Should You Buy or Rent While in Residency?

Let's talk for a minute about buying a house. As a resident, I figure I'm only able to talk out about 5 or 10% of residents who want to buy a home out of buying that home. But the truth is it's probably not a great idea. There's a lot of reasons why. The good news is sometimes it works out okay. Lately, the last few years has worked out pretty good for people as homes have really appreciated dramatically in just a few years. And even when it doesn't work out, which is probably the majority of the time for a three year residency, probably two thirds of the time you end up coming out behind financially for buying a house during a three year residency. But even when it doesn't work out, most people are rescued by their attending income, right? Because yeah, now they're stuck with this house. They're underwater on it, or they didn't make much money on it or they're having trouble selling it, or now they're a long distance landlord, but their income also quadrupled or quintupled or more. And so even if there's a drag on them, they can handle it. It's not the end of the world. But it still doesn't make it a smart move, right? What people don't get about buying a home is that it's not just about comparing your mortgage to your rent payment. Right? Your rent payment is the maximum you'll ever pay for housing. Your mortgage payment is the minimum you'll pay for housing. There's lots of other expenses associated with owning a home. There's insurance, there's taxes, there's maintenance. Now you need a lawnmower and a snowblower. HOA fees. There's all these other expenses associated with buying a home, but perhaps the most significant ones are the transaction costs. As a general rule, you'll put down about 5%. Not as a down payment, I shouldn't say put down. You'll pay about 5% of the value of the home when you buy it and about 10% of the value of the home when you sell it. Now that's all in. That's realtor fees. That's the cost to fix it up at the end and make you replace the water heater as you sell. And it's all that stuff, right? Maybe it's just vacant for a month or two. 15% round trip is a pretty good estimate. Obviously, on average, sometimes it's a little more, sometimes a little less. But 15% of the value of the home is what it costs you to go round Trip. So if you're buying a $300,000 home, 15% of that is $45,000. If that home does not appreciate or you pay down the debt, $45,000 over the course of the three years you're in it, you will come out behind financially. You don't get much of a tax benefit as a resident for owning a home. It's all about appreciation, overcoming the transaction costs. So the longer you're in the home, the more time you have to spread the transaction costs over. If you're in there four years, five years, six years, it's more likely that you'll come out ahead. If you're in there for 10 years, you almost always come out ahead owning a home instead of renting it. But it's all about overcoming those transaction costs. So if you happen to own a home in a very lucky time period, like 2003 to 2006 or 2020 to 2023, right. Those sorts of periods of time, everybody comes out ahead, right? Because the rate of appreciation was so high. But if you own a home from 2006 to 2010 or maybe from 2024 to 2027, it doesn't work out so good. Maybe you can't even sell it at the end. You're stuck being a long distance landlord. So there's plenty of those horror stories. If you talk to older docs, they'll tell you, you know, be a little more patient. It's not the end of the world if you don't own a home during residency. If you need a house with a backyard and a fence for your dog, you can rent that. You don't have to buy it. Now, maybe there's some area in the country where you literally can't find anything to rent, but it's not nearly as common as people think it is. Every resident is looking for an excuse while they're an exception. Well, my spouse is also working, or I got a little bit more of a down payment, or I want to be a real estate investor. And so this is going to be my first real estate property. But the truth is, most of the time, these are just excuses. They're just justifications. Look, if you want to buy a house, go buy a house. I don't care. It's not my money. But I wish you'd run the numbers. Something like the New York Times buy versus Rent calculator can help you to run the numbers. Run the numbers and see what's likely to happen. Don't assume that buying always works out better. Don't believe the mortgage industry and the realtor industry that likes to tell you that this is the American dream, to own your own house. Trust me, it's not throwing money away to pay rent. You're trading money for housing. It's no more throwing money away on rent than it is throwing the money away on property taxes or realtor fees or home insurance or mortgage interest, right? You're throwing that money away just as much. So don't believe these little one liners that make it sound like it's always better to own. Most of the time, as a resident, you're probably better off renting, right? It's more certain cost of your housing. It's a lot less hassle. Something breaks, you're not fixing it. You just call the landlord and they take care of it. And if there's anything you don't have a lot of during residency, it's time and money. And so renting allows you to have better control over both of those things. Trust me, you're not going to be renting forever. You're going to be able to own a home. If you feel like that's the American dream, you'll be able to have it. But don't rush things. Don't put the cart before the horse. And you'll likely be happier that you did 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.