Renting Versus Buying A Home: Why 18 Is The Number To Remember

Is Now The Time To Buy A House?

Now is a good moment to examine the question for many young doctors — because the answer is clearer than usual. Renting is the winner.

“This is not the time to buy for most people,” says Mark Zandi, the chief economist of Moody’s Analytics according to the morning report of the NY Times. “Mortgage rates are extra high, and house prices are extra high, and there’s not much to choose from in the market.”

Zandi added: “If you find the perfect place, then by all means buy it. But most people are not going to find it.” A recent analysis by The Economist magazine came to a similar conclusion

Embarking on a medical career is a thrilling journey, and one of the challenging decisions you'll face is whether to rent or buy a house. The choice between renting and home ownership is complex, influenced by various factors such as financial stability, career flexibility, and market conditions.

But I get it, after years of a nomadic training life, it’s common to finally want to create some roots as an attending physician—and this often includes a long-term job and a house. So when you sign on to take your first job, the reflex next step is to find is often to find a house too.

Let me encourage you to pause with that mindset, and join me to consider factors worth weighing when deciding between renting and buying—-with a particular focus on the crucial rent ratio value of 18 or less.

Understanding the Rent Ratio

I get it, for many of you’ll admit you have never heard the term rent ratio and therefore will ask What is the Rent Ratio? The rent ratio is a financial metric that compares the cost of home ownership to the cost of renting. It is calculated by dividing the purchase price of a home by the annual rent of a comparable property, this ratio provides valuable insights into the economic feasibility of buying a house. For example, if a home costs $300,000 and a similar property can be rented for $1,500 per month ($18,000 annually), the rent ratio would be 16.7 (300,000 / 18,000).

The Significance of Rent Ratio of 18 or Less

A rent ratio of 18 or less is often considered a benchmark for a financially sound decision to buy a home. This threshold ensures that the mortgage payments are in line with the cost of renting, allowing for financial flexibility and minimizing the risk of being burdened by home ownership costs.

A lower rent ratio indicates that a smaller percentage of income is being allocated towards housing expenses. This is crucial for individuals and families as it allows them to have more disposable income for other essential needs such as food, healthcare, education, and savings.

When the rent ratio exceeds 18 or goes significantly higher than that threshold, it can lead to financial strain and instability. A high rent ratio means that a substantial portion of one's income is being consumed by housing costs alone. This leaves little room for saving money or dealing with unexpected expenses.

Moreover, a high rent ratio can also be an indication of unaffordable housing in a particular area. It suggests that rental prices are disproportionately high compared to local incomes. This can make it challenging for individuals and families to find suitable and affordable housing options within their means.

Having a rent ratio of 18 or less holds significant importance in ensuring housing affordability and financial stability. By keeping this ratio within an affordable range, individuals can maintain better control over their finances while securing suitable accommodation without compromising on other essential needs.

Financial Considerations

For young doctors, managing student loan debt and maintaining financial stability are paramount. Renting provides flexibility in the allocation of income, allowing for strategic debt repayment and the building of a solid financial foundation before committing to home ownership.

Understanding the real estate market conditions is crucial from an investment strategy. Young doctors often have mobile careers, and a buyer's market with a favorable rent ratio provides an opportunity for home ownership as an investment. This allows for potential equity gain while preserving the option to sell or rent the property in the future. Bear in mind that staying in a home greater than 3-5 years is typically needed for investment gains to be realized.

Home ownership also has additional costs beyond mortgage payments. Those costs include property taxes, maintenance, insurance, and potential homeowners' association fees. A rent ratio of 18 or less accommodates these extra expenses, ensuring that the total cost of owning a home remains manageable.

Career Flexibility and Mobility

The medical field is dynamic, and career trajectories may involve relocations for residency, fellowship, or new job opportunities. Renting provides the flexibility to adapt to changing career landscapes without the commitments and potential challenges associated with selling a property. Knowing that 50% of doctors change jobs after their first 3-5 years as an attending, should make you pause before you take on the massive expenses of a “doctor’s house”. I recommend choose a modest house to begin, and you can always up-size later.

Make An Informed Decision

First of all don’t trust the bank to help you make your decision. You are such a low loan risk for them that they’ll gladly pre-qualify you a large amount of money—so you can buy the doctor’s mansion. Thus don’t make the common mistake of getting a pre-qualified loan amount and then letting a realtor know that is your “price range”. Instead follow the trusted rule of keeping your housing cost (this is not just your mortgage) at < 30% of your gross income. The less the better here.

Keep in mind if you choose to buy a home, buyers effectively pay tens of thousands of dollars to real estate agents.

Buyers must also pay to fix leaky roofs and broken plumbing. They must tie up money in a down payment, instead of being able to invest it elsewhere. They must bear the risk that house prices will fall — and prices really can fall.

And buyers must pay mortgage interest to banks, especially in the early years of a mortgage when payments mostly go to cover interest, not the loan’s principal. The mortgage-interest tax deduction does reduce the effective cost of these payments, but it doesn’t eliminate it.

Most of the time, these dueling factors argue for buying a home if you can afford to do so and you plan to live there for a long time. If you think you will move in several years, renting often wastes less money than buying.

The current housing market has made renting even more attractive. Only if you find an affordable house where you’re confident you will stay for a decade or longer does buying make sense in many places.

There are exceptions: Prices in parts of the Midwest and Southeast seem reasonable, according to Moody’s Analytics. At this all aligns with the concept of geographic arbitrage for physician compensation. The Midwest and Southeast typically pay doctors more for their services and the cost of living-including housing is typically much more affordable.

As you stand at the crossroads of renting and buying, armed with the knowledge of the rent ratio and its significance, you can make a well-informed decision aligned with your current financial situation, future career plans, and the real estate market conditions in your area.

The path to home ownership is unique for each doctor, and by carefully weighing the considerations outlined in this post, you can pave the way for a secure and prosperous future in both your professional and personal life.

Before we end, I think it’s important to review the question of whether a house should be considered a liability or not. Many of you will prefer the narrative that it is an appreciating asset which is partially true—especially the longer you live there. But there is a competing narrative as well.

Assets That Cost You Money (Liabilities)

The truth is the a home, much like a car, is considered an asset with a liability—because it costs you money. Check out the reasoning below.

1. Homes:

   • Nature: A residential property, like a home, is typically considered a liability because it involves ongoing expenses, such as mortgage payments, property taxes, insurance, and maintenance costs.

   • Financial Impact: While a home may appreciate in value over time, it doesn't generate income on its own. Instead, it incurs regular expenses that are often referred to as carrying costs.

2. Personal Vehicles:

   • Nature: Similar to a home, a personal vehicle is an asset that usually incurs ongoing expenses, including fuel, maintenance, insurance, and potentially loan payments.

   • Financial Impact: While it provides personal transportation, it doesn't contribute to income generation. In fact, it depreciates in value over time.

Assets That Make You Money

Houses and cars are a contrast to assets that make you money. The sooner you can understand this concept, more your net worth will grow rapidly. Businesses and investments are considered money growing assets that you should place your money in— so let’s briefly look at them:

1. Businesses:

   • Nature: A business is an asset that has the potential to generate income and profits. It involves the creation and sale of goods or services.

   • Financial Impact: Successful businesses can provide a steady stream of income and may appreciate in value. They have the potential for growth and can be valuable long-term assets.

2. Investments:

   • Nature: Investments, such as stocks, bonds, or real estate for rental income, are assets that are acquired with the expectation of generating returns.

   • Financial Impact: These assets can appreciate in value and/or provide regular income through dividends, interest, or rental payments. They are designed to enhance wealth over time.

Invest In Yourself First

I fully support your decision to buy a house, as real estate is indeed a valuable asset to own. However, it's important not to overlook the significance of investing in yourself and incorporating your own business at the early stages of your career. By doing so, you are recognizing that you are the most important business you will ever own, and this can be a lucrative asset that generates income. Don't miss out on the opportunity to incorporate yourself for a relatively affordable cost of $5000-$6000, especially considering that you are likely to pay a realtor five times this amount when purchasing a house.

If you want to explore starting a micro-corporation with me, I invite you invest $99 in yourself and make an appointment today.

Tod