WCI #26: When To Buy A Home

This is the White Coat Investor Podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011. Here's your host, Dr. Jim Dahlia.

Welcome to podcast number 26 titled when to Buy a House.

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Coat Investor can help welcome back to the podcast. Our quote of the day today comes from the late Thomas J. Stanley. You can act rich or actually become rich. Few of us will ever be able to do both and we certainly won't get rich by acting the part before we have the financial resources with which to pay for La Dolce Vita. I'm excited about a couple of speaking engagements I have coming up. I'll be talking at fincon, which is a convention for financial bloggers in Dallas on Saturday at Saturday 28th October at 9.30am I'll be giving a talk at Fincon, so if you're going to that, I'd love to see you there and meet you. I also have another speaking gig at the American College of Emergency Physicians Scientific assembly that's on October 30th in Washington, DC. It'll be an evening event sponsored by locumstory.com similar to what happened last year where you get a free book and some free food. If you'd like to come out to that, you can find the links to sign up for it on the website. Congratulations to the winners of the White Coat Investor Scholarship Competition this year. We had a lot of great applications. In previous years we've limited it to the first hundred people to apply, but after last year's competition, where Basically we got 100 of them in the first four days, we decided to take every single person who wanted to submit an essay for the competition and have them included in the judging process. We received 389 applications this year, which is pretty awesome. I'm glad we had a lot of volunteer judges to help though, because we decided to take ourselves completely out of the judging process this year and let the Judges do the judging. And so we had 45 volunteer judges that we're also very appreciative of. There are really three purposes to this scholarship. For us. It's a chance to give something back and pay it forward for all the success we've seen here at the White Coat Investor. It also gives us the opportunity to directly reduce the indebtedness and improve the financial situation of professional students. It might only be a handful of them, but it's nice to be able to do something directly that actually makes a difference. And then, of course, it does help spread the White Coat Investor message of financial literacy throughout medical and other professional schools, which is obviously one of the most important missions of this site. We gave instructions to people this year, but they were not terribly difficult instructions to follow. Basically, an application was just their name and their school and address and contact information, and then a thousand word essay. They could have written the essay about anything they like. You can write an essay about your own story. You can write it about somebody else's story. It can be about a financial topic, or it can even be about, you know, some special financial trick you used in medical school. Or you can be creative. You could have sent us a poem, anything you want. And then we send those out to the judges. So the judging process happens where all 389 essays were sent out to to judges. Each judge got 10 to 20 of these essays and then was asked to send us the 1 to 3 best essays of the group they got. And from that pot of essays, we ended up with 60 in the second round. And these essays were distributed such that each of the second round judges, each essay was read by at least three second round judges. And then they were asked to rank the essays they read from 1 to 10. And then we gave them all points according to that. And those 10 essays with the highest points were distributed to the final round judges. And this jury basically ranked the essays in the order in which they liked them and then sent back this list of ranked essays and we totaled up the points and that's how it was determined which essays won. Now, all of these applications were scrubbed such that the judges didn't receive the application applicant's name or address or contact information, and all the judges were kept anonymous from each other and from the applicants. Now, I'm told if you really dive into the word documents that people sent in, sometimes you can find a name in the metadata. But I don't think very many of our judges went to the trouble to go do that. So we ended up getting Five really spectacular winning essays this year. The fifth place essay we titled Cheers to a Lifelong Investment. This one came in from Samuel Joseph McMillan. He's an Ms. 2 at the University of Missouri School of Medicine. It was really a great essay talking about the idealism that really drives people to spend a decade of their lives learning to care for the sick and injured without much thought of monetary compensation. It was pretty interesting one in that it talked about the time he spent really as a bartender and working with other relatively lower socioeconomic class people and the struggles they had in their lives that drove him to go to medical school. Our fourth place essay we titled Always Get Up. It came in from Joshua Weinberg. He's an Ms. 1 at the University of Florida College of Medicine. And he wrote about basically the difficulties he had growing up in a disadvantaged background and also about some of the lessons he learned from wrestling. And I could really relate to that. I learned a lot of lessons from wrestling, like quit. Boy, I sure thought about quitting the one time I went out for wrestling. That's a hard sport. Our third place essay, and this is the first place where you start getting a big chunk of cash. Fourth and fifth place gets you an Amazon gift certificate. And then with fourth place, you get a box of books you get to distribute to your class. But in third place, you start getting cash. And this is 10% of the pot of money raised for the scholarship. It was about 3,500 bucks this year. But Adam Good, an Ms. 2 at the Virginia Tech Carilion School of Medicine, won this prize. He talked about how when he was trying to get the Navy to take him for the HPSP scholarship to pay for his med school, how they found a murmur and that ended up into some pretty significant medical problems he had. Obviously he no longer qualified for the Navy at that point, but he views it as a blessing in disguise as the medical problem was found as a result of trying to join the Navy. Our second place prize, we titled Care Even when they Hurt you, was written by Natalie Aline Moreno, who's an MS.1 at the University of Michigan Medical School. Natalie talks about some of the difficult situations she had growing up, including watching gangsters beat a man to death outside of her window when she was a young child. And so it was a pretty inspiring essay about what makes motivated her to become a doctor. That prize was good for 30% of the scholarship money raised, or almost $11,000. Our first place prize, our winner this year we entitled Fund My Retirement, and it comes from Andrew James goates. He's an Ms. 4 at the University of Iowa Carver College of Medicine. And he wrote this essay in a pretty creative way, really, from the point of view of his washing machine, which he's, you know, basically patched together to get him all the way through medical school. But what was really impressive about this essay and what I think the judges really liked was how he weaved in, in a subtle manner, all the financial work and hardships he'd done to try to get his family through medical school, as well as all the incredible experiences that many of us have had in medical school, like discussing death with somebody for the first time or delivering your first baby or, you know, suturing up a laceration for the first time and the impact that that had on him through the essay. It was really a fantastic essay. The judges really liked it. It was really a blowout competition this year compared to previous years, in which in which the competition's been quite a bit closer. But for first place this year, it was really, really not a very close contest. So I also wanted to take a moment to thank the sponsors, particularly the Platinum sponsors. This year we had five Platinum sponsors in addition to the money that we gave from the White Coat Investor. But a Platinum sponsor had to give at least $3,500 this year. And our five platinum sponsors were Larry Keller with Physician Financial Services, Laurel Road, Michael Relus with Mr. Insurance, Larry locumstory.com and Jamie Fleischner with Set for Life Insurance. So thank you very much for your generous contributions to the scholarship. So I think no one doubts that we have five exceptionally great essays here. Certainly they were considered the best by 45 different judges out of the 389 we received. I was a little bit disappointed to see people bring up complaints in the comments below the post, which was basically an announcement of the winners, you know, an award ceremony, if you will, complaining that somebody else should have won. I thought that showed a real lack of class, and I was pretty disappointed at a few of the blog readers who made comments like that. I mean, if you think the contest ought to be run differently, shoot me an email or talk about it on the forum or somewhere else. But it's basically the equivalent of people standing up in the back of an awards ceremony saying, that guy shouldn't have won or. Or that lady doesn't deserve it, or this contest is rigged, which I thought was really, you know, very poor way to behave, even online. It's important to conduct ourselves in our online lives in the same courteous way we would in real life. Today's topic for the podcast is about buying a house. We're going to talk about when you should and maybe when you shouldn't buy a house. Buying a house is two things, though. It's not just a financial decision, it's also a consumption decision. Right? It's a little bit like buying a boat that way. Buying a boat is never a good financial decision. It's a hole in the water that you throw money into. Right? Boat stands for bring out another thousand. And you know, I like boating. That's fine. We spend a lot of time boating and spend a lot of money on boating, and that's fine. It's a consumption decision. It's a decision of one way in which we've decided to spend our money and it's something that we enjoy, something we can do as a family, etc. And a house is in some ways the same thing, right? You're choosing how you're going to consume a certain portion of your income. If you really want to live in one neighborhood, even if it's not a wise financial decision to buy a house there, you may still buy a house there. Same thing with, you know, how you fit out the house or you know, how you upgrade the house, that sort of stuff. So it's important that we recognize that this isn't just a financial decision. But today we're mostly going to be discussing the financial aspects of it. Now, for a house to work out to be a good investment, and don't kid yourself, a house is an investment just like any other investment. It pays dividends and it can appreciate or depreciate. What are the dividends? The dividends are the saved rent. Once you own a house, you no longer pay rent. And so the dividend is the equivalent of what you'd be paying to rent that place. That's what a house pays. In order for this to work out to be a good investment, the appreciation of the house in the time that you're in it must cover the transaction costs and the other costs of ownership. Now, don't kid yourself that just because you sold a house for more than you bought it for that you made money. That's not true. Typical round trip transaction costs for a house are about 15%, about 5% going in and 10% coming out. Now, maybe you can cut those a little bit, but for everyone who can decrease those a little bit, there's someone who paid more than that. It just costs that much money to turn over this illiquid asset. And so in order to come out ahead, the house has to appreciate more than what it costs you to transact it. And if it's 15% of the value of the house, to transact it. So if it was a half million dollar house, that's $75,000, then it's got to appreciate $75,000 in the time you're in it. Now, in general, you know, there are averages of what houses appreciate at over the years. Maybe it's 2% or 3% or 4% or something like that. But the bottom line is if you needed to appreciate 15% and it's only appreciating 3% a year, you're not going to break even in two years. You just got to understand that that's the way the math works. So if you can use your crystal ball and know how much appreciation your house is going to have over the next 1, 2, 3, 5, 10 years, then it's easy to make the right decision. Right? If this is going to be a huge housing boom over the next three years, then you should buy a house, even if you're only going to be there three years. But on average, you got to realize that at those 2, 3, 4% appreciation rates, that is the average over the long term, that you're really going to need to stay someplace for a while in order to come out ahead. My typical Recommendation is about 5 years. If you think you're going to be there less than five years, I don't think you can really count on appreciation to save your bacon. So my general rule for an attending is to buy when your job and your social situation are stable. Now, by job, what I mean is that you're going to be there, you expect to be in that job for the next five years. If this is a job that you know you're working locum tenens, don't buy a house if you're not sure you like your partners and you're thinking about changing jobs in a year, don't buy a house. You want a stable job that you think at least right now that you're going to be in for at least five years. Same thing with your social situation. If you're dating somebody seriously, you're thinking about getting married, you're thinking about moving in together, whatever, you are not in a stable social situation. Likewise, if you've been married a couple of years and now you're talking about starting a family and you want to have two or three kids in the next five years, that's not a stable social situation. And so those are times when you want to think twice. About whether buying a house right now is such a wise thing to do. But you've got to resist this burning desire that exists in the minds of medical students and residents, and particularly their spouses and partners, to buy a house. There's this idea out there that you'll accomplish the American dream if you buy a house and that you haven't made it until you have a mortgage. And that's just a bunch of bunk. You got to realize that there's nothing wrong with renting a house. A lot of people compare owning a house to renting an apartment, and that's apples to oranges. You know, of course, being in a house is better than being in an apartment. Duh, you got a lot more space. You're not sharing four walls with other people, etc. But you can rent a house just like you can buy a condo. And so that's really not a fair comparison. But what you really want to do is make sure that your house doesn't become golden handcuffs. For example, you move into a job where your contracts really not all that fair, and you've now bought this $800,000 house. You know, you're brand new, attending right out of fellowship, and you got an $800,000 house and payments, and all of a sudden you realize they're taking advantage of you in this new job and you want to leave. Well, now you've got some transaction costs. It's going to cost you 80 grand to change houses now. And so if there's no other jobs in your specialty in your area, you're going to be kind of out of luck and you're a little bit stuck there. So don't buy a house until you know you like the job and the job likes you and your social situation looks reasonably stable. Now, for residents, I think it's a much more difficult argument to buy a house. And that's just because residency doesn't last forever. It's by definition, not a stable job. At most, you're going to be there for five years. You know, even if you tack on a fellowship, there's a good possibility you'll be going somewhere else for it. And so most residents are only going to be there three to five years, which is, you know, about the period of time in which maybe you'll break even on average, but, you know, a lot, a good chunk of that time, you'll come out behind. There's no absolutes, of course, you don't need to be dogmatic. You know, it shouldn't be. Never buy a house as A resident, but you really ought to think carefully about it. And too many new residents coming out of medical school just don't realize all the costs of home ownership. They haven't calculated in what it costs to get a lawnmower or what it costs to, you know, transact a house and those sorts of things. And so a lot of times they just buy because they think that's what they're supposed to be doing at this point in their life, and they end up losing money and regretting it. I would guess at about one quarter of the time, the docs actually do come out ahead buying during residency, but mostly that's just sheer luck. They happened to buy at the beginning of a housing boom and sell before it crashed. That's basically what happened to my classmates during residency that bought houses. Right? We were in Arizona in 2003, so we started residency in 2003, left residency in 2006. You could have bought anything and made money. Over that period of time, a lot of them doubled the value of their house. And so that worked out great for them. But the problem was predicting that in advance is, you know, basically requires a crystal ball. So I thought we'd go over 10 reasons today why residents shouldn't buy a house. Now, I have a post on this topic that I've written before that I'll be borrowing heavily from, but I think these are important factors to think about if you're considering buying a house. Number one, as a resident coming out of medical school, you probably owe two or three hundred thousand dollars in student loans and, and you don't have a down payment, guess what? Buying a house works out a lot better when you have a down payment. Doesn't mean you can never buy when you don't have a 20% down payment. But when you do have a 20% down payment, not only do you get better terms and interest rates on your mortgage and get to avoid private mortgage insurance, which of course you can avoid using a doctor loan as well, but you also have a buffer in case the value of that house goes down. If the value of your house drops 10% and you didn't put anything down and now you need to sell, well, you've got to bring 10% of the value of the table, of the house to the table to close. And if you put down 20%, you've got that buffer, and so you don't have to bring money to the table. Residents also don't have any income, right? They're coming out of this period of life where for years they basically haven't had any sort of an income that can be of part proven to a lender. And so they're stuck using doctor loans that will take you, you know, that will take your, that will lend you money without regard to what your past income has been. They'll take basically, you know, a contract going forward showing what you're going to be paid by the residency. And that's fine. The deal is not quite as good as being able to use a conventional mortgage. But that's one downside to buying as a resident is you don't have any provable income. The third downside is you have tons of debt already, right? You already owe two or three hundred thousand dollars and now you want to tack on another one, two, three hundred thousand dollars for a house, you know, I mean, how much debt do you really want to have hanging over your head? Residency is stressful enough without money worries. The main reason residents shouldn't buy a house, of course I've already mentioned residency is only three to five years long. It takes that long to break even on a house. So that's the main reason not to buy them. I also point out in that post that you can rent a house. A lot of people have just forgotten that houses are for rent as well. There's lots of people that have single family homes they use as an income property, or people that have had to move unexpectedly and have to rent out their house because they couldn't afford to sell it. All those houses can be rented. Another main problem with residents buying a house is that new home buyers, they're never done it before, routinely underestimate the cost of ownership. Ownership is expensive. Replacing carpet, replacing paint, landscaping, you know, clearing the driveway, mowing the lawn, whatever, this stuff is expensive. You got to insure it, you got to heat it, you got to cool it, you got to furnish it. And until you've done that a few times, you don't realize how much that is. Too many new home buyers just basically, basically compare the cost of rent to the mortgage payment. And they figured, well, the mortgage is less than the rent, it must be a good idea to buy. But all that does is it ignores all the other costs of ownership. And you can't ignore those and expect to make a good financial decision. And so you got to realize, I mean, think of a real estate investor, right? One of his expenses is the mortgages, is the mortgage payment, but there are a lot of other expenses. You know, he's got to insure it, he's got to maintain it, he's Got vacancies, he's got destruction from the renters and all that stuff. Well, guess what? That all affects you too when you own the home. Well, maybe not the vacancies, but everything else certainly does. And so you expect the mortgage payment to be dramatically less than what you can rent that facility, that rent that property out for. The next reason residents probably shouldn't buy a house is you won't want to live in that house. As an attending, you know, when your income quadruples or quintuples when you finish residency, chances of you wanting to stay long term in the house that you could afford as a resident are very low. Who are we trying to kid now? I want you all to live as a resident until your student loans are gone for two to five years after residency. But you know, the truth of the matter is most of us give us at least a little bit of a raise and we gradually start growing into that income, hopefully as slowly as possible. But when you're doing it, you know, but the fact remains that you're probably not going to be super happy as an attending in that house you were living in as a resident for very long. As a resident, you're busy and home maintenance costs either time or money. You either pay somebody else to do it, or you spend your very limited free time doing home fix up projects. Now, if that's your favorite hobby, fine, but chances are good it's not. Also, too many realtors and mortgage lenders and even financial bloggers out there like to talk about the tax break that residents get for owning their home. This is dramatically oversold. The tax break is tiny for a resident. Number one, residents aren't in a very high tax bracket. So even if they were able to itemize the entire cost of interest and property taxes, it wouldn't be that much of a savings. But the fact remains that their alternative is to use the standard deduction. And really only the amount of your interest and property taxes above and beyond the standard standard deduction is truly deductible to you. The first, if you're married, $12,000 a year is basically free, right? You get no benefit from those sorts of deductions. And then of course, the final reason you may not want to buy a house during residency is the budgeting is simply easier. As a renter, you know, you know exactly what your housing is going to cost. Every month something bad happens. The refrigerator dies, the house floods, you know, it needs a new roof, whatever. Those aren't your expenses. They're the expenses of the landlord and so you're much better able to predict your housing costs and to budget for them. Now, I saw a blog post written by Investing Doc some time ago, I guess it was in 2016, where he talked about 10 reasons to buy a house during residency. Now, to be fair, he wrote another post, 10 reasons not to buy a house during Residency. But I thought this would be a good chance to go through his reasons and really talk about why they're not great reasons to buy a house during residency. His first one is many residents extend training beyond residency. Well, the problem with that is that, yes, you may do a fellowship beyond residency, but there's a good chance you're going to do it in another city. So having bought that house is not a reason to, you know. So a potential fellowship is not a reason to buy a house where you wouldn't buy one otherwise. His next reason is become a landlord to eventually cash flow the property. Well, there's a real problem with this. He's basically saying if you move out now, you've got an investment property, but when you buy a house to live in, you don't look at it the same way as an investment property. An investment property is all about the numbers. What's the return on investment? What's the cap rate? You know, what's my net operating income going to be? Those are the things you need to be considering when you buy a house as an investment property. When you buy a house to live in, you're looking at the neighbors and whether you want to live next to them. You're looking at the lawn and whether you want to mow a lawn that size. You're looking at the colors and that kind of stuff. You're imagining your stuff in the house. You're just not as focused on the numbers as you are when you buy an investment property. Plus, the scenario he's talking about here is when you move away, then you've got this investment property. Well, the worst possible way to landlord is to do it from a long distance away. It's very difficult to do it well. It's difficult to hire a high quality property manager and it's expensive to do so. So I don't think, you know, potentially becoming a landlord down the road is a good reason to buy a house when you otherwise shouldn't be buying it. His next reason is to provide more room and less frequent moves for your family. Think this one's total bunk, right? You can rent a house. You don't have to rent an apartment. So you can rent a place that has just as much room as any house you can buy. Plus, if you are a resident with a stable income and you pay your rent every month, boy, that landlord's gonna love you. Our landlords bent over backwards for us when we were renting during residency. They thought we were the best tenants they'd ever had. They wrote us letters of recommendation when we left, gave us our entire deposit back. They. It was great. So when you have a renter like that in your investment property, are you going to throw them out? Of course not. So there's no more frequent moves for a renter in residency than there is for someone who owns during residency. We rented the same place for all three years, just like some of my classmates own the same place for three years. His next reason is that the bottom line is not the number one priority to every person. Okay, I'll give them this. If you're willing to lose money on a house because you want to consume the opportunity to own the place you live in, great. You know, everybody has to spend their money some way. And if this is how you want to spend your money, more power to you. Okay, then he throws in the tax break. We already discussed that and why. It's really not much of a tax break for residents. His next reason was you can put your stamp on where you live. Okay, well, there's some limitations to what you can do to rental property. You probably aren't going to be able to do major remodeling. You may not be able to paint it in the colors you love, you know, if you're into purple and green or something. But the truth is, if you want to do a little bit of work on your property that you're renting and you're willing to do the labor, the landlord will probably pay for the materials. So I think it's entirely possible to be able to put your stamp on a rental property about as well as you can on a property you own. His next reason is to build equity. Well, it's possible to build equity, but it's also possible to pay all that equity back in transaction costs when you sell the place. In fact, that's probably the more likely thing for a typical resident who's bought a house to do. It's not about whether or not you're building equity. It's about what your return on investment is over the time you have that rental property. Okay. His next reason was if you get money gifted by a relative or parents, then it's a good idea to buy. Well, okay, if somebody else is going to take the financial hit of your dumb financial move, then sure, that can make it into a good financial move. I mean that's a no brainer. If your parents will give you 50 grand to buy a house and they won't give you 50 grand to rent, then sure, buy the house. Don't turn down a fifty thousand dollar gift. His next reason is that loans for houses are currently at all time lows. Now they were lower when he wrote this post. Currently they're not at all time lows, they're still very low. And obviously the lower the interest rate on your loan, the better deal it is for you. All else being equal. The problem is all else isn't equal. In times when interest rates are low, housing tends to boom. And so you may be overpaying for a house that if interest rates spike dramatically, may not be worth nearly as much. Imagine that mortgages rates went from 3 or 4% where they are now to 8 or 10%. Well, people aren't going to be able to buy nearly as much of a house and so the value of your house is not going to be nearly as high as what it is when people can buy it with a 3% mortgage. And his last reason is that if your spouse has a non resident salary and a stable job. Now I'll confess that if you've got a spouse that makes good money, you know, another high income professional or an attending physician or something like that, then these numbers do work out a little bit better for you. The tax break matters more. And you know, some of the financial risks aren't quite so much as they are when it's just a resident buying a house. But the truth of the matter is if you're going somewhere else after you finish your residency, you still don't want to buy a house you're only going to be in for three years no matter how much money you're making. And so unless your spouse's stable job means you're for sure staying in that area when you finish residency and for sure staying in that house. And I think that's probably not a justifiable reason to buy a house just because your spouse makes more money than a resident does. Now I also wanted to point out there are some programs out there that you may qualify for as a resident. Josh Metal, one of the advertisers on the website, has told me about some opportunities they've found for residents where basically you're getting money from the settlement money that all these mortgage lenders paid for their improper activities during the global financial crisis. And this money has been put into funds dedicated to helping middle class Americans buy houses. So basically you get some money to help with your down payment and closing costs when you buy a house, and that could be as much as 10 or $20,000. Now obviously if somebody's giving you money to defer those transaction costs or to avoid those transaction costs, then you could potentially come out ahead easier. Maybe you only have to be there two years to come out ahead. If somebody gives you $20,000 to put toward your down payment, so that's something to keep in mind. If someone's offering you free money, then that can obviously sway which their correct decision is as far as buying versus Renting. All right, hopefully that's helped you in your decision of what to do in what stage of your life, when to buy, when to rent. Because there is a right answer most of the time. For most people, for whatever stage of life you're in, there are times when you should be renting, there are times when you should be buying. And if you confuse those, it's going to cost you a lot of money.

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Coat Investor can help. Head up, shoulders back. You can do this and we can help. See you next time.