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Buy a home as a Medical Student, rent it out.

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  • Buy a home as a Medical Student, rent it out.

    WCI,

    I am 25 and I start medical school in July. I am fortunate enough to have enough money saved to put a 30-40% downpayment on a house (fixed phone screens in college) close to my medical school. The medical school is surrounded by cheap homes (compared to where I am now in socal), I can get a recently built home from 3-4 bedrooms, central air, the works, all packaged into a 2,000 sqft home (average) that looks nice.

    I want to have 1-2 roommates and charge them rent while in my first two didactic years. After that. assuming I travel for audition rotations, I plan to partner with the medical school as a housing affiliate and rent out every bedroom I have to medical students.

    Rent is approx. 900-1200 a month for a 3-4 bedroom. The house price I am looking at is about 140,000, which I would put 30% down (42,000). A 100,000 10-year mortgage at 4% after all fees said and done will be approx $1250/month.

    Do you think this is a wise investment? Mississippi is not exactly a hot real estate market, I do not expect the value of the home to increase much, if at all. I am really banking on my mortgage being mostly paid for by someone else, in which case, when I sell at the end of the mortgage (or whenever), to me the money made would be [sale price - rental costs - initial dp - transaction fees]. I have never bought a home before, I am looking at averages for all the costs, but no one else is really guiding me through this.

    I have never rented to anyone before, I know the costs associated, I am really just wondering whether or not this is something wise to pull the trigger on. Or should I just pay for tuition? The general idea is that once I am done with residency I would sell the home and all of that would go towards loans.

    If you need more info let me know!

    Thanks!

  • #2
    Others may disagree but I'd say dont do it, especially if you dont think the market/house value will increase much.  Your best financial move during med school will be to study to get the best step one scores so you can choose your residency (and take out the least amount of student loans).  You dont want to be distracted by having to fix anything that may pop up in the house, and you dont want to limit your residency location options. What happens if you want to do residency far away, especially if the house hasnt gained much value? How easy would it be to sell after 4 years?  To be an absentee landlord? Have you considered realtor costs, property taxes, closing costs, the chance that it may go unrented for a few months, etc?

     

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    • #3
      Hmm.

      That actually sounds very intriguing.  The appeal is obvious.  The downside, however, is having so much of your assets exposed to risk at a point to where you don't have a whole lot of risk tolerance, unless your backup plan is just to take lots of student loans...which, seeing as that's a lot of people's Plan A, isn't that bad of a backup plan, either.

      There are the obvious risks and pitfalls, such as needing to manage the property should something go awry.  You're going to be busier than you've ever been in your whole life with more at stake as a medical student and aren't going to have much in the way of time and energy to fix/repair anything or coordinate its being done.  That's either going to cut into your time and energy, which are irreplaceable and need to be otherwise directed to ensure your future success as a doctor, or cut into your money...and you can always find more money in the future.

      *If* I were to do this, I would go about it slightly differently and improve cash flow while exposing myself to less risk by virtue of taking on more interest.  I would put 20% down and take a 30-year note.  Keep the remainder in cash reserve in savings or, if you have earned income in 2017, put some in Roth IRA.  Single-family homes (and real estate in general) work better as a cash-flow instrument than a net-worth instrument.  Should you desire to put more into principal to avoid future finance charges, do it with your excess cash each month, or invest it otherwise (it doesn't count as earned income, so you can't put it into Roth IRA, for example).

      I do not know if the same deductiblity (word? I'm inventing it if not) rules apply if you also live in the home; I think it might disqualify you from it, but you can still deduct your property tax and mortgage interest if you itemize (which you may not do with the higher standard deduction of $12,200 in 2018).

      If you can defray your living costs and build some wealth while in med school, great, but every tiny bit of time and energy you have over the next four years needs to be spent toward getting into your top choice of residency and not mucking about over getting the roof replaced or haggling with renters.

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      • #4
        I say don't do it.  I owned a house during medical school and then the 2008 housing market crash happened.  The house lost 50% of it's value overnight and we had to sell it in a short-sale (ruined my wife's credit for 7 years).  Outside of that very real possibility, there are other great reasons not to own a home now.  Houses cost money outside of the actual mortgage.  No matter how new or swell it looks, there will be other unexpected expenses.  Also, being a landlord can be a PITA.  It's the last thing you should be doing/thinking about while in medical school.

        Do yourself a favor and keep it simple while in school.  You want to have absolutely no distractions during that time if possible so you can focus 100% of your mental energy on your schooling.  The better you perform in school and on taking Step 1, the easier the rest of your life will be when it comes to finding a competitive residency and getting a great job.  You'll get far better return on investing in yourself now then you ever would on a silly 140k house purchase. Just my 2 cents

        Best of luck!

         

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        • #5
          Need more details. More exact purchase price, exact number of rooms rented, interest rate and term, taxes, insurance. You really think you won't do ANY time at your home school the 3rd and 4th years? How are you going to sell it - realtor, self, Redfin? Might be interesting but would need the above answered first.

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          • #6
            I'd say avoid doing this. I'm just getting through a section in William Bernstein's Investor Manifesto where he argues pretty convincingly that you really need to think of a house (specifically the one you're living in) as a consumption, not an investment. On average if you consider the "imputed rental value" plus the predicted price increase, you're probably only looking at 3-4% real return. Renting to others as well may push that up a point or two, but it's probably not going to be leaps and bounds more than a more standard investment vehicle.

            In order, the priorities I would focus that money on would be:

            1) Keeping your loans as low as possible, up to and including taking none out (think of the interest to be avoided!)

            2) Kickstarting your nest egg 7-10 years earlier than your colleagues (think of the interest to be earned over that period!)

            For my first year of med school, I lived in a house owned by my parents, with two other med students renting rooms, and I was a sort of property manager. Nothing major happened, but it was enough of a hassle that I was happy when I moved before second year. Imagining the hassle of trying to manage renters on a month to month basis during 3rd and 4th year makes me cringe a little, and imagining trying to sell it makes me cringe even more. Consider the possibility that you may not be keeping it long enough to start making money on the sale, and that selling on a schedule may force you to let it go for less than you'd like.

            Kudos to you for making some real cash and saving prior to med school, if I were in your shoes (knowing what I do now), I'd focus it all on limiting loans and take the easy route of renting during med school.

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            • #7
              I did this.

              Some details differed. Location and lower prices at the time meant I only had to pay $35k in cash for a 2 BR condo on the bus line to med school. I charged a roommate $300-$350 per month and had a paying roommate all 4 years. In the end I sold the condo for about $45k. Owning property also gave me ‘in state’ tuition (although this was a private school).

              Obviously this worked out well for me. But I bought at the bottom of a bust, and the total dollar figures involved were minimal. Also, I bought a condo, which I meant I didn’t have to do any outside work/maintenance at all, it was included in the modest HOA. I’d be more wary of a SFH, with all the work that needs to be done or hired out, since you’ll be a busy student.

              Definitely worth considering.

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              • #8
                Nope. Nope. Nope.

                Do not underestimate the importance of doing well in medical school. This is the single biggest predictor of future income of a physician. Its no secret that the top of the medical school class gets more competitive residencies. All of your energy/time should be invested into this.

                Paying down student your medical tuition and avoiding student loans is a guaranteed savings. Real estate investment is by no means guaranteed. If you want to dabble in that afterwards, by all means, go for it.

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                • #9
                  My wife and I bought a house in 2009, best time with the market and first time home buyers tax credit on a 3.5% down FHA loan. We thought we'd be smart and "flip" it. I'll save the details, but we made decent money from it, but that was in the perfect situation. We're now renting and the ease of renting is worth so much especially during such a stressful time. Every situation is different and so you have to figure out what works best for you, but a guaranteed >5% return by avoiding loans and the decrease in stress of homeownership and less loans should be seriously considered in your decision.

                  Best of luck, you'll make the right one now matter what you pick.

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                  • #10
                    I think the hassle factor and unpredictability make it not worth it.  Think of times when stuff breaks down and you need to fix it... which may happen before an important exam.  Think of a time when one of your renters fails out and you are left with an empty room for the next 6 months...  Think of living with people you might not actually like and having to have a dual role of their landlord, friend and possibly competitor for a nice residency slot.  So many different variables.  Given that payoff is minimal here, I would probably not do it, although the idea sounds tempting.

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                    • #11




                       

                      Rent is approx. 900-1200 a month for a 3-4 bedroom. The house price I am looking at is about 140,000, which I would put 30% down (42,000). A 100,000 10-year mortgage at 4% after all fees said and done will be approx $1250/month.

                       
                      Click to expand...


                      Your mortgage would be $1250/month with your stated terms but you would only gross 900-1200/month? You're losing money before you even consider taxes, maintenance, hiring people to do yard work and possibly shovel snow and salt your walkways.

                      If you're absolutely in love with the idea of being a landlord, you should definitely hire a property manager. That 5-10% would be money well spent just so you don't have to deal with the headache of actually managing the place and your tenants/friends won't peg you as the evil landlord when it's time to pay rent.

                      My recommendation is to not buy a home as a medical student but if you must don't buy a single family home (SFH). Get a multi family (ideally a four unit) or a condo (2/1.5 at a minimum) and then rent the units or spare room out, respectively, to permanent tenants/roommates or do Air BnB or the arrangement with your medical school as a housing affiliate.

                      How much is tuition per year and what would be your interest rates? The usual 6.8%? Would you only take out federal loans or are private loans also a necessity?

                      To recap: Don't buy as a medical student. Rent. If you're absolutely committed to being a landlord/homeowner, spend some of your free time reading about what it takes to be a landlord. That will be time well spent. Being a landlord isn't for everyone.

                       

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                      • #12
                        Love the idea of a side hustle. Mine have brought in some serious cash, and moved our net worth significantly upward.

                        Sometimes, there is wisdom in knowing which side hustles not to do.

                        You should consider the time this all will take, the limits owning will place on your life/checkbook/opportunity for next side hustle, etc. I'd also consider what happens to your cash if you don't buy? Are you still going to take loans at 6.8%? That's expensive money. Also, if you can't stay put for 4 years (and are only planted for 2, before 2 years of chaos... ), I'd really re-think this. You'll eat up a good deal of $ moving, moving, moving, and then interviewing.

                        Point is - maybe make a 10 year plan (earnings, loans, cash, etc), and see how buying might change between 2 options. Is it still worth buying for all that work and loss of flexibility? My advice here is to make the decision based on data and numbers, not just the idea - good idea, follow though, see if the evidence (# on a spreadsheet) still supports your initial idea.

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                        • #13
                          We bought a 100k townhouse in med school in 2005. Sold in 2010. The positives were that we put nothing down, mortgage was less than rent and we sold it for 25 percent more than we bought it for. We also had to rebuild it after a hurricane in 2008. You just never know what is going to happen. In the end it worked out fine but it's a risk. I think your money and time will be better spent taking less loans and renting out a room yourself. At the same time, if you go ahead with the purchase it's probably not going to be the worst decision you'll ever make.

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                          • #14
                            Remember every dollar you DON'T take out in student loans is a guaranteed 6.8% return. That's really tough to beat! I would absolutely use excess money to take out less in loans. The real estate thing may work out better than 6.8% but it may work out way worse. In what other scenario have you heard of a guaranteed 6.8% return on your money?

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                            • #15
                              I believe graduate loans are at 6% now. Would also need to know the amount of cash outflows/loans for school and when those will occur.

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