What Makes Purchasing A Home A Bad Idea
Remember that I’m referencing these thoughts to a physician that hopes to be financially independent and job independent early on in her/his life. The topic can be approached from many different angles. Rent vs. buy is usually the topic of discussion. If you are completing residency and have student loans and have a small savings account then making a home purchase is just not a good idea. This holds true specifically when your goal is to be financially independent in 5-10 years.
Exceptions To The Rule
If you live in a part of the country where homes can be purchased for less than $100k it might make sense. Even then, you have to do the math. I generally mean single family homes when I use the term ‘home’. Condos, townhouses or any property with HOA dues generally is a bad idea. Some will equate HOA dues to what they would spend on their single family home’s maintenance. But note, HOA dues are higher than what you would spend on a single family home and are not under your control. They also go up with inflation. Yes, a single family home will have expenses but you can often choose when you spend that money. An HOA is due every month no matter what. And if something major goes wrong with the building a one time larger fee can be assessed.
Heavy Financial Burden Early In Your Wealth Building Years
If you are nearing the end of your residency and finally are able to make some extra income moonlighting the last thing you need is another financial commitment. It’s easy to spread yourself too thin. You have $300k in student loan debt paying nearly $3,000/mo., another $1,000/mo. for rent, $500/mo. for food and vehicle expenses and another $400/mo. for miscellaneous expenses. So, you start your career making $200k out of residency with nearly $5,000 in monthly hemorrhaging. Depending on your specific situation you may be left with $3-5k/mo. after all your overhead. Even if your spouse is making some money is it really wise to tie up the amount that’s left of your income stream?
“But My Home Is An Investment.”
If it’s an investment then what are you doing living in it? You should be renting it out. Now, if you get roommates that might offset your mortgage then you are heading in the right direction. If you have a basement you can rent out, if it’s a duplex or you have an ADU (accessory dwelling unit) then you may have yourself an investment. Speculating that the value of the home will go up in the future is fine too but… an astute financial adviser will tell you that if you are making a real estate investment it should only be 10% of your asset allocation until you gain expertise. Consider this, if it’s an investment are you that sure of yourself that you can make money the first time around on your venture? Many successful ‘investors’ have to make quite a few mistakes before they get it right. I personally had to invest in the market in many ways before I finally figured out how to do it effectively. Along the way I’ve made mistakes which have cost me money. I even made some expensive mistakes in my auto-mechanic shop before I finally started making money. Can you afford to make such mistakes early on in your career?
My House Is My Escape
I have a whole post dedicated to the mentality that a house is one’s escape. It is such a backwards mentality in my humble opinion. Your home as an ‘escape’ creates a rift between you and your fellow human. No matter how tired you are of humans and how utterly annoying you may find them it’s never going to be better by you hiding from them. Escaping the world and society under your roof and creating an oasis is not the answer. I know how good it feels, believe me I do! A spectacular home with all luxury amenities is so deliciously wonderful. But what happens when you are ready to travel come year 5 or year 10? Once you have met so many new faces, tolerated adversity, experienced amazing joys and become location independent will you still think the same of this little mansion you created for yourself? What about the opportunities you gave up to connect with others…
Why We Think A Home Purchase Is A Good Idea
We are constantly told that a home purchase is the ‘responsible’ ‘adult’ next step. The realtor group has such a powerful lobbying arm that they have every angle covered. They have provided tax breaks for those who make home purchases… and not if you buy it cash! No, the government says that only if you go into debt will you get a tax break. Loan brokers, realtors, home inspectors, insurance companies, manufacturers, contractors and banks all stand to profit from this. This is an ultra efficient part of the market and to be able to make a profit in this niche you really need to know what you are doing. It’s easy to forget the cost of plumber, the increase in tax assessment, the price of the home inspector, the loan fees and the longer commute costs you have incurred because of the home. We also think a home purchase is a better idea because the argument is made that paying rent is throwing money away. Many of my coworkers pay way more in interest payments (which is definitely throwing money away) than I pay in rent. So in summary, think it through, do the math and if you decide to purchase then make sure to get in when it’s a buyer’s market and not a seller’s. Make a financial decision and not a consumer decision.
Have you lost or made money in your personal real estate transactions?
What’s your housing plan for the future?