The decision to rent or mortgage your first home as a doctor, or any high-income earner, is a sticky one.
It’s a decision that is quite emotional. It’s also very controversial among the FIRE crowd.
In today’s post, I’m going to wade into these charged waters and offer my thoughts and how my wife, Selenid, and I went about this decision just a couple of months ago.
Please note that I am referring to the decision to mortgage or rent your first primary residence AFTER training i.e. as an attending. The reasons for a trainee to buy are few and far between. Perhaps if you are house-hacking or will be training in one location for 7 or more years. But really, renting is better as a trainee.
With that disclaimer in place, what is a fresh residency/fellowship grad with a 8x pay increase to do after decades of delayed gratification?
Do you mortgage or rent your first home?
The Argument for Renting
1. Time to make sure you like your new job
First, you are starting a new job that you may hate and want to leave after a year or so. It is not an insignificant percentage of doctors that leave their first job within 5 years and relocate.
If this happens to you, and it might, selling your house is the last thing that you will want to deal with. If you local market has been cold since you bought your home, you may be selling for less than you bought. Even if you sell at the same price that you bought, you will lose money via the closing and selling costs that you have to pay.
Even worse, if you can’t find a buyer, you now have to pay for two homes. Sure, you can try to rent this house to cover your mortgage and associated expenses. The bad news with this strategy is that rents for single family homes in A class neighborhoods rarely cover the expenses, let alone cash flow. Being a reluctant landlord is never a good situation.
If you are renting, all of these issues disappear. In most cases, you can just leave when your lease ends with no issue. At worst, you break your lease early and move with all strings cut.
2. Ease into your new paycheck
I’ve never received a windfall in my life. No inheritances, lottery wins, or any such event. If I ever do though, I know exactly what we are going to do with it.
Nope, we’re not going to buy a fancy car, new home, or some other toy. I’m not even going to use it to pay back my loans immediately.
It’s going to sit in an account for at least a month, probably more like three months. This way, I’ll acclimate to it and not spend it emotionally. Here’s to hoping we all have such problems!
Managing your first paycheck follows a similar philosophy in my mind
It’s shocking. I just got my first paycheck one week ago as of this writing. The amount I received in that one single paycheck after 2 weeks of work was equal to 1/8 of what I made in the entire prior year as a fellow. Just even thinking about this can make one react (and spend) emotionally.
Renting your first home allows one to acclimate to their new paycheck without spending emotionally. Spending emotionally can often lead to spending regret as expenses add up and you don’t have as much to save or invest as you would want. Or maybe you don’t have anything left to save or invest – you’re back to living paycheck to paycheck. This is what we want to avoid.
3. Save Money to Pay Off Debt and Invest
This is probably the most compelling reason to rent instead of mortgaging your first home.
The mortgage is just the beginning of the payments when you buy a house. The main expenses people talk about are PITI – Principal, Interest, Taxes, and Insurance. But there are also usual wear and tear repairs as well as unexpected issues that arise. Buy a house without furniture and you may be enticed to buy all new furniture. (Better in my opinion to leave rooms unfurnished that to buy a bunch of expensive furniture that you won’t use all that often.)
These payments tend to surprise new doctors who often just compare their current rent to the principal + interest payments of a prospective house. This is comparing apples to oranges.
All of a sudden, you may be shifting money earmarked for your debt payments or your retirement plan to support your home purchase. Don’t sacrifice your future financial freedom for a house. You will be able to find beautiful places to live without needing to do this, even in higher cost of living areas.
So far, we have rent at 3 points and mortgage or buy at 0
I’ll spare the suspense…my overall recommendation for new physician grads becoming an attending is to rent, not buy your first home.
Surprise…I didn’t follow my own advice
Yup, I’m going to recommend that you rent your first home even though I bought mine. Classic do as I say, not as I do advice.
And I don’t regret it. Actually, my home purchase increased our net worth a good deal.
How Buying a Home Out of Residency/Fellowship Can Work
The reason that my wife and I bought our first home is multifold.
But the bottom line is that we set a budget of what we could afford, created criteria for what we were looking for, and kept emotion out of it (ok fine…emotions were involved but we acknowledged them and kept them out of the decision-making process).
First, we had created our written financial plan and budget before buying our home
A written financial plan and budget MUST come first.
The first things we factored into our budget were our “needs” and our savings, including loan payments. Once we set this number with a savings rate of 41%, we knew how much we would have for everything else, including PITI and other expenses for a mortgage.
Sure, you can use some rules of thumb in making sure you don’t buy too much house. The purchase price should definitely be less than 2x your annual income (ours is 1.2x our salary). Your annual mortgage to income ratio should be less than 28%.
These generalities are fine. However, I recommend setting a budget and knowing down to the dollar how much house you can buy. You’ll feel a lot more confident and relaxed in your decision.
Second, we set strict criteria for our home
Much like with an investment property, we set criteria for the type of home that we were looking for. If a house didn’t meet this criteria, it wasn’t for us. Most home buyers let emotion dictate which houses they consider and like. We set these hard terms to limit the effect of emotion in our decision.
Our main criteria were:
- Below our maximum purchase price (2x our income would be over $1 million but we set a maximum sticker of $700,000)
- 4 bedrooms minimum (enough for 1 more kid at least)
- In our preferred school district
- In our preferred town with lower taxes than surrounding areas
- Finished basement
- Fenced backyard to keep our kids and dogs contained
- Room for potential expansion in future
- We would use a physician loan requiring 0% down
By following these criteria, we were selecting for a home that we knew we would want to stay for at least 10 years. As I’ve said before, the housing market is like the stock market – volatile in the short term but stably increasing in the long term. Buying a home that we were planning to live long-term, we maximized our chances of making a profit when we sold.
Also, by using a physician loan with 0% down, we would not need to sacrifice any savings or investments.
My wife and I agreed that if we didn’t find a house that fit these criteria, we would rent until we did.
Most Importantly, I Moved Home
This is probably the biggest qualifier of our decision to mortgage or rent a house.
We were moving back to my hometown of Buffalo, NY. My wife is from Miami but she has lived in Western New York for 8 years of her life and spent a ton of time in Buffalo during our 11 years together.
Further, I had vetted my job for a long time prior to making the decision to take it. This included time in the hospital, with the partners, with the partners spouses and my spouse. I knew the job inside and outside by speaking with the partners obviously, the hospital administration including the COO, and former residents who spent time with the department. It has been an amazing fit and I am not surprised. I knew and wanted exactly what I was getting into.
Both of these factors minimized the risk of me becoming a reluctant landlord or a reluctant double mortgage payer.
More Details about Our Purchase
In the end, we found a house that met our criteria and beyond. It was below our maximum purchase price. The house was initially listed for $730,000, above our limit.
We had our eye on it for awhile and then one day, the seller dropped the list price to $699,000. We made a trip to go see it in person about a week after this.
The home had 4 bedrooms, a fenced backyard, was in our school district and town of choosing, had a finished basement, and plenty of room to expand if we desired in the future.
We offered $675,000 with all furniture and the playground included. The offer was accepted.
Currently, the estimate for the house is ~$685,000. This means that we actually increased our net worth on the day of closing by ~$10,000 plus the value of all included furniture.
Buying in this case made sense.
So, Rent or Mortgage?
As I’ve shown, there is no simple answer to this question.
If I could only give one simple answer, it would be that you should rent until you are stable at your job and have a significant savings rate for debt pay down and investments.
However, there are scenarios where buying your first property can also accommodate these parameters as in my situation.
What do you think? Did you buy or rent your first post-training house? Would you do the same thing again? Did I make a mistake?