owning vs renting in school

[arkenstone]

Pre-dental student here: so I assume, if you have the resources, often it can be better to own and build some equity while you're in school/residency instead of renting. We recently had a plastic surgeon come talk to one of our pre-health meetings, and he tried to convince us to do anything we could to build equity while in school in order to have some cash/equity on hand when we go to the bank asking for a business loan fresh out of school/residency/fellowship.

But here's my question: if I tried to go down this road and I had to ask family for help with only one of the other -- help paying down loans or help with a downpayment -- which would be better?

Factors: interest rates are higher than mortgage rates, so paying down loans makes more sense there. But dentists (and plastic surgeons) are specialties where single-owner private practice is still the norm, and it's certainly the way to make the best income. You'll end up needing a $250k-500k loan to buy/start a practice, and it's my understanding that, although the bank will finance the entire endeavor, you're much more likely to get the loan if you have some saved cash or equity to show. So there's the question -- is it better to have the equity ready to go so you can buy a practice, or better to have less earning potential with a little less debt?

If you don't have that cash ready when you finish your education, you're going to have to spend some time working as an associate to save that money. And during that time you won't be paying down as much of your loans than if you had gotten your own practice running. Generally, an associate just out of school makes somewhere in the neighborhood of $100k, and most established practice owners makes somewhere from $100k - $300k. People out of dental school often have debt ranging from $250k - $400k.

---

Members don't see this ad.

 

[QofQuimica]

How sure are you that you are going to be staying in your current location after you finish school? (For that matter, since you're still a pre-dent, how sure are you that you will be accepted to your local school?) Considering how much debt you will likely take on to go to dental school, that you will not have any income for the next four years, and that you likely don't know yet where you will wind up practicing, I'd be hesitant to take on yet another large debt load when it's not necessary. In other words, my vote is for waiting until after you graduate and start practicing to buy a house, and just rent during dental school. If your family is kind enough to contribute some funds to your endeavors, paying down those loans ASAP is, as you noted yourself, probably going to give you the better return on your investment in many cases given how high the interest rates are nowadays.

 

[TexasPhysician]

I would not buy in the current market unless you know you will live in the same house for 8+ years.

 

[arkenstone]

Thanks -- you two echo most of the responses I've gotten.

If I were planning on being a medical doctor, I wouldn't think twice about it -- pay down the loans. But the long term benefits of owning your own practice as a dentist, and the equity needed to get to that stage -- it's throwing a wrench in my reasoning. But to answer your question, no I wouldn't be sure I would stay in the same area for school/residency/career. That seems to be the real issue. Even though I would just be looking for casa el cheapo to build some equity, I guess too much can happen in that short a time.

 

[QofQuimica]

Thanks -- you two echo most of the responses I've gotten.

If I were planning on being a medical doctor, I wouldn't think twice about it -- pay down the loans. But the long term benefits of owning your own practice as a dentist, and the equity needed to get to that stage -- it's throwing a wrench in my reasoning. But to answer your question, no I wouldn't be sure I would stay in the same area for school/residency/career. That seems to be the real issue. Even though I would just be looking for casa el cheapo to build some equity, I guess too much can happen in that short a time.

Houses aren't always the great investment people think they will be, especially in the short term. What's going to happen if you buy a house and the market goes down? Owing more money on your home than it's worth won't exactly make you a wonderful credit risk.

 

[The White Coat Investor]

Why would you need home equity to get a practice loan? Are you planning on taking out a home equity loan instead of a practice loan? I see little reason for a typical student/resident to buy a house.

 

[arkenstone]

Why would you need home equity to get a practice loan? Are you planning on taking out a home equity loan instead of a practice loan? I see little reason for a typical student/resident to buy a house.

I've been told by several people who have sought practice loans that the banks are more likely to say yes if you have equity or cash on hand -- even though the bank will finance the entire endeavor, it matters in their personal assessment of you . . . or so they say.

Admittedly, as I'm not in even in dental school yet, the practice loans are pie in the sky -- probably more like pie in space -- at this point. But the owning/renting decision would be one I'd make in the next 18 months, and perhaps it would make a couple years difference way down the line when I'm seeking business loans.

But it's a big enough risk and there's enough difference of opinion on the matter that I'm coming away more reluctant than before . . .

 

[ThoracicGuy]

I've been told by several people who have sought practice loans that the banks are more likely to say yes if you have equity or cash on hand -- even though the bank will finance the entire endeavor, it matters in their personal assessment of you . . . or so they say.

Admittedly, as I'm not in even in dental school yet, the practice loans are pie in the sky -- probably more like pie in space -- at this point. But the owning/renting decision would be one I'd make in the next 18 months, and perhaps it would make a couple years difference way down the line when I'm seeking business loans.

But it's a big enough risk and there's enough difference of opinion on the matter that I'm coming away more reluctant than before . . .

Like others have said, owning a home has alot of risks for you as a student. You need to know that you will be staying in the same town after dental school. What if you decide to do a residency in something and end up moving to another city? You would be stuck with a house that you've only had a few years. The cost of selling could erase any equity that you have built up. I owned a house for 7 years during my training. I ended up selling because I moved to another town for fellowship and I lost a significant amount of money between the repairs that I had to make, the decreased sale price of the house, and the closing costs I had to pay.

What you are contemplating is likely to hurt you far more than it could help.

 

[rl2]

Step out of the box. Not sure what area you are in and what are rents and the ability to attract roommates. Debt is always a noose on your neck, and short term real estate doesn't make sense. However if you purchased a place at the right price (you make money in real estate when you buy the property) and could get x roommates to help cover the mortgage then it could make sense. Your expenses go down versus paying rent. Save the difference. Even if the property is flat x years into the future you are making money every month off the roommates and building equity. You need to figure out what the possibility of a decline in property prices in your area could be. Look a few years back to see what the historical drop looked like. Remember once you make this choice it's a commitment, so be sure nothing is going to effect that and cause you to move.

 

[ENTologist]

Like others have said, owning a home has alot of risks for you as a student. You need to know that you will be staying in the same town after dental school. What if you decide to do a residency in something and end up moving to another city? You would be stuck with a house that you've only had a few years. The cost of selling could erase any equity that you have built up. I owned a house for 7 years during my training. I ended up selling because I moved to another town for fellowship and I lost a significant amount of money between the repairs that I had to make, the decreased sale price of the house, and the closing costs I had to pay.

What you are contemplating is likely to hurt you far more than it could help.

My experience is quite different, and in my case, purchasing a home paid off. The main advantage you have as a buyer right now is obscenely low interest rates. This is a HUGE determining factor in whether or not a "short term" home purchase is worthwhile, when ignoring other factors.

For me, we purchased a 2,000SF home (new) and pay about $400-800 less per month than if we rented. Secondly, we were very intentional with the location of our purchase, resulting in noticeable appreciation over a relatively short time period. Since we purchased new (aka complete gut and rebuild), we severely mitigated our risk of incurring high home maintenance costs in the short run (all new appliances, furnace, roof etc.). So, combining appreciation, $400 savings monthly because mortgage is cheaper than rent, plus equity accrued through mortgage payments, plus tax benefits, plus lower upkeep costs (new home) seems to (at least currently) have resulted in making short term home ownership for us a VERY smart decision.

Admittedly, this could not have been the case if any of the above variables were different.

 

[thesauce]

plus lower upkeep costs (new home)

I was with you until here. How are your upkeep costs lower than if you rented? If you rent, the landlord pays for all maintenance.

 

[TexasPhysician]

I was with you until here. How are your upkeep costs lower than if you rented? If you rent, the landlord pays for all maintenance.

A new home may require no fixes/upkeep. Many new rental agreements include a $50 or so charge for every maintenance request. This is done to minimize requests.

 

[thesauce]

A new home may require no fixes/upkeep. Many new rental agreements include a $50 or so charge for every maintenance request. This is done to minimize requests.

I've never heard of this. I doubt it's even legal in my area.

 

[QofQuimica]

I was going to say, I've been renting apartments in seven cities located in four different states over the past two decades now, and I have *never* been charged for a maintenance request, with the one exception of having to pay to call out a locksmith after locking myself out of the apartment at night once during my first year of med school. And I readily concede that charge was justified, since it was my own carelessness that led to needing to pay a locksmith, not anything wrong with the apartment per se.

 

[TexasPhysician]

I was going to say, I've been renting apartments in seven cities located in four different states over the past two decades now, and I have *never* been charged for a maintenance request, with the one exception of having to pay to call out a locksmith after locking myself out of the apartment at night once during my first year of med school. And I readily concede that charge was justified, since it was my own carelessness that led to needing to pay a locksmith, not anything wrong with the apartment per se.

I have not seen it occur with apartments, only rental homes.