Should I buy a house in medical school? What about residency? What if I stay in the same area for both medical school and residency?
I heard all of these questions during my training. I even went to lectures on this matter sponsored by “financial advisors for physicians”. Those lectures were educational too. No money for a down payment? No problem! You can even take out a Doctor Loan! Buying a home while you have a temporary job like residency always seems enticing, but there aren’t too many good reasons why you should do so. Buying a home for your first job may not necessarily be a great idea either. Here’s why:
You Need More Money Up Front to Own a Home Than To Rent
Traditional loans require a deposit around 20% to obtain the best interest rate. Yes, there are Doctor Loans that require no mortgage insurance or deposit depending on how much you have in your bank account. You will still pay for it. If you don’t pay for it up front, you will pay for it in monthly increments in your mortgage payments. Unless you had a job prior to medical school or have family help (or are independently wealthy), it’s unlikely that you actually have enough to put down for a decent house that you’d want to live in. I certainly didn’t. I also had no stable income during medical school either and a three to four figure bank account balance.
As a resident, you make approximately $50,000 pretax. While many families with children live off of $50,000, there is obviously a limit to the amount of house you can purchase and have enough for living expenses. Obviously if you have a working spouse, the circumstances change…
Mortgage Interest Deduction is Less Than You Think
Mortgage deduction sounds great in theory, but remember that any deduction requires you to pay money up front. You have to SPEND money to SAVE money. Tax deductions treat a certain percentage of monies you’ve paid as untaxed income. Tax laws allow you to deduction mortgage interest from your income. So if you pay $10,000 in mortgage interest in one year and are in the 25% marginal federal tax bracket, you “save” $2,500. In other words, you still pay $10,000 in mortgage interest but at the end of the tax season, the government taxes your income as though you earned $10,000 less on your income.
Additionally, you must itemize your deductions if you wish to be eligible for a mortgage interest tax deduction! I certainly did not itemize my tax returns during my entire residency or fellowship due to limited expenses and income! By not itemizing, I actually saved even more money through TurboTax/TaxACT since it was free.
As a full-time physician, mortgage interest deductions make a little more sense simply because you are in a higher tax bracket. I still consider this more of a perk rather than a reason to own a home.
Home Ownership Has Upkeep Costs
If you rented a home, your landlord is responsible for most of the maintenance costs (unless your landlord is an asshole and puts conditionals on certain home appliances). Stuff breaks. Appliances need maintenance. Air filters need to be changed.
If you owned your home, you or your spouse is responsible for it. If you don’t know how to fix your toilet, tough luck. You hire your friendly neighborhood plumber* who hits you with a $100 house call fee and $130/hour rate on a job that takes him 32 minutes but he still bills you for the full hour. Don’t forget the 3x markup price on parts and a miscellaneous charge for shop items. Oh, and if you really knew how to fix it yourself, it’d only take you a trip to the local hardware store and 10 minutes of your time.
There are fees for lawn care, cleaning, maintenance, property taxes, and home association fees. Even if you can outsource all of the basic tasks, you will still have to deal with the hassle of calling for help. As a renter, you don’t have to worry about this. If you are a busy medical student, resident, or have any busy career, you want to minimize tasks outside of your work life.
Your Money Is Tied Down in Your House
Equity in your house is illiquid unless you have a buyer. Even with a buyer, it may still take weeks to months to even close unless you have a cash offer. The problem with equity in real estate for medical trainees and young doctors is that their jobs may be transient. Medical school and residency only spans a set period of time. Most doctors do not stay at their first jobs forever either. Professionals who are early in their careers cannot afford to have equity tied down in real estate if they have to move.
Real estate value cycles. If the housing market is down when you need to move, you either have to sell at a loss or hold onto the home until the next housing peak. If you rent, the money that isn’t tied down can be used to invest elsewhere.
The benefits of renting vary depending upon locale. For example, homes in one neighborhood in my town are selling for approximately $350,000. Rent for a similar unit goes for around $1800 a month. The Price-to-Rent ratio is roughly 15.4, which means that the cost of renting is equal to that of owning.
Assuming a 30-year mortgage at 3.5% interest with 20% down and closing costs rolled into the mortgage, this is what I estimate:
|$1900 monthly rent
|$1304 monthly mortgage
|$4830 annual property tax
|$10,500 closing costs on first year
|$3500 annual maintenance
|$1853 monthly payments with taxes, insurance, and mortgage insurance
So based on this projection, owning this home can possibly save you around $47 a month at the expense of tying down a portion of your money and dealing with home ownership. Obviously if you can cut down your annual maintenance costs, you will save even more. The breakeven point for a house in this price range will be at least 3-4 years. Remember, most markets have at least a 6% seller fee.
While I know many intelligent medical students and residents who own homes, most of them have no business owning one. Many of them have spouses who stay at home to take care of the kids, so they often have limited income. After 3 years of residency, some end up moving to a different city and either rent or put up their home for sale. Those that stay in the area even move simply to live in a larger home. It does not seem worthwhile to go through the hassle of home ownership with such a busy day job.
Did you own a home during medical school? What benefits did you find in home ownership? Sound out below!