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 the 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 principle 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 + principle payments after 40 months.
Now the big negative expenses – so many it needed a spreadsheet!
|Closing costs (est.)||3000|
|Realtor fees (est.)||11000|
|New HVAC when ours died||5500|
|Slab leak (post insurance)||900|
|Old tree died, cut down||750|
|Closing inspection repairs||1500|
|HOA fees (300 x 3 years)||900|
|Security system (1000 + 55mo)||3200|
|Lawn mower (300+75 maintenance/yr)||525|
|Total for 3 years ownership||58,000|
(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 who 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 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 are 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 a 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 might run the numbers for renting and see how much of a financial benefit that would be. ***
The home sold after we moved to my new attending job. It was on the market for about 40 days, with another 50 days before closing. Final sell price was $180,000 with a $2000 closing credit. Then during inspections, the windows (particularly their age and a small degree of “fogging” from bad seals) became a major issue – eventually negotiated to $3000 credit. That would put our bottom line at unfortunately less favorable by about $10,000 than the numbers quoted above. I still probably “beat” renting about $5000, a number I can confidently say is not even close to worth it.
Why didn’t it work out as well as I’d projected?
During residency both time and money are tight, and we didn’t have enough of either to do adequate maintenance/upgrades/upkeep to keep the home in top shape and top-asking price. Additionally, I believe the opposing Realtor easily identified that having moved over 1.5 hours away, we needed/wanted to sell a lot more than they wanted to buy. This lead to multiple concessions on our part during the negotiation and closing process.
All and all, the numbers aren’t the REAL story. The hassle factor is, and now having experienced it first hand through the demanding hours of residency and transition to attending – the HASSLE IS NOT WORTH IT. RENT, DON’T BUY for residency.
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