Buy vs Rent – Why I bought a Home during Residency

If you read most medical/financial blogs, the verdict is pretty clear on the fact you should rent during medical school/residency. Renting is lower maintenance and lower hassle while you are in the most time consuming stretch of your medical training. In the span of <5 years, renting is generally thought to be financially smarter than owning a home as well. That said, my wife and I were fairly sold on the “idea” of owning a home. After years and years of renting through undergrad and medical school, we wanted something that felt more like it was “ours.” I also am the type that enjoys outdoor chores and actually looked forward to a yard/landscape I could take care of myself. Plus we knew we’d have at least 1 child during residency, so we wanted a little more space for everyone. Owning a home is the American dream right?

 

My optimistic but admittedly uneducated “gut feeling” was the housing market was still on its way up when we were buying in 2014. So we went for it! We bought a 4bdrm, 2.5 bath, nicely updated home about 15-20min from downtown in a well established neighborhood. We specifically picked a home that I felt was undervalued compared to the neighborhood in hopes of selling quickly after residency. I went through a physician home loan and used 100% financing at about 3.3% with a 5yr ARM. The process was very simple and easy. It is now 2016 and I thought I’d go through on here what the financial picture is looking like.

  • Home price $175,000 – no money down, physician home loan. Closing costs negotiated into selling price.
  • Mortgage w/ escrow for taxes/insurance is $1000 per month.
  • Principal payment on that $175,000 loan – about $300 a month while $700/mo is interest+escrow (the principal will go up as the loan ages, this is an average).
  • We try to sell after about 40 months for principal payments of about $12,000.
  • Given recent home values/sales in our neighborhood, I expect but not guaranteed to get around $185,000..
  • For a grand total of positive $22,000 in selling equity + principal payments after 40 months.  

Now the big negative expenses – so many it needed a spreadsheet!

Interest/Escrow (700/mo*40mo)28000
Closing costs (est.)3000
Realtor fees (est.)11000
New HVAC when ours died5500
Slab leak (post insurance)900
Old tree died, cut down750
Kitchen update1500
Exterior paint1500
HOA fees (300 x 3 years)900
Security system (1000 + 55mo)3200
Lawn mower (300+75 maintenance/yr)525
Landscaping (~150/yr)450
Misc*775
  
Total for 3 years ownership58,000

(*There always are numerous small expenses, but too small to keep track of, probably a couple hundred dollars a year*).

Total LOSS on the 3 years of home ownership (assuming selling for $185k) = $36,000

Yikes. Loss of around $36,000 and I’m sure I underestimated the miscellaneous expenses. Plus I had to do all the work on the lawn, landscape, and basic maintenance. That is a lot of work and time when you a resident. Luckily, I am one of those people that actually enjoys lawn/landscaping work but it’s still a major time cost.

But… a quick look at the renting market and things don’t look as bad. The house literally next door to ours is a rental with an identical floor plan (though honestly not as nicely upgraded over the years) and lot size. It rents for $1600 dollars per month. Now, if my wife and I were to have rented, we would have definitely downsized compared to what we have now, but would have likely lived closer to downtown and the medical center. A 2-3 bdrm in that area is approx $1300 per month.

Estimated cost to rent similar home = $1600/mo for 40 months = $64,000

Estimated cost to rent 2-3 bedroom apt = $1300/mo for 40 months = $52,000

So.. while I am going to take a loss in the neighborhood of $36,000 owning the home, I easily could have had a loss of $50,000 plus by renting. The danger with the above assumptions is I haven’t sold my home yet and won’t until around June/July 2017. I also have a pretty fixed time period where I have to sell; once residency is over I’m moving across the state no matter whether this home sells or not. The market could rise, fall, or even crash between now and then. If a crash would occur, and home prices fell significantly, I would certainly take a great loss that could have been prevented by renting. Think about it this way: I only will have about $12,000 in equity built up when I try to sell and if I end up accepting any offer less than about $163,000 (not an unrealistic scenario by any means), I would have to PAY at the closing, on top of the realtor and closing fees. Which of course would be during a time period when my cash reserves are going to be thinned from moving to my new job and possibly another house. Also, every month it sits empty I will lose out on about $700 in interest/escrow that I’ll never see back, even if I’m not in the home. The take home point is that, I have a very small window/margin of error for this project to have been a financial win. It may end up being a win, but it’s a lot of risk for that small benefit.

And thus, why I think for most people, renting is the “safe” and smart way to go. It’s easy, it’s predictable/lower risk, and the lack of maintenance is very worthwhile while your free time is at it’s lowest. I’ve given all that up to at best gain maybe $15-20,000 over renting, with a lot of labor time added in. At worst I could lose significantly financially during a period of great change in my life. But, I do get to live with the great “idea” of owning a home and at this time don’t regret it a bit! So in the case of “Renting vs Buying” during residency – do as I say… not as I do!

So what do YOU think? Is it ever the right move to buy when the timeline may be 3-5 years max? I’d say the only time you can truly justify buying at the start of residency is if it’s a long program (5 years+) and you sincerely expect (and it’s realistically probable) to stay in the same house/location for a few years post residency.

What have you done or our your experiences? Add some input in the comments section!

 

***Note: There is another option to this equation I am considering more and more – renting out the home. I would have good connections to medical personnel/residents who may take my advice and rent>buy. These would likely be more responsible class of renters than the average pool, which is a huge benefit. Also, they would likely be living on the same July yearly pattern as I do – thus would move in at the same time we are moving out, and likely stay a few years. And because the renting market is pretty strong, I would likely come out ahead financially, and could consider this an “investment property” of sorts.. Of course I would have to become a landlord and all that entails, which is no small task and certainly presents its own set of hassles. In a future post I will run the numbers for renting and see how much of a financial benefit that would be. ***

 

 


Sponsor highlights:

#LifeofaMedStudent is proud to have partnered with sponsors who offer physician friendly home loans. These companies will overlook the mountains of student debt and offer high rates of financing for qualified applicants – including 100% in many cases. This is what I did when we purchased our home. It was a fairly easy process and we were in our home without putting any money down. I have been very happy with the experience and even though there is extra risk in buying a home during the residency time, these companies can help make the process easier. I am planning to use one of these companies when we move next year for my mortgage. 

 

 

stmc-6101-arcelay-doctor-loan-web-ad-v1-250-x-250

SunTrust Mortgage: Stephanie at SunTrust specializes in doctor loan programs. See how she can help you get into the home you want! Now offering up to 750k mortgages with 100% financing! Website: Suntrust.com/stephanie 
Email: stephanie.arcelay@suntrust.com / Direct phone: 615-484-6690

 

 

loams

Physician Home Loans at FAIRWAY: Covering nearly all 50 states, Physician Home Loans is another great option for physician specific loan opportunities. Want to know more details about physician specific home loans? They will even send you a free book on the subject! Check them out at physicianmtg.com 

 

regions-final1

“You’ve worked hard to reach your life-long dream. Let Regions help you to the next dream of home ownership!”

Regions Bank is another option for doctor specific home loans. Talk to Chris RobertsPhysician Loan Specialist and VP/Senior Mortgage Loan Originator of Regions Bank today! New residents are welcome! 100% financing (no down payment) for qualified applicants up to $650,000.  Chris.Roberts@regions.com / https://www.regions.com/MLO/chrisroberts


Give the other great companies that sponsor #LifeofaMedStudent a look here: #LifeofaMedStudent Recommended Sponsors

 Disclosure: These Banks are paid sponsors of #LifeofaMedStudent and has a financial relationship with the site. 

 

 

 

2 Trackbacks / Pingbacks

  1. Top 5 Financial Mistakes I’ve made during Residency – #Lifeofamedstudent
  2. 5 Financial Tips for Medical Students – #Lifeofamedstudent

Add your thoughts here!