Despite its appeal, buying a home in residency is usually a bad idea
By Christopher Rufus Sweeney
In residency, buying a home is most often not a wise financial decision. That said, the emotional appeal of owning a home is powerful and difficult to resist.
In my previous blog – Live Like a Resident – we looked at how living frugally for five to 10 years after residency is the fast track to financial freedom. Speaking of powerful, the emotional appeal of buying your dream car, taking high-end vacations, bringing your wardrobe up to a higher standard, regularly treating yourself to fancy restaurant meals (because after all, you deserve it!), can be all but irresistible.
Just like owning a home.
But, if you detach emotion from your reasoning, and rely solely on logic in your financial decision-making, you are likely to decide against buying a home in residency. Here’s why:
- Closing costs associated with buying are on average 2-5% of the value of the home, which pushes the break-even point out quite another year or two
- Residents often don’t have enough saved for a down payment. If you can only afford a down payment of less than 20%, you will need Private Mortgage Insurance (PMI), or a certain percentage to insure the loan
- You could lose money if home values decline
- There are extra expenses beyond mortgage payments
- You are responsible for repairs, remodeling
- No tax advantages because residents typically can’t afford an expensive enough home to exceed the standard deduction
On the other hand, renting a home has these advantages for a resident:
- Far fewer upfront costs and paperwork
- You have freedom to be more mobile
- You are not responsible for maintenance, repairs
- You can build your credit rating (if your landlord reports rent payments to the credit bureaus)
- No property tax bills
- And, there’s no need to worry about falling home values
Under certain circumstances, owning a home can make sense. For instance, if you have minimal student loans, are facing a long residency, and the housing market where you want to own is favorable, then it may make financial sense to own. If your residency is five or more years, the financial logic is sound as it is enough time for your home to appreciate beyond your costs.
If you are uncertain of where you will be attending after residency, you may think you can always rent your home if you move out of town. This is typically a bad idea. First, if you may end up in a different city, you will quickly learn that remote land lording is hard. If you do end up in the same city, you’ll be managing the place unless you hire someone to do it. Regardless, you’re still on the hook for any repairs you make to the home which can eat away at the amount of income you make.
If you do buy a home during residency, it’s usually a good move to sell when you’re ready to move on (hopefully for more than you bought it for).
A word of caution before you buy: Online services like Zillow provide a history of what the house has sold for previously. If you notice it’s cheaper than it was a few years ago, this could be a good sign… or a bad sign. The place could be cheaper because it has serious problems. Which is why you must always get the home inspected by a professional before purchasing.
It’s up to you. Whether or not you can apply Spock-like logic to your home buying versus renting decision, or find some sort of logic/emotion compromise, you need to always ask:
- What can you really afford?
- How long do you plan to stay in the home?
- Do you want stability or flexibility?
- Can you afford to be responsible for home repairs/maintenance?
- What impact will this decision have on your long-term career, family and financial goals?
Here are some additional resources to help you make the best possible decision.
- Info on physician mortgage loans:
- Rent versus buy calculator
Next blog: Different Kinds of Debt: Knowing helps you choose the best repayment method.