Speaker 1 00:00:08 What's up, everyone. Welcome to the finance for physicians podcast. I'm your host, Daniel Raimi. 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 our
[email protected] let's. Jump into today's episode. What's up guys. Hope you're having an awesome day today. We're going to be talking about home ownership and buying versus renting a home. I know, uh, several of you probably this time of year are thinking about this decision as I'm recording this as April. And if you're going into practice maybe, or about to be moving that's a lot of times, one of the decisions among many that are on the table is are you buying or renting? Maybe you've already made the decision or recently made it maybe, you know, in the next few years you're going to be having to make this decision.
Speaker 1 00:01:02 Do you buy, do you, or do you rent? And so we're going to be talking about how to navigate that decision. We'll talk about some of the rules of thumb that you've probably heard. Maybe you haven't, maybe you have, and we'll talk about the numbers behind that and why rules of thumb are pretty terrible at, at, at telling you whether or not it's going to be good for your situation. Uh, and then we'll talk about some of the non-financial reasons behind one versus the other, and ideally give you some of the tools so that you can better navigate that decision. So, first of all, let's talk about some of the rules of thumb that are out there. And part of it depends on who you're talking to, but I'd say like on average, the rules of thumb are that it's going to be better to buy if you're going to live in the home for at least three to five years.
Speaker 1 00:01:56 So what does that mean? Well, when you buy a home, there's typically transaction costs upfront. Like there's going to be upfront cost associated with buying like a, you know, real estate or realtor commissions, or mortgage, uh, fees or that sort of thing. And you have to own the home for enough period of time to recoup those costs. So that's kind of the easy, uh, you know, most obvious reason it's going to take a little while to break even on house, because if you rent a house, you know, you don't have those upfront costs. And so if you only live there, like say, you know, a month, then it's always better to rent. And even probably a year or two, it's always almost always better to rent, but there's typically a point in time where that shifts where you have recouped your costs upfront costs, and it's, it's better to, to buy.
Speaker 1 00:02:55 And so the rules of thumb, typically, like I said, three to years, uh, if you're going to live in the house that long, you probably are better off buying, but the problem with that is they're pretty terrible at, you know, looking at your specific situation. And so when it comes down to what you have going on, there's a good chance. That's, uh, that's, that's just a bad, bad way of looking at it. So that's, that's what we're going to be talking about today is how to start to think about it in relation to what you have going on so that you can, you can better, uh, you know, apply this, this sort of decision. Okay. So let's start with the numbers side of the coin. So I'm going to talk about the numbers. We'll talk about all the different variables at stake here. Uh, this is kinda more like the science side of things.
Speaker 1 00:03:47 Uh, then we'll circle back to the, uh, the non-financial reasons I'll hit on a few different examples and then we'll wrap it up. So, so we're talking about the numbers. So there there's the numbers side of things. So as I was mentioning before, when you're buying a home, there are transaction costs that you would not otherwise see when you're renting a home. So sometimes these are, or most of the time, I guess these are unavoidable, but in every once in a while, like, for example, say you have, you're buying the house in cash. Uh, one of those transaction costs, most people pay his mortgage closing costs. So if you're buying a thousand cash, you don't have to pay any mortgage closing costs. So that's not a factor. The other transaction cost most common one is realtor commissions. It's pretty difficult to get around these as a buyer.
Speaker 1 00:04:39 Uh, you know, I guess you could, if you found like a, for sale by owner house, basically the seller pays those real estate commissions, but essentially they're passing in theory, half of that onto you, but that's kind of a indirect costs you would see from buying a house, uh, unless it's a purely for sale by owner situation, which is rare. And then there's, uh, some houses that just really, you know, you, you have to put in some upfront improvement costs just to, to make it a livable or to your standard. And so that's, that can be transaction cost well, as well that you would see. So these are the transaction costs that you would see as it, when you buy a house, uh, that you would otherwise not see if you, uh, rented a house. And so the higher these transaction costs, the more that skews towards renting.
Speaker 1 00:05:29 So it's an important factor to understand there's also the return on the, in the value of the house. So if you buy a house, you know, the values go up and down, I guess most of the time they go up, but there's definitely, you know, houses can definitely go down and die in sometimes by a lot. And so compare that to renting. There's, you know, no volatility, I guess your rent price might go up and down a little bit, but, um, you know, the price of the houses has no effect on you. And so real estate houses, that's difficult to pinpoint real estate home price, value changes. There are indexes, you can find, um, real estate home price indexes, and they are, I would say mediocre predictors or, um, mediocre representations of real estate prices, but they're okay. And so if you look at a real estate, uh, home price indexes, they tend to be a re a little bit above inflation.
Speaker 1 00:06:31 And if you look over a long period of time, but the problem is they don't do a good job, or really they do a terrible job of incorporating home improvements, uh, or money you put into the house. They just basically are showing you a representation of what home prices have done over periods of time from starting or purchase to sale. So they have a, there it's really difficult to incorporate the improvement costs. So they tend to be, I think, overstated, but I think most of the, uh, real estate experts in financial people, I would follow would say it's probably closer to inflation or a little below inflation. So in other words, home prices collectively really don't return anything over long periods of time, but that's as a whole, like as the market, as a whole and over really long periods of time. And what happens is totally depends on your area.
Speaker 1 00:07:29 It totally depends on, uh, you know, the market cycle that we're in. And so returns are completely a factor and can totally drive this decision. But the problem is you can't really predict them. And so in some ways it can be, uh, you know, an added risk on top of top of the table, but returns definitely are a factor you want to kind of just think about it a minimum. Then we have taxes. So taxes are important. You can deduct certain expenses with ownership. Like for instance, a home mortgage interest and property taxes sometimes can be deducted. But with the tax laws that they passed in 2018, very few people now are able to do this, are able to deduct those. It's probably going to on average, it's like one of the other, the people typically it's rare. It's extremely rare that we see people able to deduct both property tax for their home hand mortgage interest.
Speaker 1 00:08:29 Whereas this was a lot more common before then, but basically you want to understand if you're able to deduct this or not, the more you pay in mortgage interests, the more likely you are to deduct this, the property tax thing, you gotta be above 10,000. And at that point it's non, it's a non deductible line item. So, and you, you're going to add in all your home and income tax for state. And so most of you listening, if you're in training, you might be able to deduct this. If you're in practice, it's extremely unlikely that you're deducting property taxes and mortgage interests. That's kind of a depends on situation, probably 50 50, but you want to know if you can deduct home ownership costs because that's a big factor. Also property tax, uh, rates vary big time by location. So for example, where I live, I live in Lexington, Kentucky, property taxes, like on average are about 1%, a little over 1% of the home value assessed value.
Speaker 1 00:09:33 Whereas highest rates we do typically see are in Illinois. Uh, Texas has some pretty high rates, but Illinois I think is the highest rate area I've seen. They're pushing like 3% in summaries or even more, uh, in Texas. A lot of places are like 2% of the value of the house, but that's a huge deal because if you're buying, that's kind of like added costs of home ownership, the higher the property tax rate, especially if you can't deduct it. So you want to understand both of those, first of all, can you deduct the taxes? Well, first of all, how much are the taxes in the given area? And then second of all, can you deduct those taxes? Uh, and are there any other deductions like home mortgage interest and that depending on those factors will skew one way or the other, and then there's insurance costs.
Speaker 1 00:10:26 So when you buy you, you know, you're gonna have debate insurance, home ownership, insurance, home insurance cost. Now, if you're renting, you should definitely get a renter's insurance as well, but it's typically considerably less expensive than home homeowners insurance. And on top of all that, I think this is probably the, one of the biggest things yeah. Is home just in general home ownership, the costs themselves and rent costs than in the given area that you're looking at. So what's been interesting is lately. So at this point in the market cycle, uh, home costs have been way up, like everything has been just double digit growth. Like year over year, uh, home price prices have been like double digit growth pretty much. And this is like nationwide. Some areas have been way higher than that. So home prices have been just skyrocketing lately in the past year or so, but rent costs have not rent costs have been pretty steady, which is interesting to see, but basically the longer that occurs, that's like making renting more appealing because rent rates are essentially becoming a better value relative to home home costs.
Speaker 1 00:11:39 Um, you can actually look this up. It's hard to get, um, you know, very specific in area, but they call it the price to rent ratio. So you can look up the price to rent ratio in some areas. And it's basically going to show you, like, what does that ratio in the given area? But another way to look at it is you can kind of compare different areas of like, what is a home costs in a given area and what is a home rent for in a given area. And how does that compare it to a different area, home costs versus rent costs. But that's an extremely important factor. It's sometimes difficult, like I said to, uh, analyze, but I'll, I'll, I'll talk about an example when we wrap up, uh, hopefully that'll, it'll help you wrap your head around this one, but it can be a huge, huge deal, especially right now with home cost as high as they are.
Speaker 1 00:12:28 I guess there's one more little sneaky cost in there is HOA fees. So HOA fees that's, you know, gonna be, unless they're passing it through, which is very rare, but HOA fees are going to be an added home ownership costs that you would avoid by renting. So when you're looking at the decision, you're going to want to run all those numbers or incorporate all those numbers, and that will completely skew one way or the other, uh, renting versus buying. And so I have, um, there's some research on renting versus buying I'll link to in the show notes, if you want to really get into the weeds of this. But, uh, their findings were that five years is the breakeven between renting versus buying at a minimum and depending on circumstances and that in a lot of cases, it's going to be quite a bit more than five years, sometimes over 10 years.
Speaker 1 00:13:26 And what they did was they looked at a lot of these factors we're talking about now on how it affected one versus the other. But the point is it's not always three to five years, and sometimes it can be considerably way, way longer than that. And so if you know, you're probably not going to live there. So you're going to live there in the house for three years. Uh, and these factors are not in your favor. It can be completely a horrible financial decisions strictly based on the numbers to buy, which goes against, I think a lot of the general rules of thumb and definitely real estate industry advice goes against that. And you definitely want to know that going in. Like I said, we'll circle back to an example. Hopefully we can, that'll help you wrap your head around this. But, uh, before we get to that, I wanted to talk about some of the non-financial reasons of one versus the other, because these can sometimes be a big deal for some people.
Speaker 1 00:14:22 Sometimes they're not as big of a deal. Sometimes we don't even realize they're happening behind the scenes, but this is some we'll talk about some of the non-financial considerations in renting versus buying. So, first of all, uh, especially let's say you're going into practice. You're going into a new area. Let's say you're moving across the country to an area of the country. You have never been to before in your life. Maybe you haven't even spent, but like five minutes looking at their real estate on Zillow or something that, so you have very, very low little, uh, uh, knowledge about the real estate market. You have a lot of uncertainty about the, the, just the location in general and the, maybe the job. There's a lot of uncertainty. I mean, there's a ton of people that first jobs just don't work out. And that's just the nature of going to new area and, and, and all that.
Speaker 1 00:15:13 So the higher the uncertainty, I think that definitely lends itself better to just renting. Maybe, maybe it's just by yourself some time. And maybe it's just to have to have that, uh, flexibility in the event, unexpected, you know, things don't work out, but with high uncertainty, renting can be a very appealing and this can be just independent of the numbers completely because say job doesn't work out. Uh, you know, a lot of times, you know it right away, but say you, uh, maybe not right away, but like, you know, one month then you're like, man, these people are crazy. Like I just don't see myself here. Um, I'm out as soon as I can get out. So the problem is if that happens in your situation, you're starting your first job and you already bought the house. It's like psychologically or just financially you're, you're stuck almost.
Speaker 1 00:16:09 So it's like, I just bought this house. I got all these costs. I paid, man. I, I have to stay here at least a few years. Uh, and that's just a really stressful situation to be in. And you can ease that. Uh, you can avoid that to some extent there's going to be a pain, a little pain either way when that, if that were to happen, but you can minimize that pain by renting and especially in that first year or so of starting in a new area, uh, or starting in practice or that sort of thing. So uncertainty is a big deal. You definitely want to take into consideration. There's also, what's called over estimation bias. So there's a tendency for people. I think this is just like a human nature thing. Like we always tend to think we're going to own home longer than we're going to, or I'm sorry.
Speaker 1 00:16:58 We always think we're going to live in a home longer than we really actually do. Uh, and so, and it's pretty substantial. So the article or the research I was referencing earlier around renting versus buying, they actually did some research around what this bias actually is. And it's pretty substantial, like four to six years or more of like how, uh, how many years people tend to overestimate. So basically what I'm saying is, uh, the average person says, yeah, yeah, I can see myself living there say 10 years, but in reality, it's going to be more like six years. So people as a whole tend to overestimate how long they're going to stay in the house. And I can see that in our clientele and the planning from like people just move way more frequently, I think, than they expect to move changes happen faster than people I think expect them to happen.
Speaker 1 00:17:54 So, uh, this, I think it's just something to keep in the back of your mind. Like maybe you should be a little careful with making too big a decision, and it's probably good to build in a little flexibility here. Another non, a big, big nonfinancial or psychological consideration that's in play here is lifestyle creep. So it's, this is, uh, this is just a really sneaky one that I've seen coming into play. So what happens is people will, you know, me included, this is just the way people work, you'll say, okay, well, um, should I rent versus buy? And you're when you are thinking about it, you're in your mind, like running the numbers in air quotes, like running the numbers on your current house, renting that you're renting is in like the hundred and $50,000 price range. Let's just say, for example, and you're like, should I rent versus buy?
Speaker 1 00:18:56 And in your mind, you're thinking, well, let's think about my current home rental, that's worth 150,000. And in the new house you're looking at, uh, the buy is you're, you're looking at like 400,000 price range. The problem with it is people. If they run the numbers, a lot of people don't really get to running the numbers. So that goes back to the first point, run the numbers, uh, or get a financial planner to run the numbers for you. But if they're running the numbers, a lot of times, they're, uh, they're doing the analysis based on renting versus buying. And they're not incorporating the fact that their lifestyle is increasing on or the home prices increasing as part of this transaction. So maybe they're running the numbers on renting a $400,000 home versus buying a $400,000 home. But the problem is that that is a lifestyle increase.
Speaker 1 00:19:54 And so renting $150,000 home is going to be pretty much, always better than buying like a $400,000 home. But that's just because you're increasing your lifestyle and lifestyle is not a good return on your dollar. Maybe it's a good return on your lifestyle, enjoyment and happiness, but I think you should just call it what it is and not say, cause what happens is a lot of people use that to kind of justify their increased pricing on their home. So they're saying, okay, do I rent versus buy? So I'm in the $150,000 home I'm going to live there seven years. So buying is always going to be better. So I'm going to buy the $400,000 home, but that logic is flawed because it's not financially better to buy a $400,000 home compared to renting $150,000 home. So what you should really be looking at is what lifestyle do I want to set?
Speaker 1 00:20:57 Like where do I want to draw this line in the sand, on the lifestyle first? Like what's most important to you in your life? What are your values? Like what, you know, what's define what that looks like first and kind of draw a line in the sand and then go back to the buy versus rent decision. Cause then you can kind of, uh, look at it more objectively and, and that way you're not kind of tricking yourself into spending more than you would have otherwise, there's also the headache factor. So, uh, buying a home versus renting renting is really, uh, I guess you could have headaches with renting, but assuming you have a good landlord in a relatively well kept rental, it's extremely low headache factor. There's just not a lot. You have to deal with other than to tell the landlord that there's a problem and they need to deal with it.
Speaker 1 00:21:48 So it's just kinda like not your problem. So when you're renting, that's nice, especially. So in training, like if you're working a ton, like I would, I wouldn't want to, I would ideally not want to have to deal with that kind of stuff. Like the house breaking down, like, just like, for example, I'll tell you in my house, we had an appliance just in the kitchen, just kind of blew up. And so since it's our, you know, we own the home, um, we had to get somebody out there to look at it and then they had to come back and there's logistics. Somebody has to be at the house and it's back and forth. And then you have to write checks and decide and what are you going to do? And how do you, so it's just all that stuff is home ownership stuff you got to deal with, or a tree blows down, you know, you gotta clean it up or pay somebody to do it or spend the time to do it yourself.
Speaker 1 00:22:40 Whereas if you're renting, you just kind of tell the landlord, you're like, take care of it. I need you to take care of it soon. So the headache factor is quite a bit higher with home ownership as opposed to renting. And so if you have no time, you probably want to consider that. And if you're gonna buy a home, if you have no time, you probably ought to build in some added, like outsourcing costs, uh, like lawn care, landscaping, handyman, that sort of thing, like cleaning house, just whatever upkeep type things. Uh, uh, it's going to be in a little bit of an added cost of home ownership versus maybe you just don't want to deal with it. You don't have the time, uh, or you're in training. You don't have the money or the time. Maybe you should lean towards renting just given that it's very low headache factor.
Speaker 1 00:23:32 On the other hand, there's, there's definitely a little bit of a kind of joy of ownership factor to consider. I don't know if everybody agrees with this one. I think it depends on who you talk to. Some people are like, homeownership is not near as cool as it's made out to be. For some reason, homeownership just has this like kind of cool factor on the front end. You're like, you're not cool unless you own a home. And so that's a little bit of a cultural thing, I guess, but some people there are, there's definitely, I would say, um, some, some happiness factors to consider with having like a, uh, anchor to go home to and kids grew up in house. Like you would have a lot of memories there. So there, there definitely is a, that's definitely a factor that can be huge for some people.
Speaker 1 00:24:20 Uh, you personalize it, you, you get to do what you like with it. It's it's your home. So that's a, that's a big factor. You just don't get that with the renting, or I guess it's difficult to get that with renting. And so that can, for a lot of people we work with, that's like the turning point, like that's the, they just are tired of renting and I can't blame them. I'm, you know, renting is not, it just gets old, not being able to do what you want with your place, or even be able to call it your place. And so I, I can totally see that that's a factor it's, it's just non-financial so you'll have to assess how important that is to you and try to work that into the equation. Okay. So we've talked about the numbers side of the coin and kind of what are, what do those look like?
Speaker 1 00:25:04 We talked about some of the additional factors beyond the numbers. And so let's, let's finish this up and hit on just an example of what this might look like. So I, so I mentioned before I live in Lexington, Kentucky, and I thought it would be good to, so just hypothetical example, let's say I'm in Lexington, Kentucky, and I am about to move to Texas, let's say Austin, Texas. And so let's say I had a rental, so I'm just using Zillow. Zillow is just a good way to kind of get a feel for, uh, home prices and, and rental prices and that sort of thing. So I'm in Lexington. So I just pulled up Zillow and looked up rentals in Lexington, Kentucky. So I was able to find a rental. So let's say I was living in a rental $1,800 a month. And it's, uh, in Lexington, Kentucky, it's, um, two, three, six, two Heather way, if you want to look it up on Zillow, it's two, three, six, two Heather way in Lexington, Kentucky, it's currently for rent, but, um, let's just hypothetically say, I'm, you know, I'm renting it now.
Speaker 1 00:26:14 So this, this will give you a kind of a feel for the variants in the market. So this rental is, uh, like I said, a hundred or $1,800 a month if I were to buy it, um, the best guesstimate would be looking at the tax assessed value. So, uh, partly why I wanted to use Lexington is I kind of have a decent feel for this is probably on the low end, but the assessed value is 173,000. I would say it's probably more like two 25, I don't know, low two hundreds, maybe mid 200, depending on the condition it's in, but it's in a pretty good area. You know, it's a pretty, it's a smaller house. Um, but it's in a good area. And so that's the assessed value. One 73, 173,000. The annual tax is 2200 per year. There's no HOA on this house. Okay.
Speaker 1 00:27:02 So that's, that's my house in Lexington. So I'm thinking about moving to, or I am moving to Austin, Texas. So if I look, go to Austin, Texas, I'm like, I would like to kind of keep it in the same price range. So if I'm looking at rentals, I found a rental in Austin, Texas, and it is $1,900 a month. It's eight, seven Oh four Qur'an ferry drive in Austin, Texas. So this one is $1,900 a month. If I look at the taxes as value, it's 369,000, which is crazy. That's like so much more. And the rent is basically the same. So that's all already telling you something that's like, huh? So you're telling me I'm a pay the same rent and the, but if I were to buy it, I would have to pay like double. Hmm. I'm not sure I would want to buy in that market.
Speaker 1 00:28:00 So, and then on top of that, that has an HOA. I don't know what the HOA is. I didn't take too much time to look, but I know that there is an HOA on top of all this. And then the annual tax is 8,235. So what the heck's going on. So basically what that, what that is telling me is Austin is a, probably not a great place to be buying right now, relative to renting. Or in other words, the rent rates are very competitive relative to the buying costs. And if I compare it to Lexington, Lexington's kind of not a bad place to buy, uh, relative to the rent costs. And you can start to kind of get a feel for that. I think I mentioned this earlier is you can look at the price to rent ratios and different cities. Uh, you can start to get a feel for the price to rent ratios across differences.
Speaker 1 00:28:56 And that'll kind of give you an indication of whether it's a pretty efficient by market versus whether it's a pretty efficient rent market, but that doesn't totally capture it. There's also the tax costs. So Austin is kind of like a double whammy. It's like prices home prices have gone up a lot in Austin, Texas. It's just like grown and exploded in, uh, in there's just a low, uh, supply of houses. So home prices have skyrocketed in Austin and it's probably not even captured in this assessed value. On the other hand, rent rates have been pretty flat plus on top of that in Austin home property tax rates are really high. That's kind of a trade-off with, uh, the, um, lack of income state income tax in Texas, but still it's a cost you have to pay if you bought. So if I'm looking at that, I'm thinking, well, if those are my numbers, I would gladly take $1,900 a month as a rental.
Speaker 1 00:29:55 It's going to take a really, really long time to break even on buying as opposed to renting so that the rules. So going back to the rule of thumb, it's like three to five years, well, not in this situation in need with these numbers, it's going to take like maybe, um, I mean really, really long time, 10 years plus to make this sort of a buying situation makes sense. If you could get $1,900 a month rent. And so that's, that's, that's definitely a, um, there's a lot of these out there right now because of the market with the prices and real estate going up so much, um, it's made, um, uh, this whole buy versus rent thing kind of out of whack a little bit. And when definitely be very, very, very hesitant to buy a place like I'm talking. Like I would be just very, very, very cautious because you know, training is a short period of time and it's extremely unlikely that you're going to keep that same sort of place for the long haul.
Speaker 1 00:30:57 And those high cost living areas like have seen such high appreciation already, and the rent rates have stayed pretty low. So in other words, it's just like rents look like a renting, looks like a really good deal, especially when you throw on top of it, all the uncertainty, um, of what the job is going to hold long-term. And another example, if I'm going into practice, like, and I'm just starting, if I'm moving to a brand new area, like I said earlier, if I don't know anything about the market and then on top of it, it's a really high appreciation area and really high tax rates. Like I was saying in Illinois, got really high tax rates or, or, um, in Texas, a lot areas in Texas. Um, I would kind of the same sort of situation. I would be very, very hesitant to buy in that, uh, in that brand new area, even if I'm pretty confident I'm going to live there for a long haul, going back to that overestimation bias, like people tend to think they're going to be in a place longer than they are.
Speaker 1 00:31:56 People tend to think like the jobs going to work out, almost everybody. In fact, I think everyone I talk to about their new jobs is like, uh, I think it's going to work out otherwise they wouldn't have taken the job. So you just gotta take that into consideration. On the other hand, if you're in Lexington, Kentucky, like with me, if you're living down the road from me and you've, you're established in a location, you know, the area you've lived here, your whole life, you're, you're already comfortable with the worked in the practice for several years. You know, the people you like it, you know, you're going to stay here. You know, you're going to stay in the given house you're in. I mean, buying makes, makes all the sense in the world. Like it's a really good financial decision typically. So I would definitely shy away from these rules of thumb.
Speaker 1 00:32:39 Uh, they can get you into a little bit of a pinch. In some cases they can cause big time financial risk, where you get into a situation where you, you, um, are stuck in a house. So ideally you look a little bit more at your situation and what you're looking at and kind of start to take what's what, what those factors are into consideration. And that way you can make the best decision for what you have going on. All right. Hope this has been helpful, good chat, and as always. And, uh, we'll talk to you next time
Speaker 2 00:33:12 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 party's informational accuracy or completeness, all information or ideas provided should be discussed in detail with an advisor accountant or legal counsel prior to the implementation. You don't have an advisor or like a second opinion. Feel free to check out our website for recommended advisors.
