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Should I buy as a fellow in training with two years left in training?

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  • Should I buy as a fellow in training with two years left in training?

    Hello Everyone,

    Me and my wife are both trainees right now. I have an additional 2 years left in fellowship and my wife is applying for a fellowship next year and is likely to stay at the same institution for a three year fellowship. We have zero debt, no kids or pets and currently rent a 2 bedroom for approximately $1800/month.

    We live in Madison, WI and the given EPIC & UW health are very big employers, the housing market for the size of the city has always been very very competitive even prior to the pandemic. From my initial research, people have said that it is easy to resell property and also to rent out (obviously with the unavoidable nuisances).

    Question right now is, should be buy a house for the next two years (for sure, likely more). This will not be our forever home. Small Townhomes/Single family homes are approximately 330-400k with a local big contractor providing new houses at 375K-400K. If we put 10% down, with the current rates, our mortgage will be around $2100 but with total 150K income, we would be able to afford it.

    We like a property but we are very confused if we should buy a property as an investment. We will live in it for 2 years for sure and once I secure an attending job, would be able to keep the property as well, likely rent out vs just keep renting for now (what bothers us is almost 22000$ going to waste every year).

    Would appreciate any recommendation/advice from experts in this situation. Thank you.

  • #2
    You have two separate issues that may but do not have to be related. First, should you buy a small starter home? For 2 years, I’d say no. There are a lot of transaction and carrying costs, so you would probably be better off renting. That is, equity is unlikely to offset those costs over just a few years. If 3-5 years then maybe. Probably I’d factor in how much you just want to be owners and accept additional costs. Five or more years, then sure. Second, could you think of this as a future rental investment? The really important questions here are: 1) do you know what it takes to be a landlord and are you willing to do that in a few years as early career docs; 2) would you stay in the area to self-manage, or move and hire professionals (at a cost); 3) is the house well set up to be a rental (hint, don’t over personalize it)? No right or wrong answers here, but if you will stay in the area and want to be landlords, then go ahead. If you are likely to move, just keep renting and buy when you settle on an area to live..

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    • #3
      It’s not $22k/year going to waste. It’s $22k vs buying a home, paying the mortgage costs/interest (deduction meaningless), home maintenance, property tax, and the 6% commission when you sell at the end.

      if you use the 1% rule on renting out you would have to charge $3750-4000/month to make it worthwhile.

      If you buy a home do it for lifestyle reasons. Most docs are not going to want to live in properties that make good investments.

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      • #4
        Obvious question #1: Do you actually want to be a landlord?

        There is nothing wrong with the basics of your plan - which I assume is to use a physician loan to acquire a rental property with zero/little down, at a low long term fixed rate. The catch is you must live in it first. Because you must live in it, you won't be evaluating properties purely as an investment. There will be an urge to get a place that's a little nicer. You may wind up with an in-between property that isn't nice enough to be your long term house, or cheap enough to be a really good investment.

        Personally I think a two physician family has better ways to make money than this. But if part of your plan is to be a landlord, sure this is a fine way to do it.

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        • #5
          Rent $1800, mortgage $2100.
          Rent is the maximum you pay and the mortgage amount is the minimum plus you have about 10% transaction costs.
          From just a financial standpoint you will need a number of things to fall your way to make it worth the risk.
          The funny part is your "costs" will actually be greater owning and you will depend on appreciation for the period you own it to make it up. The purchase will cost you more for the time period. Does not feel that way, but that is the numbers.
          If THIS property will rent for only $1800, definitely no. Sounds like you are rationalizing a rental property to avoid rent. You will make that choice when it is time to move. Looks like the feeling that "throwing money down the drain renting" is emotional. It avoids uncompensated risks. You don't have a need to buy.

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          • #6
            Originally posted by zlandar View Post
            Most docs are not going to want to live in properties that make good investments.
            True story.

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            • #7
              We (you, me, most people) are overconfident. Overconfidence is the most prevalent cognitive bias. We think things will work our in our favor.

              We look at the upside! Awesome! Cool! Think how cool this would be!

              We discount the downside(s).

              I say this to tell you that it is probably a pretty bad idea. Not the worst thing a human could do but probably not a great plan. Renting gives you a lot of flexibility and freedom.

              Owning a home can have lots of hidden costs and headaches and homes don't always go up in value (I know, personally lost $ ).

              I guess what I am saying is the following:

              1. Focus on being a great doc. You have put a lot of human capital = opportunity cost into being a doc. Focus on that. House = work / time / headache

              2. Rent for a while and put any extra $ into a Roth IRA / taxable and give it time to compound.

              3. If you do buy realize you can (and probably will) lose money if you decide to sell in less than 5 years and you could even lose money if you sell after 5 years.

              I like the idea of owning. I try all the time to talk my wife into buying property and she talks me out of it. I am over-confident = optimist.

              I would love to have a vacation home but from a financial standpoint it is ridiculous. Rent when you are a "student" and rent when you are on vacation = financially wise.

              Congrats on being close to finished! Welcome to the WCI forum! Just by asking you are better off than most.

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              • #8
                RENT!!!

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                • #9
                  Rent. EVERY single TIME. Especially with a 2 year window.

                  I bought as an MD/PhD with an 8-9 year window and if I had to do it again, I would not. It was a mistake. I did not repeat that mistake, although I was tempted in residency at 4 year + 2 year fellowship, presumably at my home institution. That fellowship on a "handshake" agreement fell through, and if I bought I would have to liquidate in a buyer's market and would have lost minimum 10%. Again, beating the dead horse people -- do NOT buy a house as a medical student, resident or even with a combined residency/fellowship. You are NOT special, this is not a different situation and if you buy it there is a good chance you will regret it.

                  For Madison, Ann Arbor and a couple other places I know in the midwest, especially if you have a family I would consider a Coop rental, which is technically desribed as a limited-equity housing cooperative (LEC). It is not a coop-condo, which are popular on the east coast in DC or NYC, and those have more downsides than a regular condo. LECs are basically a non-profit and for all practical purposes constitute subsidized housing, run basically as a non-profit in a similar style as social housing in Europe. Though there are some income based restrictons, anyone on a residents' salary especially with a non-working spouse will qualify. Here's an example:

                  http://www.arrowwoodhills.com/

                  (when I was in school the average rent for a nice 2-3 bedroom attached townhome was 650-850, with market rates closer to 1300-1500$/month. I am sure they are higher now, but still probably 60-70% of market rates).

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