Speaker 1 00:00:08 What's up everyone. Welcome to the finance for physicians podcast. I'm your host. Daniel RI join me as we dig into what it looks like for physicians to begin using their finances as a tool to live better lives. You can learn more about
[email protected] let's. Jump into aids episode. Hey guys, what's up. Before we jump into the show today, I wanted to throw out a, a couple quick things. Um, first of all, I will be guest hosting on another podcast, uh, in the near future. It's called financial residency. So I think that'll be in the next couple months. So definitely go check that out. It's kind of a similar, you know, idea behind what we're doing here is, uh, as far as the content. Um, so definitely check that out. That should be a fun side project. The other thing I had was we're gonna be going forward continuing with this, this sort of, you know, content that we've been doing in the past little bit shorter episodes, you know, focused in, on, you know, one particular topic.
Speaker 1 00:01:11 And so if you like that, let me know if you have other type formats that you prefer, definitely throw that out there. Or if you have people, you know, if you like the interview format, for example, or if you know of people that that might be good, throw that out. But up to this point in general, the feedback we have gotten is that people like the, you know, on the shorter side, you know, like maybe 20 minutes on average shows that are focused on a, uh, particular topic, um, we'll still sprinkle in some, um, you know, co co-hosted shows and maybe some guests here and there. And so that's, that's the game plan, but if y'all have other ideas or you like one particular format, please let me know. Okay, so today we're gonna be talking about renting a home. So the, the title, um, hopefully the title caught your attention.
Speaker 1 00:02:03 Renting renting is the key to wealth. Before we go through this, I should clarify what I mean by that is renting is the key to wealth, to some people. And so I think there's a lot of people that should be renting that are buying. And so the, you know, we lease or rent all kinds of things like cars, uh, you know, vacation homes or VRBO OS that kind of thing, office space, um, there's all kinds of things we rent and they're all like, they seem to be like cool or favorable or culturally a wise thing to do or not a big deal. Um, but whatever reason, renting your home or leasing your home has kind of a little bit of a negative connotation. People in general, just kind of think the way to go is to buy. Uh, and so it's kind of an, I guess a combination, a, a little bit of a cultural thing.
Speaker 1 00:03:02 Also there's some, you know, industry pools. So the buy content is all over the place. Like it's like, there's not a shortage of information out there. That's gonna tell you, like, basically buying a home is like the American dream or like a home is a great investment or, you know, it's the key to wealth or that, that kind of thing. It's all over the place. So it's kind of like ingrained already. So I don't want to talk about that. There's definitely plenty of cases where that makes sense. But, um, like I said, I think there's a big shortage of content, more focused on the benefits of renting. And there's a ton of people that really benefit from renting, uh, and, and even financially benefit from, uh, renting. And it seems like for a lot of people, and I've been guilty of this too. It's like renting.
Speaker 1 00:03:52 Like I bought my first home renting was not even like in the picture. I was like determined to buy my first home. So it wasn't even a consideration. I was just like already going under this assumption that buying is the way to go. And part of it is because of all this, you know, influence around me. But, uh, hopefully you'll hear me out today. I think what we'll go through might surprise you. And so we're gonna talk about the big reasons to consider renting over buying. Okay. So, so we're gonna go through five big reasons, five of the biggest reasons that I think you might want to consider renting over buying. So before you buy your first home or your next home, I think just these are good things to think through. So, so first big reason to really put some thought into renting would be you have a shorter time horizon.
Speaker 1 00:04:50 So maybe you're in training and you have just like, you know, only a few years, like three years or something. And when I say short time horizon, I mean like less than five years. So when we start talking about less than five years, that's where it makes it a lot harder to financially make buying make sense. Um, and so I'm not gonna get into the details of that analysis, but just from a high level standpoint, if you're to talking about five years or less, that's when renting just from a purely financial standpoint tends to start to look better. And the shorter that time horizon, the better renting will look. So maybe you're in training. Maybe you have that short, maybe you have three years or four years or something. And so that's, that's definitely a short time horizon, or maybe you just tend to be the type that likes to move a lot or, you know, likes new scenery.
Speaker 1 00:05:47 And, uh, you know, you can think about your past, like how often have you moved? I would probably be that guy, if I didn't get married, you know, I moved like a million times I've had like nine, 19 or 20 different addresses, but since I've been married, I've only had two. So, so maybe you're the type that just likes to move a lot. And, you know, so that's, that can just result in short time horizon, or maybe you're just moving into like a really uncertain phase of live and there's a, you know, decent possibility you could have a short time horizon. So a good example of that might be like, you are starting, you're, you're finishing training, you're starting in practice and a new area, especially, and you're just, you know, there's a pretty good percentage. You can look this up, I'm sure like there's a high percentage of people that don't stay in their first jobs for more than a year in, in, in medicine.
Speaker 1 00:06:43 So, um, there's a, and, and I'm sure most of them aren't like on the front end being like, eh, yeah, it's not gonna work out after a year. So everybody says, it's not gonna happen to them, but like, there's a decent chance your, your first job doesn't work out and you typically know it pretty quickly. And so, uh, that's a pretty uncertain phase, you know, or maybe you're, um, going through some big life changes and, um, just uncertainty in general can, can, you know, without it increases the chances of having to make big changes. So I'm sure you're thinking, like why, why would that have such a big, uh, effect on things? So the biggest reason really there's two main reasons I'll talk about today, but, uh, number one big reason is the transaction costs. So it's just really expensive to transact real estate, to like buy, sell, to close the deal, that kind of thing.
Speaker 1 00:07:37 And you might not even see all these costs. Some of them are hidden, you know, like realtor commissions, especially when you're buying. I mean, you know, I guess technically you could buy it without realtors, so that lowers your transaction costs, but most people buy with real estate agents. Uh, so there's transaction costs there for buying and selling and, uh, mortgage cost cost, and moving costs. And typically you have to, you know, do some stuff to the house or paint or whatever. Um, so just when you add up all that, there's, it's typically pretty high, especially when you look at buying and selling. So let's say you have, you know, a couple your time horizon, you know, you gotta pay the transac and costs when you buy and then you gotta pay the transaction cost when you sell. And those can be, those are gonna be substantial.
Speaker 1 00:08:25 Um, and basically they're going to eat into the benefits of buying when you only have two years to time timeline. So the benefits of buying come by owning it a home for a long period of time, the longer, the better in general. So when you're looking at like two years, you're not able to like recoup those big transaction costs in just two years. Now you can get lucky. There's a so side note on this, you can find a bunch of people. I'm sure you can find a bunch right now, especially. So we're recording this in 2022 real estate's hot, everything's gone up. I'm sure if you ask like your 10 best friends that have bought houses, they're all gonna say it went up a ton and they're all gonna say it was a great investment, but part of that is just, they got lucky. So, I mean, timing wise, real estate's gone up.
Speaker 1 00:09:14 Um, but real estate goes down, can go down the same percentage as it had recently went up, and this is not a normal time. Uh, and so on a, you have to look at the longer periods of time. And on average, you can, you can look at like what average real estate prices do over time. This is not a normal, and on average buying a home for two years is not a great deal compared to renting, you know, in most scenarios. That also brings me to my second point. Reason why it's a short term horizon is a potentially big reason to rent. Is that real estate. So real estate's going has gone up lately, but on the flip side, estate can go down. If, if you guys are young enough, maybe you don't. I'm sure everybody listening remembers that 2008 was bad economically, but maybe you didn't own a home then, or maybe you were too young to really feel that.
Speaker 1 00:10:11 Uh, but in 2008, that's a great example. Real estate went way down, especially in the areas that went way up. So there's this thinking now that like, especially in these areas that have gone way up is that people tend to just think things will continue as they have in the past. That's just natural. And so when real estate, especially in these areas that have gone up a lot, those areas in 2008 at least went down a lot. And so when you just have a short time horizon, you have to consider that there's a, a possibility that real estate prices could also go down a lot. Uh, so especially if you are financing the house, like a high percentage, like a physician loan, if you're financing a hundred percent the deal, and you're only gonna own the house for two or three years, and we get one of those bad markets, you're gonna be way upside down in the house.
Speaker 1 00:11:06 In basically in other words, you'll have to write a big check to get outta the house. Um, and so that is a serious possibility. In fact, I had my first home, I bought in 2007, I think, around there. Right, right in the hot time. And in 2000 8, 9, 10 real estate prices went down, including my home. Luckily my home was not, you know, it was like a hundred and something thousand dollars home. And so it didn't go down a ton, but it definitely, I was upside down for a period of time in it. And so I was early in my career and I had what most people did that were upside down is they said, oh, this would be a great rental property. And they like justified getting in the rental business kind of, but in reality, it was like, I couldn't write the check to get out of it.
Speaker 1 00:11:49 So like I just made, made due with it and made it into rental property. That's not something you wanna, that's not a great situation to get into. And a lot of people I know of were in much worse situations. So when you have that short time horizon real estate prices, well, first of all, transac transaction costs are substantial, whether you see it or not for buying and selling real estate. So you have to have a long enough time horizon, you know, three to five years, preferably five years plus to make sense of buying. Second thing is real estate prices. Although they've been up lately, they can go down and that can cause this situation where you're upside down and you really can't get outta the house with right, without writing a big check. So, so reason number one to consider renting is that you might have a short time horizon for whatever reason.
Speaker 1 00:12:40 So second, big reason then this is an interesting one. I think this one has changed, uh, lately, especially with the real estate market, but, uh, maybe it's just really expensive to buy where you are or where you're moving as opposed to renting. And maybe you're just better off, like, even if you're gonna stay in the house for a while, maybe financially, you're just better off renting. Um, just cuz buying is so stink and expensive. So I'll throw out some examples of this. So I have, we have tons, the nice thing about being working one on one with, with families is we got a million examples of all sorts of stuff. So, um, I'm not gonna throw out names of course, but, and I'll kind of change the numbers a little bit, but um, first example, family lives in high cost living area and real estate prices.
Speaker 1 00:13:33 So let's say, you know, San Francisco cause San Francisco's hot, um, real estate's super expensive. So let's say real estate prices have for the place that they're looking at are at like 2 million. And so, um, what was what's interesting in this example is when we looked at rent rates for, you know, comparable properties, the rent costs were gonna be like three, 3000 a month or so. So if you, if you're looking at it on the surface, you're like, okay, buy property for $2 million or rent property for 3000 a month. I'm not sure what option you would choose. So knowing what I know I would most certainly choose renting and I'll tell you why, but, um, I think a lot of people in that situation might still buy, you know, for various reasons. But the problem is when you look at the numbers, so if you look at, uh, buying a $2 million house and you just look at the pure costs of buying.
Speaker 1 00:14:41 So when I, what I, when I mean by pure costs is like the, um, uh, insurance costs, the maintenance costs and the tax costs. I think those are, and I guess you could throw in HOA costs, but basically these are the costs you're gonna pay. Even if you pay for the CA uh, house in cash, no matter what, you know, pure costs of owning the house. So when you look at that kind of example, the pure costs say you buy the 2 million house in cash, the pure costs you're still gonna pay forever is gonna be like maybe $6,000 a month, give or take so $6,000 a month, pure cost of owning versus $3,000 a month, pure cost of renting. So this example is about the most extreme I've I've seen, basically, even if it was like, even I would not wanna be buying a house, like in other words, if the rent rate was 3000 a month and the pure cost was 3000 a month.
Speaker 1 00:15:48 And even in that scenario, I would, I would definitely lean heavily toward words renting, unless I had some other good reasons. But in this example, it's like double, like in other words, it's double the pure cost to, to own, um, as opposed to rent. So you could take your $2 million and put it in, you know, investments and then save $3,000 a month on of it. I can, I mean, you don't have to be a rocket scientist, like go plug that into a online calculator. I can tell you it's gonna be astronomically better in terms of wealth building to like take the 2 million, put it into an investment. And, uh, plus the 3000 savings per month, it's gonna be astronomically better. Um, just financially. So in that, in this example, it's like way, way, way, way better, uh, financially to rent. So you might wonder like how in the world is that happening?
Speaker 1 00:16:44 That's what, you know, that would be my first question is what's up with that? Like, it doesn't make any sense. Well, so what's happening basically is like these high, high cost living areas. Like there's not a ton of people renting. And so prices have gone way up in purchasing or, or buying costs have gone way, way, way up, but rent rates just have not increased at the same level. So, you know, there's situations like this where it's just not, it's a different, uh, you know, different sort of factors affecting it. You might also wonder like what about the home appreciation? So especially in these hot areas, people I've heard this idea a lot of times it's like, well, um, you know, this market is gonna appreciate a lot. Like what about that factor? Uh, and you usually, that's based on this idea, they're getting from like it's appreciated in the past a lot.
Speaker 1 00:17:39 So therefore it will appreciate in the future a lot. That's not, that's not the right way to look at it. The past does not always repeat itself. And so that can skew the numbers a lot. Uh, you, at the end of the day, you really don't know the future of, you know, especially in economic situations. I think it's much better to use like broader measures of real estate. So usually that thinking is based on like in my neighborhood, real state prices have gone really, you know, 20% increases a year. So therefore my house, if I buy it is gonna appreciate by 20% a year now that could happen, but it also could go the other direction. And so what's the, what's a better way to look at it. What I would say to do is use BR much broader like measures of real estate, like I said, so you can look at like the entire real estate market in the United States, that's a much more like diversified or a better data sample or whatever you wanna call it of real estate and look at what it has done.
Speaker 1 00:18:44 And, and don't just look at like a year ago, cuz that's not enough time either. You gotta look at like, what's it done for the past 30 years? So what's interesting if you look at that, all the research or data I've seen on this is real estate overall, when you look at broad area of United States and long time horizon tends to go pretty close with inflation, you know, maybe a little higher, maybe a little lower to ending on the cycle. Um, so on average real estate prices tend to just go up with at about what inflation goes up at. And so I think it's a better, a better analysis would be to assume that's gonna happen with the real estate you buy. And in that case, that kind of, you know, kills that whole I idea of, you know, the home appreciation, because if it's gonna appreciate at say, you know, even in high inflation, like right now, it's like say it's 6%.
Speaker 1 00:19:40 Like even if real, estate's gonna appreciate by 6%. Well, like that's still not. I mean, you're paying three in this example, you're paying $3,000 more of expense. Plus you could invest 2 million on the side. Like that's still not gonna make up for that difference, not even close. So you might also be thinking, okay, well, why are you just looking at pure costs? What about the mortgage? And you know, so as I mentioned, I was only talking about insurance costs, maintenance costs and tax costs. And, and I did not say anything about mortgage. Um, the reason is because this is a simpler comparison and it's a more pure comparison I think, and it, and it doesn't tend to change the conclusion any. So I think when you do this, even if you're planning to finance it, I think it's simpler to just look at the pure costs of renting versus buying, assuming you pay in cash, or in other words, just look at the maintenance costs, the insurance costs and the tax costs.
Speaker 1 00:20:39 Um, another little side note, like most people don't use reasonable maintenance cost assumptions. So if you look at like real estate, uh, I guess objective real estate sources tend to say like two to 4% for maintenance costs. I use 2% in this example, I'm throwing out, but uh, some people would say that's too low. I think it's reasonable. But uh, most people do not use. And what I mean by when I say 2%, I mean, 2%, uh, multiplied by the value of the home and any at any given point. And that is your annual, um, maintenance cost. So if it's a million dollars, uh, what's 1% of a million, $10,000, right? Yeah. So 20002%, $20,000 a year for a million dollar home would be, you know, a decent estimate of the maintenance costs. So if it's a 2 million home, it's 40,000 here. Um, so most people, I, I don't think I've ever seen anyone, uh, maybe once or twice use reasonable maintenance cost assumptions when they're buying a home most real estate people tend to shy away from those numbers too.
Speaker 1 00:21:46 You gotta use, you know, go in their eyes wide open. The other thing I always think about in this scenario is like why in the world would, uh, someone, why would the people own the 2 million house rent it out for $3,000 a month? That doesn't make any sense they're paying $6,000 a month. How in the world <laugh>, uh, can they justify that? And so maybe the, you know, you might be surprised or you might not, but there's a whole lot of people that own pretty inefficient real estate and they don't really care or they're not even looking at the numbers it's doing. Okay. So maybe they bought it a long time ago and it's appreciated a ton. And, um, they're not really viewing it as a year by year investment. They're just kind of saying, you know, well, um, I got the thing paid off.
Speaker 1 00:22:36 It's appreciated a lot 20% a year and they don't even look at their costs. They're like, you know, it's kind of paying for itself. Plus it's appreciating a lot, eh, seems pretty good. And maybe they don't even track the maintenance costs. So I, I totally and be surprised at that. Or maybe they're thinking, you know, um, maybe it's something they're gonna move back into. There's all kinds of reasons. Um, a lot of times they're just completely ignorant of what's going on. Uh, so there's plenty of reasons. People own real estate. There's a lot of mom and pop real estate owners like a ton, there's a ton. You probably know multiple people that own like or two properties. And they're typically the most prone to making poor investment decisions around the real estate. So there's a lot of inefficiencies, uh, within real estate, you know, maybe they're undercharging on rent or whatever, but, or maybe it's just economically like rents really low for the time being.
Speaker 1 00:23:26 So, you know, but there's a lot of factors in play and it definitely is happening. There's a few of their factors. So I mentioned like the market scenario causing rent rates to be low relative to buy rates. There's also situations where like my favorite example is Illinois, Illinois has insanely high real estate taxes, like 4% sometimes. I mean like the highest I've ever seen. And so when you have in Illinois, it's basically skews this analysis further towards renting. So my area is like 1% tax on real estate. Illinois might be like 4% in some areas. So if you're paying four times the amount of taxes on your real estate versus another area that completely skews the calculation towards renting. And so it can make renting look particularly good in certain areas with really high real estate tax costs. And some areas have like the, both, like, I think, uh, Austin or hu there's some areas in Texas that have both high appreciation of home prices plus high tax rates.
Speaker 1 00:24:30 And that's kind of like a double whammy. It can be like extremely expensive to buy and a really good deal to rent. So third, big reason to rent. Maybe you just don't like dealing with all these headaches of homeowners ship. Uh, it's hard to know what I mean by that until you've owned a home. Um, so you'll, I'll throw out some examples. Um, the first year or two of owning my home, I had like three big old trees we had to take out totally unexpected and that's super expensive and it's a pain. And we, so who's responsible for finding the company to come take the trees out, making sure they show up or doing it themselves or, and paying them it's the homeowner. Uh, and so that's just, that's a bigger example. It was or more expensive example, uh, but there's all kinds of like things that the owner is responsible for and if you're renting, you're not responsible for it.
Speaker 1 00:25:30 So there is definitely a pretty big appeal to renting and not having to deal with all these headaches. Maybe you're the type that likes to just have something that's, uh, you know, pretty low maintenance or not on you like leasing a car. For example, leasing a car is really easy. It's, uh, you know, you just take it into the, and it tends to not break and you're not, you just take it into the dealer to get it fixed or whatever. And so it's, that's a lot like, uh, buying or I'm sorry, renting a house. Now, caveat is, as long as you have a good landlord, there are plenty of like horror stories of people that have terrible landlords. So that tends to happen, especially in the, I think the lower cost areas, unfortunately, but it can happen at any level. So, you know, you can make sure interview, talk to the person, make sure they're good people and there's plenty of good landlord that are gonna take good care of things.
Speaker 1 00:26:30 So it is nice. Or, or maybe you're renting an apartment or something like that. That's very low. Uh, that's especially low headache factor. That's a big, big reason. The fourth big reason. Um, I think this is a little, this is like the sneaky reason. So I think when people buy homes or the deal, the transaction of buying a home, that's one of the biggest example times of when people have lifestyle creep happen. Uh, it's just where you're prone to bigger lifestyle creep. So maybe you're renting and training and you're going to buy in your head. You kind of think of it as like a equal or maybe you're thinking of it as a good financial decision. Like I'm renting a place, you know, it's, uh, $1,500 a month and now I'm gonna buy a place it's like 500,000. So it feels like a lateral move, but it's completely a step up in lifestyle.
Speaker 1 00:27:23 A lot of times, people aren't really aware of how big of a step up in lifestyle they're taking. And they're just kind of rushed through the decision or not really thinking about it analytically. And so it's much easier. It's an easy time. It's a slippery slope where you're gonna be prone to spend a lot more money, especially when you're financing. A lot of it. It's just like anything when you're financing like an iPhone, for instance, you're to be more prone, to spend a lot more or buy like the newest one, that's just cuz you're looking at the monthly payment. And so buying is, uh, a time when you're more prone to lifestyle creep. And so if you wanna renting is a good way to like lock that cost in and um, you know, renting a low cost apartment or something, you know, financially, if we're just talking financially is far, far less expensive than buying a million dollar house.
Speaker 1 00:28:11 Like that's just, even if the million dollar house is a, you know, reasonable deal, it's like we're comparing apples and oranges. So you might be the type that likes the idea of like locking that in and not beings acceptable to this last big reason. So number five, big reason to rent. Maybe you would benefit from having flexibility, like aside from the numbers part of like of, uh, you know, short time horizon, I'm just talking about maybe you would like this idea of flexibility and not being like tied down to any given location for a long period of time. Cuz I think of like buying is like putting down your roots and that could be a good thing. That's where buying works really well. So I'll throw a little love to buying just for a minute. But I mean, when you're gonna like put down your roots and stay in a place the prime example is like, or, or whatever.
Speaker 1 00:29:06 I mean, if you're gonna live in a house or place for, you know, the rest of your life buying almost always, not always, but almost always makes way more sense than renting. But what I have found is extreme. It's extremely rare, not extremely rare, but it's not, it's definitely not. I think the majority of people are not buying the home with a plan to stay there forever or maybe they plan to do that and life changes. So it's really, I think the average person, you know, buys and sells, I don't know, five years, every five years, maybe less for physicians, especially. So if you're, if you like the idea of just having the flexibility. So, so renting is like the, the opposite of the spectrum buying is like put down your roots. You're locking in, you're staying there in the neighborhood and the spot and the, you don't, you should not be moving.
Speaker 1 00:30:00 It's not a good, you know, it's great for locking down, putting down those roots. But if you like this idea of flexibility, it's like, I, I'm not sure which neighborhood, I don't know which school like, ah, who knows how this works out or you know, or I just don't like to be tied down or whatever renting is way better for having that flexibility. You can just, you know, bounce out if you need to, and you don't even have to sell the thing. Like you just finish out the lease and sometimes you can negotiate a more flexible lease and uh, you know, get out early or whatever. So benefiting from flexibility is the last reason. I think that's a big reason to consider renting. So those are five biggest reasons. I think you all should consider renting over buying and you know, depending on how many of these are in play for you, it can swing the pendulum completely towards renting and, and make it even, you know, not only just a good flexibility decision, but also a good financial decision, uh, to rent instead of buying hope.
Speaker 1 00:30:58 This has been helpful. And um, we will look forward to chatting again at, as always. Thank you so much for joining us today. If you found this valuable, please give us a review on iTunes and share with a friend. Also check out our website at finance, for physicians.co for all sorts of additional content. See you next time. Finance for physicians is not an investment tax legal or financial advisor. All content included in this podcast is for informational purposes only and should not be considered financial tax or legal advice. Material presented is believed to be from reliable sources and no representations are made by finance for physicians as to another parties, informational accuracy or completeness, all information or ideas provided should be discussed in detail with an advisor accountant or legal counsel priority and implementation. If you don't have an advisor or like a second opinion, feel free to check out our website for recommended advisors.
