The Rent vs. Buy Decision For Medical Residents (Intern Financial Survival Guide)

One of the most common financial questions that new residents ask is whether they should rent or buy a home. While everyone’s circumstances are a little bit different, I’ll go over the major considerations for this important decision.

Rent vs. Buy Calculators

There are many rent vs. buy calculators on the internet. Zillow, NerdWallet, Bankrate, and many others have their versions of the rent vs. buy calculator. Personally, my favorite rent vs. buy calculator is the the New York Times version.

In the New York Times calculator, you put in all of the assumptions of the home that you are interested in buying, and then it calculates an equivalent rent. If the rent of an equivalent home is more than this break-even point, then you should buy a home. Otherwise, you should rent.

Factors That Affect The Buy Vs. Rent Decision

Besides the house price and the equivalent rental price of the home where you are looking to live, these calculators take into account many factors:

Mortgage Rate

Your planned down payment and your mortgage term will influence your mortgage rate. If you do not have the standard 20% down payment, you will have to pay a higher mortgage rate with a physician mortgage or other nonstandard mortgage.

30-year mortgages generally have lower monthly mortgage payments (which is why most homeowners prefer them), but higher interest rates than 15-year mortgages..

Time you plan to own the home

This is a very important factor in the rent vs. buy decision. Many residents may only live in a home for 3 years for shorter residencies such as internal medicine or pediatrics. Other residents, such as neurosurgeons, may live in the home for 7 years.

While it is possible that some residents will do fellowship at the same institution as their residency program, you cannot know in advance that this will be the case. I would assume that you will leave the area after residency for fellowship or your first attending job.

Home price growth rate

Buying a home is an investment, so with higher home price growth assumptions, the break-even rent will decline.

Rental growth rate

If you assume higher rent hikes during your residency, then the break-even rent will decline as well.

Investment return rate

When you buy a home, you have to plunk down money for a down payment, which you don’t have to do when renting. That money could have been invested in the stock market or other investments, so the rent vs. buy calculator requires an investment return assumption.

Property Tax Rate / Home Insurance Rate

If you buy a home, you will have to pay property taxes as well as home insurance, which you won’t have to do if you rent.

Closing Costs

There are high transaction costs associated with buying and selling a home, which you only have to pay if you buy a home.

Maintenance

When the plumbing breaks, the homeowner pays for the repairs. This is yet another cost of home ownership that renters do not need to directly pay for.

Other considerations in the rent vs. buy decision for medical residents

Don’t just compare the rent with the expected mortgage payment

Many residents are fooled into buying a home because they consider the cost of home ownership to only be the monthly mortgage payment. In general, your monthly payments when buying a home (e.g. mortgage, taxes, insurance) are lower than the comparable rent for the similar home. However, as we saw in the New York Times calculator, the monthly mortgage check only takes into account a portion of the costs of homeownership.

When are you going to find the time to buy a home?

If you match into a program in a new city, it can be hard to buy a home. You have no idea where the best neighborhoods are, or what you specifically want in the new city. Further, you may have a limited ability to be selective when choosing homes. In many cases, you fly in to your new city for a weekend and view a bunch of homes with a realtor and make an offer on your favorites. This is compared to other buyers in the area, who may be moving locally. They will spend months or even years looking for homes, waiting for the perfect home in the right neighborhood for the right price to be available.

Invariably, many of the homes that you see on Zillow are overpriced, because they are the ones that haven’t been sold. The most popular homes in the best neighborhoods or the best values often get scooped up just a few days after listing.

One alternative would be to live in a short-term rental (3-6 months), and explore the area during your first few months of residency. You are able to figure out the optimal neighborhood for you and your family, based on proximity to the things you care about (e.g. work, church, gym, grocery store). In addition, you can take your time to buy a home for the best price. Of course, this strategy further erodes the time you spend in your home, making it more likely that you will simply rent for your entire residency.

There is value in the flexibility with renting

One of the benefits of renting is that it gives you the flexibility to move if your circumstances change. If your family size grows during residency, then renting gives you the flexibility to move. If you don’t like the neighborhood you live in, you can simply move. If you buy a home, you are usually stuck there for the entirety of your residency.

The uncertainty of home price appreciation

While you can look at historical data to estimate how much a home might appreciate during residency, there is, of course, significant uncertainty in future home prices. Long-term house appreciation rates are generally lower than that of the stock market, but real estate markets can do incredibly well (e.g. Northern California from 2010-2018), or incredibly poorly (e.g. Detroit from 2007-2009).

Even if, on average, you would be better off renting versus buying if you are in a 3-year residency program in a given town, a red-hot housing market could mean that you end up ahead by buying a home.

Buying a home as a consumption decision

While buying a home is usually a poor financial decision compared to renting for most residents, especially those in shorter residency program, many residents have already made their decision even before investigating the financial implications of buying versus renting.

There is the American Dream of homeownership, and for many residents, they want to achieve that homeowner status as soon as possible. There is satisfaction in having your own home that you can nurture. They are willing to pay a premium over renting for that satisfaction. They may want to roll the dice and see whether the real estate market while in residency will rise enough to make them money over renting.

In some ways, the rent vs buy decision is like any other consumption decision. Even if you decide you are going to rent, you have to pick between many different homes or apartments at varying price points. From a financial standpoint, it is better to leave in a cheaper apartment than a more expensive apartment. It is better to have roommates than to live alone. If you live near your parents, it would be cheapest to just live with them. Of course, everyone doesn’t live with their parents or in the absolute cheapest apartment in the unsafe part of town in order to save money. Everyone has their comfort and threshold level for amenities and safety, which leads them to spend what they spend on rent.

Similarly, if the psychological or emotional benefits of homeownership are worth it to you, then you can choose to buy a home, even if it isn’t the best financial decision. You just have to treat buying a home as a consumption decision, just like taking a vacation or buying a nice handbag.

Conclusion

The rent vs. buy decision is dependent on many factors. Run the numbers in the New York Times calculator to see whether it makes sense to rent vs buy. However, many residents feel strongly about the rent vs. buy decision even before running the numbers. It is acceptable to make the incorrect financial decision (usually buying when they should rent) if you treat the decision like any other consumption decision in your life.

What do you think? Did you buy or rent during residency? Do you think it is acceptable for a resident to buy a home during residency if they treat it as a consumption decision?