
We did a short-term rental before purchasing a home. We wanted to explore the city we would be moving to and know exactly what we wanted before purchasing a home. This is a long-term commitment and you don’t want to impulse purchase based on a couple homes you see in an afternoon where you have to fly in for the weekend.
Totally agree. It’s funny how little I researched buying a home compared to purchases that there 1000 times less important. Short-term rental is a great idea.