Wednesday, March 26, 2008

Don't Do It

Ok, to buy or not to buy, that is the question.

This bastardized version of a famous, if not overly quoted, Shakespearean line (in fact I don’t even know which play it’s from – I’m that shallow) is a question many medical students face at one time or another during their education and training. Even before medical school begins there are corporations and entities out there trying to obtain signatures from the would-be doctor, playing the hand of a stable 4 years, good investment, and why throw you’re money away? I’ve heard ‘em and don’t buy ‘em. Here’s why.

As a medical student, I must ask, why on earth are you buying a home? Unless your spouse or significant other is the one making the purchase and has the money to cover the mortgage without getting you into significant financial distress, you shouldn’t borrow money with borrowed money. Plain and simple. It’s like paying off a credit card with loans – we do it, but it doesn’t make a great deal of sense, does it?

4 years of medical school sans PhD or other pursuits, is obviously not enough time to obtain a good amount of equity in a home to ensure you won’t owe once you sell. Trusting that you can stay in the area and do a residency? Don’t – it’s hard as hell to do and unless you’ve got some serious cajones and won't interview anywhere else you probably will have to move. Getting a job is great, but worrying about selling your home before you can move can cause a lot of stress at a time when you should be celebrating. Let’s not even consider that you’re responsible for taxes, upkeep, insurance, etc. etc. etc. with owning a home that won’t affect the selling price or value.

As a resident you’ll find there are more people trying to get you to buy a home. After all, you’re finally making some BIG money (which is almost anything since you’ve been unemployed for 4 years!) and you’re a doctor. Treat yourself good. But that’s the trick– assuming you should have something when, really, you’re in the same boat you were during medical school.

Look, most residencies are 3-5 years. Because you’ve likely not been able to save a tremendous amount many residents obtain 100%, nothing down loans covering the cost of everything. Any fee that comes about from the purchase of the home will go into this loan. Now, once signed, the purchased home is now more expensive than what they bought it for. 3-5 years is not a lot of time to pay off that extra money that was accrued, gain equity, and be able to sell the home once residency is completed. You’ll most likely owe and have to write out a check just to be clear of “your home”. Plus your loans are only deferrable for certain period of time and they’ll be coming due at the time or before you finish residency - leaving you owing essentially two mortgages.

And let’s not kid ourselves, many of us believe we’ll be attendings in the area we did residency, at least for a few years while we stabilize. Can we guarantee it? Can we be sure that we’ll be offered jobs by the hospitals or groups in the area? No, we can’t. Once again you’re assuming something that you can’t control. Having a house that you can’t sell, that limits your ability to accept offers in other states or cities, and that now controls what you can and can’t do will make you miserable.

Plus the obvious factor coming into play is the status of economy. 3 or 4 years ago the housing market was doing well - now people can't sell to save their lives. Do you want to risk that?

To further explore the benefits of delaying instant gratification, let's consider what renting could offer. Are you throwing money out the door when you rent? Well, for the insurance, taxes, upkeep, housing association fees, utilities, etc. that come with home ownership you can see how, after 4 years, renters are more likely to come out on top. They’ve not been forced to pay for appliances that break, broken water heaters, home owner’s insurance and possibly mortgage insurance. Every increase in property taxes doesn’t instantly affect them or -god forbid - having entered into a variable rate mortgage, every swing of the interest pendulum won’t suddenly double or triple their monthly payment.

Instead they pay their rent, utilities, renter’s insurance and not much else. Something breaks? Call the landlord. Broken water main? That sucks, but they aren’t paying. Appliances? Unless you’re a shmuck and rent a home where you have to provide the fridge, stove, and dishwasher you’re not paying to replace these or fix them either. An increase in rent can occur, but you’re not stuck having to pay something that you don’t accept. Once your contract is over you can move to a cheaper place if the monthly payments become too much – you aren’t suddenly crippled if the landlord wants another $500 each month.

And if you’re considering the tax deduction that comes with a home – the savings overall per year from a renter are often similar, if not more than those deductions even with a higher monthly payment.

Sure there’s the pride of ownership, but it can wait. It’s just not worth it to get in over your head simply because of pressure to fit a persona, a lifestyle, that you can’t meet anyway. Yes you’re a doctor, but you’re really not - so don't behave like you're set and secure. You’re still a student and it would be wise to think that way.


social worker said...

the quote is from Hamlet..and i agree...bastardized and overly used :)

The Lone Coyote said...

Interesting perspective. I think if you are going to be living in a very high cost of living area, ie large urban area on the coasts, it makes sense to explore buying since your mortgage payment, even with a 30-yr fixed rate, may be about the same as your over-priced rent payment on a small apartment will be. Of course, you have to be careful not to get in over your head with the borrowing as you mention.

ladyk73 said...

I think that people should buy a house because they want to keep a home. The investment part is real, you have to do the math, but buying a house should be about staking a claim to a geographical area.

I am a single woman and I own a house. For me it was about wanting a garden, a place to put in a pond, a house to rehab, a place to be my home. It was about not being able to live in the way I wanted as a renter.

I bought a very inexpensive house is a working class neighborhood. It needed a lot of work, and some of it I did myself.

My mortgage/taxes/payment is cheaper than most apartments in the area. But most importantly, I have a huge garden, and it is mine!

I also call this place home. I call this place home after moving about and returning. I choosed to root myself here.

However, I am a full time grad student at the moment and I just had my furnance die.

$2500, that I did not have.

I think you are making a good choice for you. Don't buy a house for all of the $$$ issues, because it is still a crap shoot, you buy a house for the roots.

Anonymous said...

You are on the right track. Just don't get caught in the trap of trying to "max out" on how much apartment you can afford. Allow for the incidentals and try to put a small amount away if you can, stay out of credit card debt but treat yourself well every once in a while because you'll need and deserve it.

I spent my first two years of residency digging a big financial hole via credit cards and once I started moonlighting, my first 100 hours of work went to paying credit cards. I felt like a slave to the credit card companies. Many of my colleagues had worse problems than myself and had to borrow money from family after graduation until they got their first check as an attending. Make wise decisions from the get-go and it'll pay off later. Living beyond your means because "I'll make it later" only leads to a lifetime of making bad financial decisions for many doctors. I'm now an attending and I see many who could have retired years ago if they had planned better.
Still very early in my training but hoping to avoid that trap.....

MSG said...

Ladyk73 and Anon 1:46 brings up the exact perspective I was trying to bring to my argument: Buy for the long term and not to appease some inner or outer pressure to "fit in" the doctor life. It's extremely important to understand that wealth is created through home ownership *through the long term*. If you still want to buy, be very frugal, don't get over your head, and realize that you're a resident - not an attending. Don't plan to pay it forward later, it will only bite you in the end.