Rent or buy?

[Classof2010]

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My first post! Hi everyone. These forums are amazing!

OK, I have a dilemma: if I move to another city to start med school, should I buy a house or rent?

Here are the specifics. I'm married, two kids, we own a house already with a fair amount of equity. My wife will continue to work part-time but her income will not be able to cover our living expenses. I'm planning to get as much as possible in federal loans to cover tuition and other expenses. I will not be elegible for any need-based loans because my parents won't supply their financial information (I'm sure that if they did supply their financial information I would still be inelegible for need-based loans). My parents will not pay for med school, but they are willing to do the next best thing: loan us as much money as we need to make ends meet, whether we buy a house or rent.

So if we buy a house, we'll need to max out federal loans and get a substantial loan from my parents to pay the mortgage and help cover our expenses. In other words, enormous debt when I get out of med school. But we'll still have the equity in our home, and maybe substantially increased equity if the housing market in the area continues to rise. We could end up being in the house for eight years or more if we stay in the area for residency (definitely a possibility). Also, some of that enormous debt will be paid back to my parents, so it's tempting to think of those payments as deposits into my inheritance.

If we rent, we'll still max out federal loans, but we may not need to borrow anything from my parents, at least for awhile. That's because we'll be able to live off the proceeds from the sale of our current home. So at the end of med school, we have less debt, but little or no equity.

I know it's hard to give advice without examining the actual numbers. I'm still working them out myself. So many variables, so many unknowns. I'm not complaining, btw -- I recognize that having parents who are willing and able to give us large loans at favorable rates is a blessing. We won't make this decision based entirely on the financial factors, but they do matter.

Any thoughts? (BTW, I'm not willing to consider a military scholarship.)

 

[blee]

We have a home with a good amount of equity in it as well. Our strategy will probably entail moving to a school in a location with lower cost of living, buying a house with most of the equity as a down payment, and making sure the monthly PITI ends up being less than or equivalent to rent.

I considered renting for the duration of my med school years, but couldn't bear with the thought that we'd basically eat through our equity and that we'd have little saved up to put down on a house once I'm done with school and/or residency. I personally would feel better about paying off a higher student loan burden in a more comfortable home than having less student debt but having to save up again for a house in what might be a much more expensive market.

 

[MJB]

I'd probably buy below your means at that point...

Maybe a townhome or something? If everything works out right, that's what we'll likely do.

 

[Tribeca]

MY situation's slightly different from yours, but here it is: My husband and I decided against buying a house prior to med school. We're in a hot buyer's market right now, but things are slowing down. I only have 1 1/2 years until MS, so we decided that it's not woth buying if the market drops significantly low by the time we sell it (kinda like a gamble). Plus trying to figure out whether to sell, rent out, or keep the home will only complicate our already complicated out of state move. The deciding factor was when I read (MD)^2 from the AMCAS website. It describes different scenarios for non-trads and their financial situations. For example, in the lending process, if you have a home, you might not have enough money to cover the mortgage. If you sell or rent it, it will count as income and will decrease the financial aid that you may be eligible for. My father is a Realtor and my brother a financial advisor, so we did get a lot of sound advice (no, too bad they won't be helping us financially in MS, but I know they will if something tragic happened.) It was a difficult decision to make for us (cause I really wanted a house!), but then again, it was the best thing to do for OUR situation.

 

[NE2NUR2DO]

When I finally get to go, then I plan to find a cheap (5000 or so) RV and live out of it. That way, I can keep the house that I am in now, continue to build equity, and will just drive home on the weekends. Granted, I won't see my family during the week, but with properly managed time, I will be able to drive home and see them all weekend, and I will probably get better studying since I won't get distracted.

 

[medicalbound]

To the OP: My wife and I have decided to rent instead of buy. The equity we will get from the sale of our home will pay our rent for 4 years. We will then be able to scrape by on the fed loans we will receive (maxed out). My wife is a stay-at-home mom for our 3 kids. I guess the word "decided" was a bit ambiguous as it is really the only feasible way for us to make ends meet. Although it's not optimal, we aren't too upset about "losing" the equity from our home. It's going to keep a roof over our heads through medical school. Aside from the immediate practical reasons, if I get matched out of state for residency (not an unlikely scenario), we would *have* to sell the house and who knows what the housing market will be like then. Yes, the equity makes it so we are ineligible for needs based scholarships and grants, but we are still eligible for the full amount of loans authorized by the gov. even if they are unsubsidized and through alternative lenders. It's still better for us. As you can see from this and other posts on this thread, what is right depends on your specific circumstances. Just know the options inside and out, and make the decision with your wife. I wish you the best and welcome to SDN!

 

[njbmd]

Hi there,
If you are going to be in a location more than 2 years, it makes sense to buy. The biggest downside is that moving to a completely new location takes some planning before you sink money into a house. Some locations like the metro DC area and Charlottesville have strong housing markets and you can get a sizable return on your investment if you buy in the entry-level markets.

This being said, I rented for medical school (moved a couple of times) and bought during residency (seven-year residency). I was shocked at the increase in the value of my house after three years!

njbmd 🙂

 

[Non-TradTulsa]

Maybe I can put my CPA hat on again and be of some use here. I just went through the "do I dump my house" process, and it was painful and took a lot of thought. Here goes...

My first instinct when faced with four years of unemployment was "dump the house - cut the expenses to the bone." As a non-traditional, however, I don't think you should just look at what you'll owe when you're done - you need to look at your net worth - what you will owe, and what you will own. I quickly realized that I might cut my living expenses a few hundred dollars a month, but the realtor commission on selling my house plus moving would approach $12,000 - oops, better think about this one. Also, you do have to consider that the appreciation in value of a house - if you own one - will be an asset at the end of school.

But, paying off low-interest fixed mortgage debt with student loan debt (Stafford is ultimately variable up to 8.25% - and your private loans can go higher than that) didn't make sense either. Remember, while you're in school, you're actually paying off nothing no matter what you do - you're just paying off debt with more debt. So, even though I despise them for working people, I'm putting my house on an interest-only loan which has a fixed (pretty low) rate for 30 years. For the first 10 years it's interest-only, then it converts to a 30-year loan. Perfect for me - and I don't have any risk of future mortgage rate increases since I'll have a long fixed term.

So, I'm not paying off my mortgage balance - but I'm keeping my equity safe (also remember that, if you sell your house with a fair amount of equity, you're going to have to spend that money on your education - you can only keep about $19K in exempt cash - whereas your house equity is fully exempt). And, since my monthly increase in the house's value (even in a fairly slow market) is about the same as my interest-only payment - I am, for all intents and purposes, living in my own house for free when compared to renting.

I would check with your school's financial aid office. My school is pretty tough on raising living expense budgets, but they said they had no problem with increasing the housing part of my budget to meet my mortgage payment as long as I could document it.

This is only my experience and the thought process that I went through. If you're not strong with financial calculations and "what-if" scenarios, I would recommend spending a couple of hundred dollars to talk to a CPA or a personal financial planner about your specific situation before making decisions about buying or selling a house. As a non-trad, you really need to look at all the angles.

 

[liverotcod]

My wife, two kids and I moved from Virginia to Wisconsin for med school. We had sizeable equity in our Virginia home and were able to put 60% down on our new home in Madison. The first six months, though, we rented so as to familiarize ourselves with the area and do extended house-shopping.

It's costing us about $200 more per month to own than rent. We're easily earning that in appreciation, though. My wife does not currently work outside the home, and if things get too tight she can take a weekend/evening job if necessary - that's our backup plan.

 

[CaveatLector]

Someone correct me if I'm wrong but your parents don't need to supply their financial info for you to get need-based loans. You're married with a family and your parents' situation is no longer relevant. Unless they were going to cosign.

I'd be wary about buying if I were you. If you crunch the numbers you will see that you GENERALLY don't touch much of the principal of the loan in the first several years of the loan. So, gaining equity in that respect isn't much to think of, especially when you consider closing costs, etc. The only true way you would benefit much would be if you expected that real estate values would rise enough within those 4 years. There would also be a bit more of a benefit if you put down a substantial down-payment such that MORE of your monthly payments would go towards principal because interest on the loan would be less.

I don't think you should bank on being in the area through residency unless that is what you want to do. Some people may decide it is better to stay in the area so they don't uproot and cut ties with their children's friends, school, etc. If that is how you are thinking then being 8 years in the area would make buying a little more attractive. However,if you think you are more likely to take the best residency offer and therefore move again then you are back to being just 4 years there.

I don't know how much equity you have but if you think it may be just 4 years in the area it may be best to invest the money and use the dividends and principal if necessary to help finance things. But if you do that be sure to factor in any capital gains losses. It's really a numbers game that comes down to the amount of equity and the housing market. Without more specifics it's hard to advise.

 

[oldManDO2009]

I had a pretty similar experience. We moved from AZ to CA where the housing market is insane. Our choice was to save a few hundred bucks a month renting or buy a house. In the end we bought a house because of tax and equity advantages. Unfortunately the housing market has cooled off a bit and since we could not afford the house we wanted we ended up buying something less than optimal and sinking some money into painting, repairs and upgrades. Overall, even if I sell the house and break even I would be better off than rent.

Many non-traditional med students come with 401Ks and IRAs - we had to look at the overall advantage of preserving our retirement accounts - debt, and expenses associated with med school. The financial implications are varied and require some deeper thought. I chose not to cash in retirement savings because the market is in good shape and those accounts could grow significantly in the 4 - 7 years of school and residency. The later you start saving for retirement - the harder it is to catch up.

I chose to pay off debt before I started school and we are only left with a car payment - we were unable to pay it off prior to school. I think that strategy was more helpful then anything else. We just have the basic living expenses and that seems to be the approach that worked best for us...

We did many excel spreadsheet budgets and our best efforts have resulted in a fair approximation of actual expenses - having a family in med school means some expenses cannot be deferred and that make it tough to budget.

I have droned on long enough - good luck with school and enjoy the fact that each day you get to come home to your family. It makes school some much more palatable.

 

[Tribeca]

I had a pretty similar experience. We moved from AZ to CA where the housing market is insane. Our choice was to save a few hundred bucks a month renting or buy a house. In the end we bought a house because of tax and equity advantages. Unfortunately the housing market has cooled off a bit and since we could not afford the house we wanted we ended up buying something less than optimal and sinking some money into painting, repairs and upgrades. Overall, even if I sell the house and break even I would be better off than rent.

Many non-traditional med students come with 401Ks and IRAs - we had to look at the overall advantage of preserving our retirement accounts - debt, and expenses associated with med school. The financial implications are varied and require some deeper thought. I chose not to cash in retirement savings because the market is in good shape and those accounts could grow significantly in the 4 - 7 years of school and residency. The later you start saving for retirement - the harder it is to catch up.

I plan not to touch our IRA when I go to med school, but I've read somewhere in our prospectus that you can borrow or take money out of IRA without penalty if it's for professional school. I'm worried that the financial aid office or FAFSA will take this into consideration and reduce your aid amount because of our IRA. Does anyone know about this? Or am I misinformed? Non-TradTulsa?

 

[PhDtoDO]

Hey,

I may be moving from New Orleans to California. I can't sell my house (crazy situation down here) although I'm redoing it because of the hurricane even though I might be heading to the bay area.

It all depends on the market where you're going. I've been in NOLA for 7 yrs and know where to invest.

I've looked at houses and condos near Touro and if I get some med school roommates I can handle it, if I get a military scholarship and a good house. I have an aunt who knows the area and is a realestate maveric.

No help from my parents, but there are certain types of mortgages where if you put down 20+ percent they don't look at income so I'm hoping to take out the equity (my house will be completely redone) of my house here and use it as a down payment (I own a duplex here).

But if I stay here, I can buy another duplex.

Its pretty different depending on where you are going.

I don't have kids but I have a bunch of pets and am living in a closet dorm room while I finish my PhD and rebuild my house. I had to outsource my pets and I miss them desperately. Major stress time in my life.

I think I'm just talking to myself about myself but really it all depends on where you are, what you need and where you are going.

If I go to california, the cool market could help me. It's better than the stock market generally. I'd say call the school admissions office and ask for a list of realtors in that area...they often have a list of recommended ones...at least they do for residencies. If you have any friends in realestate ask them even if you're moving to somewhere else. Sometimes its all about housing needs, sometimes investment, often both.

Just my opinion,

-s

 

[MeowMix]

Buying or renting depends very much on your location. You have to do the math and figure out which makes sense. For example, I live in an expensive housing market for buying, but cheap for renting and lots of supply. Landlords are giving away free months of rent, free high-speed internet, etc.

I sold my house and I'm renting during school. I like it.

Advantages: if I have maintenance problems, I call the landlord. If I get a really noisy neighbor, I can easily move. I don't have time to shovel snow or water the yard. I can afford to live very close to campus without having housemates. I invested my equity and it's making enough money to cover about half my expenses each year, so I'll still have savings left when I graduate.
At our school, we can end up moving around the state for rotations in 3rd year. I don't have to worry about a house while I'm out of town. I could move out of my apt and save the rent money altogether. And, if I have to move for residency, I don't have to worry about having to sell a house at a specific time (and I really don't want to be an absentee landlord during the most stressful years of my medical career).

Disadvantages: I no longer have the mortgage interest to deduct against my income. I can only deduct $4000 of my >$20,000 tuition. So I have to pay tax on the income from my equity.

 

[oldManDO2009]

The FASFA has a weird formula for investments and retirements and you are allowed a certain allowance that is deducted and calculated, mostly confusing in the usual government fashion.

Bottom line, I did not qualify for much in unsubsidized loans and ended up with a majority of non-subsidized loans but I was able to barrow the total allowed budget. I can chose to pay the accruing interest or be in more debt. I think barrowing from an IRA is a mistake - I am up 10-12%, if I had barrowed against it I would not have those funds working for me and time is key in investments. I would not regain ground lost - so I leave retirement money working...I plan on practicing in a rural area and many states offer incentives so it makes no sense cashing in an IRA that could double while in school (7/2 rule) when I can repay my loans with those incentives.

This year I will qualify for more subsidize loans and next year I should be able to max out subsidized verses unsubsidized loans. One benefit most non-traditional students have is good credit. I was able to qualify for loans with good rates - whereas some students had credit problems that made the process more difficult for private loans.

BTW the FASFA is completed annualy

 

[1Path]

I'd probably buy below your means at that point...

Maybe a townhome or something? If everything works out right, that's what we'll likely do.

Depends on where you live. Townhomes in metro DC in a good neighboorhodd w/good schools can EASILY cost 500K.

 

[blee]

Depends on where you live. Townhomes in metro DC in a good neighboorhodd w/good schools can EASILY cost 500K.

And actually, those $500k townhomes are 15-20 miles outside of downtown D.C., meaning a 60-90 minute commute during rush hour. (Ask me how I know...sigh)

 

[MJB]

Hence, the reason I won't be moving to the East Coast any time soon. 🙂

That's ridiculous.

 

[1Path]

And actually, those $500k townhomes are 15-20 miles outside of downtown D.C., meaning a 60-90 minute commute during rush hour. (Ask me how I know...sigh)

I live in suburb of DC in Maryland. But the crime and school system in DC is enough for any parent to NOT conside living there, IMHO. If I'm accepted to a DC med school, I'll most certainly commute in everday by metro. However, a 60-90 hour commute isn't that bad considering I was commuting 5 hours daily to B'More everyday! 😱

 

[mshheaddoc]

Someone correct me if I'm wrong but your parents don't need to supply their financial info for you to get need-based loans. You're married with a family and your parents' situation is no longer relevant. Unless they were going to cosign.

for medical school some schools require it no matter how old you are

I'd be wary about buying if I were you. If you crunch the numbers you will see that you GENERALLY don't touch much of the principal of the loan in the first several years of the loan. So, gaining equity in that respect isn't much to think of, especially when you consider closing costs, etc. The only true way you would benefit much would be if you expected that real estate values would rise enough within those 4 years. There would also be a bit more of a benefit if you put down a substantial down-payment such that MORE of your monthly payments would go towards principal because interest on the loan would be less.

I believe that is the point with having his parents help him I imagine with downpayment of a house or monthly payments of rent or mortggage. That is just my interpretation though. Additionally, in certain areas some people retain rental properties. If its a good area for rental (such as right near the school or area for renting) then he can have an investment in the house which would extend more than 4 years. Only reason I mention that is because we plan on staying here for at least 4 years then renting our current house.

I don't think you should bank on being in the area through residency unless that is what you want to do. Some people may decide it is better to stay in the area so they don't uproot and cut ties with their children's friends, school, etc. If that is how you are thinking then being 8 years in the area would make buying a little more attractive.

It's really a numbers game that comes down to the amount of equity and the housing market. Without more specifics it's hard to advise.

I agree with the above advice. Depending on what housing market you are looking at, the type of mortgage you get, and if you are staying in the area then I would examine and weigh the pros and cons. If it were me, I'd probably buy if I wasn't in a major city. I'm out in the midwest where housing is pretty reasonable compared to the prices I'm used to in Philadelphia/New York/New Jersey area where prices are insane (or California to boot!

 

[mshheaddoc]

However, a 60-90 hour commute isn't that bad considering I was commuting 5 hours daily to B'More everyday! 😱

60-90 hours! 😱 I think ya meant minutes. 5 hours daily is insane. i draw the line at 3 hrs.