I was browsing the White Coat Investor forums and came across this question from a soon-to-be medical student:
I am 25 and I start medical school in July. I am fortunate enough to have enough money saved to put a 30-40% downpayment on a house (fixed phone screens in college) close to my medical school. The medical school is surrounded by cheap homes (compared to where I am now in socal), I can get a recently built home from 3-4 bedrooms, central air, the works, all packaged into a 2,000 sqft home (average) that looks nice.
I want to have 1-2 roommates and charge them rent while in my first two didactic years. After that. assuming I travel for audition rotations, I plan to partner with the medical school as a housing affiliate and rent out every bedroom I have to medical students.
Rent is approx. 900-1200 a month for a 3-4 bedroom. The house price I am looking at is about 140,000, which I would put 30% down (42,000). A 100,000 10-year mortgage at 4% after all fees said and done will be approx $1250/month.
Do you think this is a wise investment?
While most of the respondents on the thread dismissed the idea, in the non-medical financial independence community, this strategy is actually gaining in popularity. It is colloquially called house-hacking in the FI world. Let’s take a look at this strategy and see how it would work for a medical student.
House Hacking For Medical Students
The strategy goes like this: a medical student (or college student) buys a multi-bedroom house using a mortgage. They live in one bedroom and rent out the other bedrooms to other medical students or other tenants. If done correctly, the rent paid by the other students is equal to the mortgage payment (hopefully plus other expenses), and the medical student can live in the home rent-free. In addition, if the house appreciates, then the medical student will make a profit on the home when they finish medical school.
Downsides to House Hacking For Medical Students
Dealing with Tenants
The usual hassles of dealing with tenants apply when you are house-hacking. If there are repairs that need to be handled with the house, you need to coordinate these repairs. If tenants miss payments, you have to bug them for payment or possibly even evict them. These should be less of a concern if your roommates are medical students, but it could still happen. Are these the things you really want to be dealing with when you should be studying anatomy?
Transaction Costs
Buying a home has many transaction costs, from broker’s fees, appraisal, inspection, mortgage fees, etc. These are fixed costs for buying and selling the house, so the longer you own the house, the more these costs are spread out over time. However, most medical students will only spend four years in the area, and then leave the region for residency. You could sell the home, but this often is not enough time to recoup your losses.
One option could be to continue to rent out the home to medical students, but you could be potentially managing the property from afar. Hiring a property manager would be a way to be more hands-off with management, but good property managers are hard to come by and can erode your cash flow.
Getting the Mortgage
While the WCI forum reader has enough money for a conventional mortgage, most medical students will not have the money for a down payment, and it’s going to be hard to get a mortgage without any money down. In some cases, parents can provide financial assistance to their children for the down payment.
Will The Math Work?
You have to be smart in your house selection. You can’t just buy any house and be able to fill it with medical students who will pay your mortgage. You will need to choose the home you purchase wisely (paying close attention to location), and then make sure you don’t overpay for the home.
It is possible that your roommates will be able to pay off your mortgage, but they may not be able to also pay for the property taxes, homeowner’s insurance, lawn maintenance, snow removal, and home repairs. You need to account for the many additional costs of homeownership before diving in and buying a home.
You’ll then have to finance the home to minimize the mortgage payment. This may be feasible in low interest rate environments such as those following the Great Recession, but could be more challenging in a higher interest rate environment.
More Information On House Hacking
If you are interested in this strategy, Chad Carson has written a lengthy beginner’s guide to house-hacking over at his blog.
Conclusion
House-hacking is a strategy to reduce costs in medical school. By taking advantage of relatively low mortgage rates and high rental rates, you can potentially significantly reduce your out-of-pocket housing costs. However, like in other forms of real estate investing, for this strategy to succeed, you need to buy the right home in the right location for the right price. There are significant risks with the house-hacking strategy, and most medical students would prefer not to spend their precious little free time managing tenants or home repairs.
What do you think? Did you “house-hack” during medical school? Did you pay rent to a roommate who also owned the place?
I had to borrow money for school so obviously didn’t house hack. I rented rooms from landlords I found on Craigslist. Many of my roommates were medical students but they were also party animals that trashed the houses. Since I lived with them, my landlords punished me too by keeping my deposit even though I was always in my room. Those experiences turned me off from investing in real estate.
This is only a good idea if you plan to keep the house as a rental after you leave medical school and it will pencil out as a good investment then. If you do this with the idea you will sell the house when you leave medical school then it is not worth the risk. Buying rental houses is a long term investment. If you are selling in four years, you are making a short term investment. Buying a house is a poor short term investment and very risky. If the market is down or slow at the time you want to sell, this may cost you a lot of money. In general, medical students should rent, not buy. When you settle down and know you are staying somewhere for a long time (>5 years) then buying is the best option.
I covered this in two of my books, The Doctors Guide to Starting Your Practice Right, and The Doctors Guide To Eliminating Debt. For medical students, Residents and new attendings, the right answer is to rent a house or apartment. Once you settle down, the right answer is to buy. Don’t get suckered in by the notion that you can have a lower monthly cost in your budget by hacking/buying. The monthly cost is not where the risk is. The risk is the buying and selling in a short time frame. Saving a couple hundred a month could cost you 10’s of thousands of dollars in the buy/sell transaction
Dr. Cory S. Fawcett
Prescription for Financial Success
I think you also have to consider where the housing market is in relation to the boom bust cycle. Real estate has cycles too, just like the stock market. It is not a market that goes up forever and ever.
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