The Money Meets Medicine Podcast

Should Physicians Buy or Rent a House?

By Jimmy Turner, MD
Host of Money Meets Medicine

To buy or to rent? It is a question as old as time for medical students transitioning to residency and residents transitioning to their first attending job. Unfortunately, this is often an apples-to-oranges comparison.  But fear not, my friend. We’re here to break it down for you. We’ll dive into the nitty-gritty of finances, lifestyle, and all that jazz. By the end of this, you’ll be equipped with the knowledge to make the best decision for you.

So, grab a snack, get cozy, grab the beverage of your choice, and let’s figure out if buying or renting is the way to go for you.

Table of Contents:

Understanding the Housing Market Dynamics

Before we can dive into the rent versus buy debate, we have to understand the context in which this conversation is happening. If reading this in the future, the dynamics may have changed, but the principles below remain. As of April of 2024, the housing market has been a wild ride for some time. It’s like a rollercoaster that never seems to end, with prices soaring to new heights and interest rates climbing right alongside them.

But what’s really driving this crazy train? Let’s take a closer look at the factors behind the housing market’s recent ups and downs.

The Surge in Home Prices

It’s no secret that house prices have been on a tear lately. In fact, from 2020 to mid-2022, the average price of a home has shot up a whopping 40% (shown below). And even since then, they’ve continued to climb, rising another 4.4%. So what’s behind this surge?

increase in housing prices

Source: https://fred.stlouisfed.org/series/ASPUS

Well, there were a few key factors:

  • Low inventory: There simply aren’t enough homes on the market to meet demand, which drives up prices.
  • Historically low-interest rates: Until recently, borrowing money was cheaper than ever, making it easier for buyers to afford more expensive homes. More on this below.
  • Demographic shifts: As millennials enter their prime homebuying years, demand for housing has increased.

Rising Interest Rates and Their Impact

The low-interest party couldn’t last forever. In recent months, interest rates have been on the rise, with the average 30-year fixed mortgage rate climbing from 3.6% in 2017 to a staggering 7.5% in March 2024:

Average Interest Rate on Homes since 2020

Source: https://fred.stlouisfed.org/series/MORTGAGE30US

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So what does this mean for buyers? In short, it makes borrowing money more expensive, which can put a damper on affordability. In fact, as of the writing of this article, the monthly mortgage payment on a $750,000 home with a 30-year fixed interest rate of 7% produces the same monthly payment a buyer would have had on a $1.2 million home in 2021.

For some concrete number, let’s say you’re looking at a $300,000 home. With a 3.6% interest rate, your monthly mortgage payment would be around $1,364. But at 7.5%, that same payment jumps to $2,098 – a difference of over $700 per month.

This turns into a double whammy of sorts. With rising home prices in the context of rising interest rates, affording a home becomes more and more challenging.

To Buy or to Rent? Factors to Consider

So you’re at a crossroads. On one hand, buying a home is the American Dream – a symbol of stability, success, and putting down roots. On the other hand, renting offers flexibility, freedom from maintenance and repairs, and the ability to pick up and move on a whim.

How do you choose? Let’s break down some of the key factors to consider.

Financial Commitments and Benefits

First and foremost, it’s important to understand the financial implications of buying vs. renting. When you buy a home, you’re taking on a significant financial commitment in the form of a mortgage, property taxes, homeowners insurance, and potential tax benefits.

Renting, on the other hand, typically involves a more straightforward monthly payment that covers your rent and maybe renters insurance. While you won’t build equity or benefit from tax breaks, you also won’t be on the hook for unexpected repairs or maintenance costs…

Maintenance Costs vs. Flexibility

Speaking of maintenance and repairs, that’s another big factor to consider. As a homeowner, you’re responsible for everything from leaky faucets to broken furnaces – and those costs can add up quickly. How much? You can expect to pay 1 to 1.5% of the home price each year in maintenance fees.

So, that $500,000 house will cost you $5,000 to $7,500 in annual cost to maintain and repair the home. Forgetting this as part of the “rent versus buy” equation makes it more apples-to-oranges than apples-to-apples.

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On the other hand, renting offers more flexibility in this regard, as your landlord is typically responsible for handling repairs and upkeep. Of course, you may have less control over when and how those repairs are made, but it can be a relief not to have to worry about them yourself.

The Role of Job Stability and Location

Another important consideration is your job stability and location preferences. If you’re in a stable career with no plans to relocate anytime soon, buying a home may make more sense. You’ll have the opportunity to put down roots and build a sense of community.

But if your job situation is more uncertain or you anticipate needing to move in the near future, renting may be the better choice. It allows you to remain flexible and avoid the hassle and expense of selling a home if you need to relocate.

This is particularly important when considering the cost of selling a home, which is typically ~8% of the sale price. Take that same $500,000 home. The owner can plan on paying $40,000 in cost to cover the realtor commissions and fees associated with selling a home.

Understanding Property Taxes

Another important financial consideration is property taxes. These are annual taxes levied by your local government based on the value of your home, and they can add hundreds or even thousands of dollars to your monthly housing costs.

It’s important to research the property tax rates in your area and factor them into your budget when considering a home purchase. Keep in mind that these rates can change over time, so it’s a good idea to build some wiggle room into your budget.

Insurance Essentials for Homeowners

Homeowners insurance is another must-have for any home purchase. This type of insurance protects your home and belongings against damage or loss due to events like fire, theft, or natural disasters.

If you’re taking out a mortgage, your lender will typically require you to carry homeowners insurance. But even if you own your home outright, it’s still a smart investment to protect your assets.

In addition to homeowners insurance, you may also need to carry private mortgage insurance (PMI) if you put down less than 20% on your home purchase. This type of insurance protects the lender in case you default on your loan, but it can add to your monthly housing costs.

Benefits of Homeownership

Owning a home isn’t all a downer, though. One potential bright spot in the financial landscape of homeownership is the tax advantages it can offer. As a homeowner, you may be able to deduct things like mortgage interest, property taxes, and PMI on your federal income tax return.

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However, for this mortgage interest deduction to matter, you must itemize your deductions. If you add your mortgage interest to your State And Local Tax (SALT) deductions, which cap at $10,000 annually, and your charitable giving then your mortgage interest may start to provide a significant tax benefit.

These deductions can add up to significant savings over time, especially in the early years of your mortgage when you’re paying more in interest. Of course, tax laws can change over time, so it’s important to consult with a tax professional to understand how these deductions may apply to your specific situation.

It’s also worth noting that these tax benefits are not available to renters. So if you’re on the fence about buying vs. renting, the potential for tax savings could tip the scales in favor of homeownership.

Building Equity Over Time

One of the biggest advantages of owning a home is the opportunity to build equity over time. With each mortgage payment, you’re essentially putting money back into your own pocket instead of your landlord’s.

As you pay down your mortgage and your home appreciates in value, you’re building a valuable asset that can provide financial security and even a nest egg for retirement. That’s a powerful motivator for many people to pursue homeownership.

“Owning a home is more than just a financial investment – it’s an investment in your future and your family’s future.”

Personalization and Sense of Community

Another big benefit of owning a home is the ability to personalize your space and make it truly your own. Want to paint the walls a bold color or renovate the kitchen? As a homeowner, you have the freedom to do so without worrying about a landlord’s approval.

Owning a home can also provide a greater sense of community and belonging. When you own a home, you’re more likely to put down roots and get involved in your neighborhood, whether that means joining the HOA, volunteering at local events, or simply getting to know your neighbors.

“Owning a home has given me a sense of pride and accomplishment that I never experienced as a renter. It’s a place where I can build memories with my family and really feel like I’m part of a community.”

Making an Informed Decision Based on Your Circumstances

At the end of the day, the decision to buy or rent is a highly personal one that depends on your unique circumstances and goals. That said, the breakeven point where buying a home outweighs the price of renting is around 5 years (see below for information from a Zillow Whitepaper on buying versus renting). So, for those in training, buying a house doesn’t make a ton of sense the vast majority of the time.

Why? Well, here is an example on the breakeven based on the concept of “forced savings” buying a home versus renting and investing the difference. Based on current mortgage rates, you can see that the breakeven if ~7 to 9.5 years.  Ouch.

Maybe that’s not the best comparison, though.  What if we take into account the cost of owning a home versus renting and add it to the picture?  And let’s say that we assume you are doing a general surgery residency that is 5 years in length. How much would you stand to lose buying a home versus renting with a 7% mortgage? The answer is a four to five figure number. Here is what that looks like:

 

That said, there’s no one-size-fits-all answer, but there are some key factors to consider as you weigh your options.

Considering Your Long-Term Plans

An important factor to consider is your long-term plans. Where do you see yourself in 5, 10, or even 20 years? Do you anticipate staying in the same area or do you have dreams of moving to a new city or state?

If you have a stable job and plan to stay put for the foreseeable future, buying a home may make sense. But if you’re early in your career or anticipate needing to relocate for work or family reasons, renting may offer more flexibility. This is why this is often the best course for physicians-in-training.

It’s also important to think about your personal goals and values. Is building equity and creating a stable home environment a top priority for you? Or do you value the freedom and flexibility that comes with renting?

There’s no right or wrong answer – it all depends on what matters most to you.

Ultimately, the decision to buy or rent is a big one that requires careful consideration and planning. By evaluating your financial situation, long-term plans, and personal values, you can make an informed choice that aligns with your unique circumstances and goals.

Conclusion

So, should residents buy or rent a house? The answer is… drumroll please… it depends! Yep, I know, not the most satisfying conclusion. But here’s the thing – there’s no one-size-fits-all answer. If you plan to stay in your location for less than 5 years you are rolling the dice. Less than 4? It’s getting risky. If you are planning to stay in your location for 3 years or less, you can expect buying a home to lose to renting the majority of the time.

It all boils down to your unique circumstances. Your finances, your lifestyle, your long-term goals. What works for your neighbor might not work for you, and that’s okay!

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