Rent or buy a home in residency?

[Romberg45]

I am a third year at a medical school in the south and am looking at going into a 4 year residency. I am single, have no kids, and have no debt (NHSC scholarship) and will have to do a 4 year payback after residency. Where I want to do my payback doesn't have a residency program, so I am 99% certain that I won't be an attending in same city as my residency which means I will only live there for 4 years.

So far, I have been maxing out a Roth IRA for the last 4 years. I have a monthly stipend of ~$1350 and pretty much spend all of it each month, but I have ~$17,000 in savings which I was planning on using to continue to max out my Roth IRA during med school and the beginning of residency. Lately, I have been wondering if I would be better off saving the money as a down payment for a house during residency or just continue putting in retirement accounts.

I'm not a big fan of renting. I don't like the idea of "throwing money away" when I could be building equity in a home, and I also like the idea of not having to answer to a landlord. But I also realize the negatives of owning a home, especially for only 4 years: losing money on closing fees and real estate agent fees, having to pay for repairs, possibly being stuck with the house for a few years if it doesn't sell, and of course the possibility of losing money if the market goes bad. But the pros include profiting off of the sale (maybe) and building your own equity instead of the landlord's.

I see a few different options and would like some opinions on which plan is the wisest:

(1) Continue to save money into a Roth IRA while in school. Buy a home with a small down payment (~$6,000). And focus on maxing out a Roth IRA and paying the mortgage while in residency.

(2) Quit putting money into a Roth IRA now and buy a house with a modest down payment (~$17,000) and start saving in my Roth IRA again during residency.

(3) Continue saving in my Roth IRA while in medical school. Rent an apartment in residency, max a Roth IRA each year, and save as much as I can into a 401k each year of residency.

(4) Continue saving in my Roth IRA while in medical school. Rent an apartment in residency, max a Roth IRA each year, but skip the 401k and raise my standard of living during residency because you only live once (or put in a small amount in a 401k if my residency program matches).

 

I think I should take advantage of the Roth IRA as much as possible which makes me not so much a fan of #2, but would also be concerned about not getting a mortgage with a small down payment. I like the Roth a lot since I'm only paying about $300/yr (~2%) in taxes right now.

[Peds]

you dont understand the statement "throwing money away"

with a 4 year time frame, that favors renting.

 

[Panscan]

Buying a house to keep for 4 years is the definition of throwing money away.

[CordMcNally]

This is a rent situation and it isn't even close. Renting isn't throwing money away. It's paying for a roof over your head. Plus, it won't be easy to get repairs done when you're working 80 hours a week, and trust me, there will be repairs.

 

Remember, with renting you know the maximum you're going to pay that month for housing. If you buy a house, you know the minimum you're going to pay that month with an unlimited ceiling on the total you may end up paying.

[AlexxT]

You need to understand that there's a reason that the conventional advice is not to buy the house.  You aren't going to come up with a reason why this will work for you, but not anyone else.

You are "throwing money away when you pay rent".  I suppose that's true to some extent.  But when you own, you throw away the mortgage interest, the property taxes, the repairs, and the maintenance. You throw away the time and money you spend on lawn care.  You throw away the extra money you spend on higher utility bills needed to heat and cool a bigger house.  More important, you throw away all the time you spend waiting for repairmen, time you won't have as a resident.  You will throw away the real estate agent's commission when you sell, and you'll throw away the closing costs.

The equity you put into the house will grow at around 2% a year.  If you put your money into index funds, it will likely grow at 10% a year.

The leverage you get by using a mortgage will be outweighed by the interest you pay.

When you compare the growth of equity in your house, you need to compare it to what you would have if instead you put the down payment into index funds, and added your mortgage payment, less rent, each month.  Most people would have more money if they rented and invested the difference.  The real value in buying is having a place to call your own forever, that you can remodel.  You will leave in 4 years, so you won't have that benefit.

[G]

Option 1 is ... unlikely.
2 is slightly less unlikely but unwise.
3 is a grand idea.
4 is feasible but it's a little early to splurge for many.

[ENT Doc]

I like options 1, 2, and 4.

[MPMD]

Stop repeating the phrase "renting is throwing money away" and you will win your next few years of financial planning.

When you rent you are purchasing the following freedoms (some already mentioned), the value of these things is actually incalculable when you're in residency:

-freedom from worry about repair

-freedom from losing all of your equity in an housing crash

-freedom from being turned into a unwilling long-distance landlord at the end of residency when your place won't sell

-freedom to hand the landlord the keys, shake their hand, and move on to your new life at the end of training

 

[AlexxT]

As for your options: Do #4. Live a little.

[Bonez]

Just to play devils advocate.. I bought a house right outside of Detroit for $86k before starting a 5 year residency. It was recently flopped 3br 2ba believe it or not (2011). Had to drop about $3k on a sewer repair and otherwise did several DIY projects for curb appeal. Put it on the market 2 months before graduation and had several offers in 2 days. Sold for $180k. Made payments throughout residency that were 1/3 what my friends were paying for rent. Probably can't replicate that scenario in the market today though.

[portlandia]

Bonez wrote:

Just to play devils advocate.. I bought a house right outside of Detroit for $86k before starting a 5 year residency. It was recently flopped 3br 2ba believe it or not (2011). Had to drop about $3k on a sewer repair and otherwise did several DIY projects for curb appeal. Put it on the market 2 months before graduation and had several offers in 2 days. Sold for $180k. Made payments throughout residency that were 1/3 what my friends were paying for rent. Probably can’t replicate that scenario in the market today though.

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And I can counter your example with those of my classmates that lost their shirts in the housing crisis. Anecdotes prove nothing as to the wisdom of an action. The process used to arrive at the decision is all important. Sometimes a good decision will have a bad outcome and a terrible decision will have a fortuitous result. The process matters. Just because there are lottery winners, doesn't mean that everyone is making a sound financial decision by playing the lottery.

In the OP's buy vs rent question for a 4 year time frame, it is pretty hard, if not impossible, to make a compelling mathematical case for buying that does not assume the unknowable (significant house appreciation). If the OP buys and it turns out well, it still doesn't mean it was the right choice, just that he got lucky.

[portlandia]

Romberg45 wrote:

I’m not a big fan of renting. I don’t like the idea of “throwing money away” when I could be building equity in a home, and I also like the idea of not having to answer to a landlord

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Please disabuse yourself of this mindless bromide repeated endlessly by millions of broke Americans. Renting is no more throwing your money away than buying food is. You need somewhere to live and something to eat, spending on these items has value.

Whether or not buying comes out ahead financially is a question of mathematics. You have provided no numbers to analyze, so assuming traditional numbers, most of the financially savvy posters here recognize that it would take significant price appreciation to break even over that short a time frame. The equity that you build in a home over a 4 year time frame will equate to ~5% on a 30 yr note. When you sell, you will pay 5-6% realtor fees plus another ~1% in closing costs. Don't forget the transactional costs associated with buying as well. Then there is the maintenance. The only way buying makes more sense is if there is significant house appreciation which is unknowable in the present or if the cost of rent is multiples more than the cost of owning for this time frame (could happen, but is extremely rare).

[Peds]

Bonez wrote:

Just to play devils advocate.. I bought a house right outside of Detroit for $86k before starting a 5 year residency. It was recently flopped 3br 2ba believe it or not (2011). Had to drop about $3k on a sewer repair and otherwise did several DIY projects for curb appeal. Put it on the market 2 months before graduation and had several offers in 2 days. Sold for $180k. Made payments throughout residency that were 1/3 what my friends were paying for rent. Probably can’t replicate that scenario in the market today though.

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n = 1.

[Zaphod]

Bonez wrote:

Just to play devils advocate.. I bought a house right outside of Detroit for $86k before starting a 5 year residency. It was recently flopped 3br 2ba believe it or not (2011). Had to drop about $3k on a sewer repair and otherwise did several DIY projects for curb appeal. Put it on the market 2 months before graduation and had several offers in 2 days. Sold for $180k. Made payments throughout residency that were 1/3 what my friends were paying for rent. Probably can’t replicate that scenario in the market today though.

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This is a pretty extreme example in all contexts. After the GFC in one of the worst hit regions in the US, bought at near nadir time, did work which was not accounted for in obvious monetary ways, but had a cost.

This is the definition of a special situation among special situations. Its an extreme outlier.

Standard decision making should rely on average and likely probabilistic scenarios. An analogy to your situation is someone winning the lottery and saying "devils advocate". Its still a negative expected value play and relies on survivorship bias.

In no way at all is renting "throwing money away". You dont even have to rationalize or discuss it. Is buying food throwing money away? Renting gives you a roof over your head. It doesnt need to do anything else, thats its sole purpose. Owning is different entirely and has its own issues.

[LizOB]

You're single and will be a resident. What exactly do you think will happen when you need some sort of repair or delivery during business hours? You can't just take a day off. I rented an apartment as a resident and it was the best thing ever. When the toilet wasn't working, I called and it was fixed while I was gone. Appliances break. HVACs go down. Trust me you do NOT want to deal with those things as a resident.