Explain To Me Buy vs Rent

[Postictal Raiden]

I understand that during residency, it’s almost always smarter to rent than buy because 1. You don’t know where you’ll end up practicing afterwards 2. Don’t have enough money for 20% down payment 3. You need flexibility 4. Easier to manage your budget when you have only to worry about rent vs mortgage/insurance/maintenance/etc

However, I’m having a hard time understanding why people still recommend renting over buying for newly minted attending who has massive student loans. Why continue to pay rent when this money could be used to gradually acquire ownership of a property? Many times, the rent you pay is equally or marginally less than your total monthly payment for mortgage + property tax + insurance + maintenance.

I do realize that the situation maybe different for someone residing in an area where housing prices are astronomical (SF, LA, NYC, etc), but for the vast majority of large non-costal cities, a 300k can afford a very decent house for a small family.

Yet, I keep hearing Dave Ramsey advising couples with massive student loans to “live on nothing and buy nothing until loans are paid off”.

---

Members don't see this ad.

 

[tartesos]

If you are broke you shouldn't buy a house. It is cheaper on the long run to rent, if something breaks it's someone else's problem.
Usually a new attending will change jobs in the next 3 years after training, sometimes this has to be in another city.
Things to consider.

 

[werd]

the thinking is that it's usually a good idea to build up an emergency fund, build up your down payment funds, and make sure you are likely to stay at your job before buying a house. so, consider renting for a year or two before buying to make sure you have all your ducks in a row.
I don't think it's usually necessary or better to pay off student loans before buying a house. as always, it depends on the details though. if you have a very high loan burden or high interest rate, I could see shrinking that debt before purchasing a house.

 

[DokterMom]

For new attendings, I think it's more the "likely to move soon" issue. Not that you're not stuck in an apartment; you can rent a house.

 

[Postictal Raiden]

I’ll have about half a million dollars in debt by the time I’m done with training.

PP docs in my specialty make ~300k/year with potential to make much more depending on willingness to work more nights/weekends or see more pts.

Will it be more advisable to continue renting through attendinghood until loans are paid off or would it be smarter to buy after spending a couple years in the same job?

I’m just trying to understand the justification for paying 2k a month in rent while this money could easily cover a mortgage payment + property tax + insurance.

 

[LookForZebras]

Having a lot of student debt isn't a good reason by itself to not buy a house. If the other factors in your life point towards buying as a good option (you're staying in the area, you have money for a down payment, etc), don't let your loan debt dissuade you from buying. Mortgage debt is a "good" kind of debt to have, especially now when interest rates are relatively low.

 

[Snoopy2006]

Here, I'll use myself as an example.

I pay $1400/mo in rent. A mortgage+ins in this particular area would run me $1800-2000/mo. If I had bought coming out of residency, my interest rate would have been even higher with a doctor loan.

I value my freedom. I needed to have the ability to move if I didn't like my first job as much as I anticipated, a problem that I think fresh grads underestimate. I didn't want to feel stuck in a job because I wouldn't recoup five figures in transactional costs.

For me, renting is the better option. For you, buying might be. You can't generalize. Run your own numbers.

 

[dpmd]

You have to run the rent versus buy calculations (using any of the online calculators as a starting point) and see where your break even point is. Too many people discount the buying and selling costs when they think about whether to rent or buy. Or they compare mortgage to rent and forget about the higher maintenance costs, insurance costs, property taxes, etc. Or they think they are going to gain significant equity in the first few years of ownership. The amount of student debt is a factor in what you can afford to buy but you don't need to pay it all off before you buy a home as long as you can service both debts without issue (including a good size cushion in the event of a job change since credentialing can take a while). The issue is too many people get the most expensive home they can qualify for and then become slaves to the debt servicing, staying in jobs they hate or working more hours than they really want to in order to try to keep up. When you are renting it is easier to get out of a situation you can't sustain even if there is a lease. But losing your home in foreclosure is rough for all kinds of reasons.

 

[Mman]

I/we chose to rent an apartment my first 2 years as an attending despite having the cash flow to afford buying a house. Why? Well for one who knows if your first job will work out as you hope it will. I wanted to have the flexibility renting allowed in case I needed to change jobs and move on short notice.

 

[Raryn]

I understand that during residency, it’s almost always smarter to rent than buy because 1. You don’t know where you’ll end up practicing afterwards 2. Don’t have enough money for 20% down payment 3. You need flexibility 4. Easier to manage your budget when you have only to worry about rent vs mortgage/insurance/maintenance/etc

However, I’m having a hard time understanding why people still recommend renting over buying for newly minted attending who has massive student loans. Why continue to pay rent when this money could be used to gradually acquire ownership of a property? Many times, the rent you pay is equally or marginally less than your total monthly payment for mortgage + property tax + insurance + maintenance.

I do realize that the situation maybe different for someone residing in an area where housing prices are astronomical (SF, LA, NYC, etc), but for the vast majority of large non-costal cities, a 300k can afford a very decent house for a small family.

Yet, I keep hearing Dave Ramsey advising couples with massive student loans to “live on nothing and buy nothing until loans are paid off”.

Lets stop one second and consider all expenses right now.

First, there are monthly expenses to consider. For buying, these consist of

1) Mortgage (including interest)
2) Property Tax
3) Homeowner's Insurance
4) HOA (if applicable)
5) Maintenance (or a fund there of - this is a bit of a wildcard)

For renting, these consist of:
1) Rent
2) Renter's insurance (which is a few bucks a month)

It varies from market to market whether rent is as much or more than the above expenses with buying. Some places the rent is actually cheaper than the owner is theoretically paying for the place - the difference is made up with in equity (both through mortgage payoff and appreciation). But it is true that in *general*, the rent is more than your monthly expenses would otherwise be. So why shouldn't everyone with the opportunity to buy buy?

Two reasons:

1) Fixed costs. This is primarily the closing costs buying/selling. Total round trip transaction is about 10% of the purchase price - this is a big chunk of change that is divided out over the course of the time you own the place.

2) Opportunity cost. Every penny you put as a down payment is money you could have invested elsewhere, either towards your loans or in the market. The lost opportunity for the benefit of the money is a real cost.

Two things basically end up deciding the question (for me) of whether buying makes sense. The first is how long you will stay there - if you divide out the closing costs by more months, they get relatively cheaper. The second is what the expected appreciation is in that particular market - if the appreciation is high enough, it will always make sense to buy rather than sell. Of course, predicting the latter is near-impossible. The NYT calculator ( Is It Better to Rent or Buy? ) is the best I know of for comparing all the numbers.

As a new physician, it may make sense to do either - though I can say a significant proportion of my friends ended up changing jobs within 1-2 years of graduation, so tying yourself to a particular location may not be the best strategy in the world.

 

[calvnandhobbs68]

Lets stop one second and consider all expenses right now.

First, there are monthly expenses to consider. For buying, these consist of

1) Mortgage (including interest)
2) Property Tax
3) Homeowner's Insurance
4) HOA (if applicable)
5) Maintenance (or a fund there of - this is a bit of a wildcard)

For renting, these consist of:
1) Rent
2) Renter's insurance (which is a few bucks a month)

It varies from market to market whether rent is as much or more than the above expenses with buying. Some places the rent is actually cheaper than the owner is theoretically paying for the place - the difference is made up with in equity (both through mortgage payoff and appreciation). But it is true that in *general*, the rent is more than your monthly expenses would otherwise be. So why shouldn't everyone with the opportunity to buy buy?

Two reasons:

1) Fixed costs. This is primarily the closing costs buying/selling. Total round trip transaction is about 10% of the purchase price - this is a big chunk of change that is divided out over the course of the time you own the place.

2) Opportunity cost. Every penny you put as a down payment is money you could have invested elsewhere, either towards your loans or in the market. The lost opportunity for the benefit of the money is a real cost.

Two things basically end up deciding the question (for me) of whether buying makes sense. The first is how long you will stay there - if you divide out the closing costs by more months, they get relatively cheaper. The second is what the expected appreciation is in that particular market - if the appreciation is high enough, it will always make sense to buy rather than sell. Of course, predicting the latter is near-impossible. The NYT calculator ( Is It Better to Rent or Buy? ) is the best I know of for comparing all the numbers.

As a new physician, it may make sense to do either - though I can say a significant proportion of my friends ended up changing jobs within 1-2 years of graduation, so tying yourself to a particular location may not be the best strategy in the world.

This is a great explanation. Although you might get a great number on the Zillow "estimated mortgage payment" thing when you're looking at a house, those typically fail to take into account all the other costs above.

People forget how much money they spend in closing costs every time they buy a house. Spreading that cost over 5-7 years instead of 3 years is way less of burden.

 

[DOsoon_2Be]

Sorry to sidetrack the thread but I just heard about this US Bank doctor loan program for mortgages. If I'm understanding it correctly, you only have to have a down payment of 5% for houses up to ~400k, 10% 1m, 15% 1.5m? That seems too good to be true. Anyone else heard of this and can confirm?

US Bank Doctor Loan - Doctor Mortgage Loan

Explore more details on the US Bank Physician Loan Program and connect with a mortgage loan specialist.

www.doctorloanprograms.com

 

[dpmd]

Sorry to sidetrack the thread but I just heard about this US Bank doctor loan program for mortgages. If I'm understanding it correctly, you only have to have a down payment of 5% for houses up to ~400k, 10% 1m, 15% 1.5m? That seems too good to be true. Anyone else heard of this and can confirm?

US Bank Doctor Loan - Doctor Mortgage Loan

Explore more details on the US Bank Physician Loan Program and connect with a mortgage loan specialist.

www.doctorloanprograms.com

Have heard of various lenders that do this. It had to be your primary residence. Also the interest rate was higher enough that since I could afford the full 20% I just went with a traditional. There were even zero down options. One other hitch was that when I looked at things while self employed it was going ro be an issue getting it funded before I had enough years at it (not a problem if you have an employment contract)

 

[DOsoon_2Be]

Have heard of various lenders that do this. It had to be your primary residence. Also the interest rate was higher enough that since I could afford the full 20% I just went with a traditional. There were even zero down options. One other hitch was that when I looked at things while self employed it was going ro be an issue getting it funded before I had enough years at it (not a problem if you have an employment contract)

Ahh I see. That would make sense if interest was higher. Thanks for the input and response!

 

[redfish955]

What you don't want to do is lock yourself into a long term mortgage and student loan repayment that eats up all of your funds for the next 30 years. Instead live like a resident until your loans are paid off. If there is a house you would be happy with on a residents salary then go for it. You could easily walk into a 1.5 million dollar home, $450k in student loans, and when your 60 that home will be your net worth. The key to building wealth is compounding interest and time.