Buying a House During Residency

My daughter called me up yesterday and she said, dad, what do you think about me going to do summer sales next summer? For those who aren't familiar with summer sales, this is basically people that go out and sell something door to door. Pest control, sometimes that's a common one, and sometimes some other sorts of products, but they get paid very well. It's all commission sales. And if you're good at it, which I think she would be, you can make tens of thousands of dollars in the summer before you come back to college. She's like, well, what do you think if I go do summer sales, make a whole bunch of money and buy a house? This is my 20 year old, right? Buy a house and live in the basement and rent out the top and then have that be my first real estate investment. This is what she tells me. I was proud that she said, go earn the money to do this rather than take my 20s fund and do this. But we had to talk about some realism when it comes to house hacking. When it comes to real estate investing, the first thing I asked her was, well, where are you going to live when you get out of school six months after you buy this house? Where are you going to be? I don't know, dad. What's your job going to look like? I don't know, dad. How much income are you going to have? I don't know, dad. But you think buying a house now and starting your real estate empire now is the way to go, Is that right? And she's like, well, okay, it doesn't sound so smart when you put it that way. And that's how it sounds when I hear lots of new residents talking about buying their homes. Right? You found just as you sound, just, just as foolish now, to be fair, lots of people out there have made house hacking work, right? It's worked in medical school, it's worked in residency, right? The idea is you buy a house and you rent out all the rooms, right? To fellow residents or fellow med students. Right? And they're paying for all the costs of ownership. The problem is this is an extraordinarily risky time in your life to begin real estate investing. I mean, real estate investing has enough risk in it anyway, right? You've got leverage risk, you've got some market risk, you've got some vacancy risk. You've always got that in real estate investing. But to take that on when you don't have any real income at all, it's a very risky time to be doing that sort of thing. Can it work out? Absolutely. It can work out. If your tenants are all great, nobody destroys your place. You don't have a bunch of vacancies, your loan works out, you stay cash flow positive and you enjoy what you're doing and you keep this property for 5 or 10 or 15 or 20 years. Maybe this all works out wonderfully. But there's a lot of potential for badness to happen. And I think this sort of thing happens when people get in a rush. They get in a rush to be financially successful. Well, you don't have to rush financial success, okay? Most of you listening to this are high income professionals or you're in school or training to become a high income professional. And the truth is, if you can apply the basics of financial literacy and a little bit of financial discipline to your life, you're going to be financially successful without any tricks. You don't have to do any tricks to do this. You don't have to have the perfect credit card hacking strategy, you don't have to have the perfect house hacking strategy in order to be financially successful. You're going to be financially successful by making a lot of money, carving a big chunk of it out and using that to build wealth to retire your debt and to invest in some reasonable way. That's how you become wealthy. It's not about the tricks of figuring out just the right credit card to use or just the right way to file your taxes or anything like that. Stop looking for the tricks and make sure you get the basics right. Now. If you want to play around with the tricks on the side, that's fine. Get a brokerage bonus when you move your money from Fidelity to Interactive Brokers or something. Fine, knock yourself out. Isn't what makes you wealthy. What makes you wealthy is making a lot of money, carving a big chunk of it out to build wealth with and investing it in some reasonable way and giving it a little bit of time. That's how people become wealthy, okay? So be careful with stuff like house hacking before you have any real income. And realize that not every real estate investment works out great. Especially if you end up with a bunch of unplanned vacancies, a bunch of unplanned expenses, and you don't have a lot of income or a lot of equity already in the home to make up for that. So I encourage you to take risks in your financial life. I'm a big fan of ownership, but there's a time and a place for both of those. And that time and place is not usually while you're in college, much less medical school or residency. Now, all you people that just matched last week, congratulations on your match. Now you all want to buy a home and your partner definitely wants to buy a home. You may not have talked to them about this, but they want a house. They want a house and they want a fence around the backyard and they want to be able to take pictures of it and buy furnishings for it and show it off to all their friends because they finally made it. They've been supporting you through school the last few years and dang it, it's time for life. We've been delaying gratification for a long time. Let's go buy a home. At least think about renting during your training. And the reason I tell you this is there's a number of reasons. One, you're a busy person during training, you're going to be working a lot. You don't have a lot of time to be dealing with the hassles of homeownership. And there are lots of hassles of homeownership. If you've never owned a home, you may not believe this, but it's true. Stuff's always breaking. Stuff always needs to be fixed and maintained and refurnished and whatever, right? There's lots of hassles with homeownership and you don't have lots of time. The other problem is you've been told a whole bunch of lies about homeownership. And maybe people didn't intend to lie to you, but they did anyway. And they might be professionals, they might be your family members, they might be your friends, but they've told you lies. Here's some examples of some of the lies. My mortgage is less than my rent, so it must be smarter to own than to rent. Well, the problem with that is you expect a mortgage to be less than rent, right? I mean, imagine you're a real estate investor, right? So you buy this place, you got to pay all the expenses with the money you're taking in from rent and hopefully have something left over for profit, right? So if the mortgage has to be paid as one of those expenses, it's got to be less than the rent or you're definitely not going to be anywhere close profitable. And in fact, a fairly good rule of thumb is that about 45%, 45% of what you bring in as rent is going to go toward non mortgage expenses. We're talking about taxes, we're talking about insurance, we're talking about vacancies, we're talking about the other stuff you have to have to have an investment property. And so the mortgage should be significantly less than rent in order for it to really be a good deal. Here's another lie that you've been told or maybe heard or maybe just assume that owning a home is the American dream. It is not the American Dream. I don't know where that comes from. Probably the national association of Realtors or maybe some national association of Mortgage lenders. People that want to sell you something and they make a lot of money by you buying and selling homes. And the more you do it, the more money they make. So they're big fans of not just homeownership, but multiple homeownership. They want you buying and selling all the time. That is not the American dream. Okay? The American dream is to come and have a more successful life in America after you left your home country than you had there. Right. It's not owning a home, maybe it's owning a business more than it's owning a home, but it's just being financially successful in your new life as you come to America. Well, a lot of you have already been in America for eight generations, all right? We don't need to worry about the American dream for you. Something else that people tell you about homeownership, that's a lie, and that is that paying rent is throwing money away. That's not true. It is exchanging money for a place to live. If paying rent is throwing money away, what is mortgage interest? What are property taxes? What are realtor fees? What are all these other costs of homeownership insurance and replacing the roof? If that's not throwing money away, what is? Right. It's just as much throwing money away as paying rent. Okay? The only money that's going toward your pocketbook when you own a home and you're making your mortgage payment every month is whatever's going toward principal. And when you have a 7% mortgage, 7% 30 year mortgage, it's a very tiny percentage of your mortgage payment that is going toward principal and that is actually building home equity for you. Yes. The property's hopefully appreciating as well. Maybe you're doing something to add some value to it. But for the most part, most of the cost of homeownership, most of the payments you make goes the exact same place your rent does. Right. You're exchanging it for a place to live. So don't believe any of those lies. So the main calculation you have to make when you're trying to decide whether to rent or own is whether the home is going to appreciate during the time you own it by more than your transaction costs. Right? Transaction costs. We're talking 5% to buy, 10% to sell, 15% total. Right? 15% of the value of the house. So this is a $500,000 house. The transaction costs are probably $75,000. You needed to appreciate $75,000 while you're in that. So if it appreciates at 7% or 8% a year, well, you're going to make money in just two years. If it appreciates at 5% a year, you may make money after three years. If it appreciates at 3% a year, well, after five years, you're going to be making money. If it appreciates at 1.5% a year, well, after 10 years, you're going to be making money. But there's obviously no guarantee. You don't know when you buy a house how quickly it's going to appreciate. But on average, if you look at the historical data, historically, homes appreciate by about 3% per year. And so what? That would suggest that if you're going to be in there longer than five years, you ought to own, because most of the time you're going to come out ahead. And if you're in there less than five years, you probably ought to rent and residencies typically three to five years long. So most of the time you're not in there five years and you're probably coming out behind. Historically, most of the time buying a house for the three to five year period that is residency. Now, I know that's not the case. In the last few years, lots of people that bought houses did not lose money, okay? Because houses have gone through the roof since about 2010. Trees don't grow to the sky. That doesn't happen forever. We bought a house in 2010 or not in 2010, in 2006, moved out of it in 2010, couldn't even sell it. Couldn't find anybody to buy it at any sort of reasonable price. Ended up finally selling it five years later. So nine years total in 2015, we bought it for $138,000. We sold it for like 116, nine years later. There is no guarantee that you're going to make money even owning more than five years. But on average, five years is long enough. So now I know I can't talk most of you out of buying a home. Most of you are going to buy it no matter what. And here's the good news. The good news is your future income is probably going to rescue you even if it turns out to be A bad decision because you just make so much more money as an attending that even if you got to carry that house for a while, or even if you have to come up with 10 or 20 or $50,000 to get out of the house, you're probably going to be able to do it eventually. But that doesn't mean it's not a bad decision just because you have the means to overcome it. So at least consider renting when you go to buy your house during residency. And if you want to do house hacking or something in med school or residency like my daughter is, know that this is a pretty high risk proposal, that it wouldn't be that hard to come out behind doing this. You know, you don't have to become rich as an undergraduate or as a medical student or as a resident. You're all in this pathway where you're gonna become a high income professional. Most of you doctors, where you're gonna be making 200, 300, 400, 500, $600,000 a year. If you will make that high income and you'll carve a big chunk of it out to build wealth with and invest it in some reasonable way, you're going to do very well financially and have an awesome financial life. You don't have to play all these tricks to do it. You don't have to house hack, you don't have to credit card hack, you don't have to swap your brokerage account around every year for for sign up bonuses. That's not the stuff that makes you wealthy. What makes you wealthy is making a lot of money, carving a big chunk out and investing it in some reasonable way. So if you want to buy a house, go buy a house. I can't talk most of you out of doing it anyway, but at least consider renting during your residency. You don't have to deal with the hassles of ownership and you just walk away at the end of your period and go on to buy a house as an attending down the line. And you probably most of the time come out ahead financially by doing so. The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation a house for a while, or even if you have to come up with 10 or 20 or $50,000 to get out of the house, you're probably going to be able to do it. If you.