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Residency move: rent or buy?

Discussion in 'Emergency Medicine' started by Coleman, Dec 4, 2002.

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  1. Coleman

    Coleman Senior Member

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    I've heard from residents in other programs (OB, Radio) that depending on the institution, there are sometimes great incentives/abilities for residents to buy a home in the area, even though they make a paultry living and already have a mortgage of debt.

    Has anyone heard of this at any ED programs? In your interview process, are most residents you talk to renting a place or have they bought a house?

    For those of you living on your own (i.e. no financial help from the parents or others) what is your plan?

    Thanks.
  2. docB

    docB Chronically painful Administrator SDN Senior Moderator Lifetime Donor

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    I absolutely recommend buying a house. The rule is that might lose money if you flip (resell) in less than 5 years but that doesn?t take into account the fact that you would be paying rent otherwise and you get a tax deduction on the interest.
    Here are a few points in favor of buying:
    Interest rates are extremely low right now.
    You can get a mortgage even with your debt by getting them a letter saying that you will be able to forebear you loans.
    Once you start taking your mortgage interest deduction you can itemize on you taxes which allows you to deduct your unreimbursed professional expenses like books, professional dues (EMRA, ACEP, AAEM, SAEM, etc.), PDAs, equipment, conferences and travel to and from such events, tests like USMLE, your licensure expenses and others.
    Owning will give you a credit history to use to get a better place once you move on and make the big bucks.

    Bear in mind that this will probably be the first time in a long time that you and your spouse if you have one will be making money together. A family making >$60k (two people making $30k each) is considered the super rich by the government and you will be taxed into oblivion. Whatever you do you need to do it with an eye on your taxes.
    docB
  3. Coleman

    Coleman Senior Member

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    docB - thank you!

    I knew there was someone out there with the information I wanted to hear. I've wanted to buy and am still worried about the downpayment, however the pros so outweigh the cons, it really makes no sense to continue throwing away rent money.

    What letter you mentioned stating our ability to handle the loans, does that come from the school or bank?

    Overall, great answers to my questions. I appreciate it.

    Cole
  4. Annette

    Annette gainfully employed Lifetime Donor

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    I think buying, if you can, is a wise idea. However, you should consider your income very closely. If you payments are low, and have enough to cover emergency expenses, like a new furnace, then buy. If you are on a very tight budget, you should still continue renting until you have a big enough safety net. If you rent, the landlord has to fork out the money for a new furnace!

    Another thing to consider when buying is where will the market go? What is the main industy supporting the area you are going to live in? Is it stable? If the industry should crash, you may lose you shirt becuase property values may crash.
  5. docB

    docB Chronically painful Administrator SDN Senior Moderator Lifetime Donor

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    Annette makes some good points. Housing values can go down and just like any investment you can lose money. However home ownership is a relatively safe investment and a tough market usually means you break even rather than lose. And remember that to have a net loss you have to lose more on the value of your house than you would have paid in rent for the time you were in the house. Her other point about having a cash safety net is a good idea. One way you can lose out big time is if you have something come up that you can?t handle and you default on your mortgage. It would be a good idea to have 2-3 months worth of mortgage payments saved up.
    The letter I mentioned came from my residency in my case. Interestingly they were nice enough to write that before I started working for them (after match, I think it was in May). All it said was that residents have the ability to request forbearance of their educational loans. That worked for me. Most lenders and mortgage brokers don?t understand the system so it can be variable. I believe SallieMae has some info on this too on their web page.
    As for down payment it?s very nice if you can put 20% down as this saves you money on various things (PMI mainly). Most residents can?t do this so there are 100% and even 103% financing available. 103% is designed to pay for the house and the closing costs.
    docB
  6. codebrown

    codebrown Junior Member

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    You guys are absolutely right about the benefits of buying, but one major benefit of renting if absolute flexibility. You can rent with the knowledge that you can accept a joba after residency in a distant city, and not have to worry about turfing the house. If there is a slow housing market when we finish, your capital can be tied up for months while you wait for the house to sell- or worse, you end up being an absentee landlord, living thousands of miles away- maybe having to make two mortgage (or one mortgage and one rent) payments.
  7. DoubleDoctor

    DoubleDoctor Ceder Dog's Daddy

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    There are 100% financing programs for doctors that do not require a down payment soyou only need 2-3K for your closing costs and some will even let you finance those up to 103% of the purchase price. Not all lenders have these programs so you may have to do some research to find them but they are definitely out there and the interest rates are fairly decent, although slightly higher than a conventional loan but it's tax deductible so it really doesn't have that big of an impact on your payment and just gives you more to deduct on your taxes. I second all the other opinions that buying is a sound investment. Average appreciation in the US is 4-6% a year (granted there are places with negative or no appreciation so research where you are buying and don't take some realtors word for it, check tax records of sales and get hard numbers).
  8. EM_Rebuilder

    EM_Rebuilder Member

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    I actually limited my application partly to places where I could buy a house, and prefer a few acers.

    The house I bought for medical school; I should make about 20K+ on. Guess I can report back after it goes up for sale after the match....

    Plan on doing the same or better for residency....
  9. hyperbaric

    hyperbaric Cool under pressure.

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    Speaking of Bank of America and downpayments...

    I saw a related thread *somewhere* (and now I can't find it) where someone mentioned using your BOA credit card rewards towards closing costs. Anyone have any experience with this?
  10. sarahinromania

    sarahinromania New Member

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    I recommend buying as well. My husband and I are living in a very nice (brand new, even, house) for 870/mo in mortgage/taxes/homeowner's insurance. It's better than what we could rent for that money, and so as long as we break even when we sell, we've saved $870x36 months=$31,300 on rent plus the tax deductions. As a new M.D., you're in a great place to bargain for a good deal with mortgage companies. If you take the time, you can totally get a 0 money down mortgage, refuse to pay PMI, and we negotiated to have the seller pay all our closing costs because the market was so tight. There is a mortgage thread in here somewhere with about 30 pages to it that I recommend reading at least in part to get educated about ARMs vs. 30 year fixed, what kind of interest rate to accept (we got 6% with one point that the seller paid as part of our closing costs) which companies offer 0% down mortgages in which states, etc.

    I would also advise not being too aggressive in buying a fixer upper. We bought a new house, but really wanted a couple of older houses that needed work and thought we could make some money. Just making some relatively minor changes in a new house (painting, building a fence for the yard, etc.) ended up being a huge investment in time and I can't imagine trying to flip a house during residency.
  11. NinerNiner999

    NinerNiner999 Senior Member

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    We are selling our home in Baltimore after living here for three years through residency. The market is stable here and we will be making close to 100k in profit after our closing costs from the sale. Although I don't plan to do so, this amount of profit could wipe out my student loans! I have been very pleased with owning a home during residency and would highly recommend it for all of the above reasons.

    We are in the process of buying a new home where I will be working next year and they have accepted our offer (yeah!). This would not have been possible without the home we currently own. For this reason alone (boosting our credit score, giving us sizeable assets, securing a second mortgage) I would buy a home during residency.
  12. b18c1

    b18c1 New Member

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    Good thread. Does any of this apply in California?
  13. LovingItAll

    LovingItAll Member

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    I think the decision to rent vs. buy is as much an individual choice as choosing a residency program. I believe that generally it is more economical to buy rather than rent...but for my situation I foresee renting during residency as being the better option.

    Assuming I get one of my top three choices and there are no major changes to my family's financial picture, I anticipate we will be renting rather than buying because its very possible (if not strongly likely) that we will move after three years to a different location. There is a ton of money that you "lose" when you buy/sell a house- mortgage points, mortgage interest, buyer and seller fees, property taxes, property insurance, maintenance costs, etc. As was mentioned before, you need to stay about 5 years in order to recoup these costs by home appreciation.

    As for the tax write-off for mortgage - don't forget the standard deduction, which depending on your filing states will minimize the perceived benefit. For example, at 5.5%, you would pay about $6500 in interest during the first year for a $150,000 mortgage. That figure happens to be LESS than the $10300 standard deduction for a couple (like my situation) that files "married, filing jointly." True, you can also write off property taxes and a host of other things when you itemize, but depending on your situation it may not be a clear slam dunk. As for professional expenses: the programs at the top of my ranklist have tremendous benefits where they will be paying for a majority of the things I saw in an earlier post such as conferences, books, society membership, etc. So obviously, there's no itemization opportunities there.

    Secondly, the thought of any sort of home repair project sounds about as enjoyable as rounding everyday for the rest of my life. I don't want to spend my precious off time fixing a house - I like the idea that I can just call the landlord and tell him to fix it.

    Finally, I'm pretty risk averse. True, the property values could increase and you end up making a little bit of money. Its also true that property values could go down, and you end up losing a little bit. With renting, I know I will be paying for a place to live, no worries about home maintenance, and no worries about property values going down.
  14. Dr.Evil1

    Dr.Evil1 Senior Member

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    I personally love owning my own home. I am very glad that I made that decision.

    I do warn though that by buying a home you are actually making a rather large investment. You want to make sure that if you buy you may actually be able to sell after 3 years of residency. Even if you don't relocate to another area you will probably want to upgrade from the house you can buy on 40K to the house you can buy on 250K. Yes housing prices have consistently risen forever but you never know.

    I am from Detroit and if I were looking at it from a pure investment standpoint I would NOT buy in this market. Michigan has a particularly poor real estate market right now. I know one person in particular who has been trying to sell his old condo for over a year. He has dropped the price to below the purchase price from 2001. He has already bought another place with his attending money but CONSTANTLY bitches about not being able to sell the place. If you are on the fence at all you can always rent and not have that one more thing to worry about at the end of your residency.
  15. quinsy

    quinsy

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    just wanted to add, as someone who bought a home for the first time during medical school, that you have to look at a lot of hidden costs.

    Some people have already mentioned a few of the potential hidden costs, but here are some I completely forgot about:
    1) real estate tax & school tax. I thought I was breaking even on my house until I realized I was paying over $3000 per year in taxes on it.
    2) Homeowner's insurance. For me it's like $300/year, not that big a deal.
    3) Appliances and furniture. If you are moving to a larger place or a new place, there are significant costs in buying stuff. I was so surprised that new houses do not come with appliances. Mine came with an oven and a microwave, but it took a bunch of work and money to get a fridge and a washer and dryer. Plus to fill up all the space I ended up buying a king sized bed, sofa, dining room set. I shopped around to get them cheap, but still I hadn't really been taking all that into account.
    I guess it's kinda obvious from the other posts in this thread that you can't just use the formula "if mortgage monthly payment is less than or equal to rent, then buy"

    Having said that I would note that I'd absolutely buy again. Owning a house is pretty cool. I will be selling soon and expect to make about 5-10K on it.
  16. The White Coat Investor

    The White Coat Investor AKA ActiveDutyMD Partner Organization

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    All right DocB, let's brawl.

    Point # 1: "The general rule is don't buy if you are leaving within 4-5 years." Although this didn't apply from 2003-2006 because housing prices went through the roof, it is a rule of thumb for a reason. It takes 4-5 years of normal appreciation to make up for the costs of buying and selling. I owned a condo from 1999-2003. Bought it for $80K, sold it for $83K. Paid $2K in closing costs to buy, and paid about $4K to sell. Guess how much money I made?

    Point # 2: "But you're paying rent otherwise" sometimes also stated as "renters are just throwing money away." Guess where all that interest money goes? The same place as rent, to someone else. Same thing with property taxes and closing costs. The only money you are paying to yourself is the amount going to equity. Let's say you get a mortgage for 6.5% right now (the going rate), $0 down, $0 closing costs for a $100,000 mortgage. After 4 years of residency you will have paid down exactly $4940. Closing costs when you sell are approximately 6%, or $6000. If the home doesn't appreciate significantly, you will lose money on the deal assuming rent=mortgage.

    Point # 3 "But you can deduct the interest." This is only true for the amount of interest above the standard deduction. If you donate $10,500 to charity every year, then yeah, your mortgage interest is deductible. Let's say your only deduction is mortgage interest. Let's say you get that same 30 year 6.5% fixed mortgage for $200,000. The first year you pay $12,934.00 interest. You only get $2434 more in deductions than the guy who rents, not $12,934.

    Point # 4 "Interest rates are really low right now." This implies the ability to forecast the future. Rates were lower in 2002-2004 than they are now. Who is to say they won't be lower in the future than they are now? Historically they have been higher, especially if you look at the 70s and 80s. But that was also a time when 8-10% inflation was the norm. Interest rates had to be high to compensate lenders for the inflationary losses.

    Point # 5 "You can deduct your professional dues etc." This is only true if your professional dues are greater than 2% of your adjusted gross income, a hurdle that many of us can't get over, especially if your residency program is picking up the tab for those things.

    Point # 6 "You need to worry about your credit history." Too many people emphasize credit history. It simply isn't that hard to get a decent score. Get a couple of credit cards, put a tank of gas on each every month, pay it off every month, repeat x 2 years and you will have a credit score adequate to get the best mortgages available.

    Point # 7 "Two people making $60K get taxed into oblivion." Two married persons making $60K per year and deducting nothing beyond the standard deduction pay about $5712 in taxes, or 9.5%. If they have two kids they pay $2782, or 4.6% of their income. I'm not sure what you mean by oblivion, but I'm pretty sure 5-10% of your income doesn't quite qualify.


    Now, there ARE times when it makes sense to buy a house. The most obvious, of course, is when the market is going to go through the roof while you own it. Unfortunately, this is hard to see. I have made this call wrong two times so far. I owned during a flat market in med school from 1999-2003, and I rented during the real estate boom from 2003-2006. As you can see, this is hard to predict in advance.

    In my opinion, if you cannot afford to put 20% down on a 15 year fixed mortgage you can't afford to buy the house. Most people coming out of med school can't do this on a resident salary, but some can if they live modestly in a relatively inexpensive area and happen to have some cash saved up.

    When you are an attending making $180K-$250K it doesn't make much sense to rent. At that income level the interest deduction IS important. You are also often in a bit more stable situation and will be in the house long enough to realize the benefits of home ownership.

    A home IS a great investment. Home prices generally keep up with the inflation rate, and since you buy it with leveraged money, real estate investing returns are generally comparable to stock market returns. But just like in the stock market, great returns don't come without taking risk. Home prices DO go down, sometimes for long periods of time.

    A few miscellaneous points to consider when deciding whether to buy a home:

    1) Maintenance costs are not insignificant. Plan on 1% of the value of the home per year, more if it is an older home.
    2) A home owner pays ALL the utilities, including garbage, water, recycling, homeowner association fees etc that you may not have paid directly as a renter.
    3) Sometimes homes are difficult to sell. In a buyer's market you pay dearly for a quick sale.
    4) Homeowners get to do whatever they want with the house. You can paint it whatever color you want, add on an extra room, recarpet with whatever you want. How do you feel about repainting on your day off after an 80 hour work week?
    5) You will see "doctor's loans" advertised by places like Bank of America. How nice. They think doctors are so great that they don't force them to get a higher rate second mortgage or to pay PMI for not having 20% down. Trust me, they don't cut doctors any breaks. They know we're financial suckers. The rate on the primary loan will be sufficiently higher to make up for the fact that there is no second. For example, while shopping for mortgages I learned that if I put 20% down I get a 6.25% mortgage. If I do an 80/20 loan, I pay 6.75% on the first mortgage and 7.75% on the second. Just the fact that you have a second makes your first mortgage cost more. The Bank of America $0 down doctor's loan would have been about 7%.
    6) The run-up in housing prices that many markets have seen has not been accompanied (for the most part) by a run-up in rents. In some places, California in particular, rent is downright cheap compared to the price of buying a home. The cheaper the comparable rent, the more the home has to appreciate for you to break even.
    7) Homeowner's insurance costs more than comparable renter's insurance.
    8) Don't forget the main benefit of renting is flexibility. I showed up in my residency town two days before orientation starts. I rented a house one day before and moved in. I got a couple extra weeks of vacation out of that. Nor did I have to pay any additional months of interest when I left.

    In short, owning a home is a good thing to do eventually. But if you rush into it before you are ready and before you understand the costs involved, you may regret it. (And if the market goes through the roof like it has the last few years, none of my points above matter a bit.)
  17. The White Coat Investor

    The White Coat Investor AKA ActiveDutyMD Partner Organization

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    I've got to dispute these two too.

    # 8 "To have a net loss you have to lose more on the value of your house than you would have paid in rent." This is not true. You must evaluate the cost of the interest as well. Interest=rent. That entire mortgage payment doesn't go to principal. (In fact, with a 0% down, 30 year mortgage, very little of it does for the first 3-5 years.)

    # 9 "It would be a good idea to have 2-3 months worth of mortgage payments saved up." If you don't have an emergency fund worth 3-6 months of ALL YOUR EXPENSES (not just your mortgage) you're probably not in a financial position to buy a house. Let's assume your living expenses are $3K per month. Your mortgage costs $1K per month. You lose your job. You have 3 months of mortgage payments saved up ($3K.) That is only 1 month worth of living expenses. In a tough creditor state like Virginia you won't own a house in 3 months in that situation.

    Again, owning a house is a great investment, but be sure to "read the prospectus" before investing.

    www.mortgageprofessor.com is a great resource for more information.
  18. The White Coat Investor

    The White Coat Investor AKA ActiveDutyMD Partner Organization

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    As far as great financial moves to make as a resident, I would rank fully funding a Roth IRA for you and/or your spouse as a higher priority than buying a house.

    http://www.emra.org/index.cfm?FuseAction=Page&PageID=1001588

    If you don't know how to open one or what to buy inside of the account, go to Vanguard.com and put it in one of the target retirement funds and just forget about it until next year when you put more money into it.

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