Shelter: It’s essential for survival. Meeting this simple human need, however, has proven quite difficult for many doctors. According to W. Ben Utley, President of Physician Family Financial Advisors, he’s seen too many physicians make the mistake of buying too much house, too soon, and with the wrong form of financing. This begs the question, how does a doctor know when they should think about buying a home? When should they stick to renting? We turned to Utley for some answers. Should a doctor buy a home? The answer to this question depends on your life stage, Utley says. For example, where are you in your career? If you’re just getting started, you might want to wait. Your first job likely won’t be your last. He likes to see physician home buyers who have held a position for at least 2 years. At that point, Utley says, you have a good idea of whether you like where you work and whether the place is financially stable. If you haven’t held a job for at least 2 years, you should remain in the rental market. Another critical consideration is the size of your family. If you’re single but hoping to marry, you might want to hold off on buying that home. After all, you won’t just be buying a home for you. Both partners need to like the place to promote marital bliss. If you’re already married, would like to start a family, and are thinking of buying a home, Utley offers this insight: “It’s not actually very popular with doctors, but the ones who follow this advice do really well and it is: Buy the smallest home you can comfortably occupy. That doesn’t mean a tiny home. It just means the smallest home you can comfortably occupy.” Like a hermit crab selecting a shell, Utley says, choose a home that fits you right now. You don’t see too many hermit crabs scuttling around with oversized shells. You can buy a bigger shell of your own when you need one later. When should a physician buy a home? Let’s say you’ve passed the life stage test. There is another important sign Utley likes to see before steering a physician toward home buying: a full emergency fund. A classic mistake that many make is wiping out an emergency fund to put together a down payment for a home. Buying a home is not an emergency, and therefore not a good excuse to raid your fund. In fact, that emergency fund might come in handy after you’ve bought that home. Home inspections are good, but not perfect. You might move into your home only to discover it requires a major repair in order for it to be safe. Or, you might find yourself facing some other major expense, such as surgery or an auto repair. Perhaps your emergency fund is as discrete as having $50,000 in the bank. Or perhaps it’s having an understanding with mom and dad that they’ll bail you out if you hit trouble. Regardless of what it is, if you don’t have an emergency fund, stick to renting while you build one. What if a doctor just doesn’t want the trouble of owning a home? Maintenance. Repairs. Cleaning. Owning a home can sometimes feel like having another full-time job. Think home ownership just isn’t for you? Want to remain a lifetime renter? “Fine,” Utley says. “But you need to be putting money somewhere to fund those rent costs when you retire. You need to match up that outflow with an inflow — something that would be an investment of some sort.” The good news is it’s not hard to find investments that will do this for you, Utley says. “Stocks have outperformed real estate over long periods of time. Real estate typically performs in line with inflation — maybe plus or minus a percentage point.” Is a home truly a retirement asset? You might be thinking, wait, I thought owning a home was an investment. Not quite, Utley says. Investments don’t send you bills, he points out. Investments also generally can’t be wiped out by natural disasters. Also, with a traditional investment, like a stock, you can determine exactly what your investment is worth at any given moment. Not the case with a home. “When we’re planning with clients, we look at that primary home as a long-term care fund,” Utley says. Eventually, as you age, you will most likely need some sort of assisted living. This may take the form of living in a home, or having a full-time caretaker. The sale of your home, Utley says, can help pay for this. “We like to see clients have their homes paid off by retirement. Of course, we want clients to have a place to live during retirement, but we never include that home in the plan as an asset used to fund a goal. For example, we wouldn’t include it as an asset to fund retirement or college.” How should a physician buy a home? First, you’re going to need a down payment. The down payment funds should be safe in a bank, not in an investment account. “The reason for this is we’re typically talking about a time horizon of fewer than 5 years to save the down payment,” Utley says. “From peak to trough, sometimes it takes 5 years for the market to recover. So we never recommend that clients put their money in stocks or bonds if they’re using it to buy a house.” Ideally, you should put down 20% to avoid Private Mortgage Insurance (PMI). As a physician, 5% down qualifies you for a doctor loan. The drawback is that these loans are often larger, due to the lower down payment, and they keep the physician in debt longer, meaning more profit in the form of interest for the loan holder. The financial fun doesn’t stop after you sign a mortgage. As soon as the ink is dry, you’ll want to start a housing fund, Utley says. Aim to put away about $5,000 annually. These funds can offset the cost of any modifications you want to make. TL;DR Should you buy a home?: Timing is everything. Have you had your job for at least 2 years? When should you buy?: After you’ve amassed an emergency fund. What if you don’t want the hassle of home ownership?: Fine, but you need to save money to cover rent in retirement. Is a home an investment?: No, but selling it can help cover long-term care costs, which is why your home should be paid off when you retire. How should you buy?: Save for a 20% down payment to eliminate PMI. Doctor loans are a possibility, but they’ll keep you in debt longer, and cause you to pay more in total interest fees. Source
