New Doctor: Rent or Buy Home in Chicago?

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newdoc
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New Doctor: Rent or Buy Home in Chicago?

Post by newdoc »

Hi,

I'm just finishing medical school, and I'll be starting my specialty training in July in Chicago where I"ll be for the next 5 years. I have a plan to buy a home using a physician's loan (no down payment) of about $200-250K with a 7-ARM. I'd like to sell it at the end of the 5 years for a possible profit. The monthly rates would be lower than rent for the same quality/size space and if I select a quality house/condo in a desirable location I feel I can easily resell well before my 7-ARM is up and even possibly pull a profit. If I rent out a room while there, I may even pull a profit that way. Even if I don't sell at the end of the 5-years, I could continue to pull a profit renting out the home. But I love Chicago enough to very well settle down there, and if the house/condo is quality enough, I may not resell at all.

I feel that this is a smart plan. Is there something I'm missing? Are the prospects for the Chicago housing market that dismal? Should I just bite the bullet and pay more per month to rent?
Valuethinker
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by Valuethinker »

FWIW I think housing prices will go up from here, most US metropolitan areas.

However the hassles of home ownership are not to be underestimated. Plus significant closing costs on the deal.

We don't know your whole picture. For example if you have student loans of say +6% interest rate, then paying those down first can be a very good investment.

Ditto if you have access to employer match on 401k or other savings plans-- that can be a very good long term investment.

You should not look at this primarily as a monetary investment, but what gives you the best life in a demanding part of your career.
ks289
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by ks289 »

My personal opinion is to rent with the time frame you are looking at, particularly with no down payment. The transaction costs and other fees associated with buying/selling would eat up the first 15% or so of any price appreciation (or monthly payment savings compared to rent in the first several years). Also, while the doctors' loan allows you to borrow with no down payment and avoid PMI, my understanding is that fees and rates tend to be higher than other options.

I have no opinion or knowledge about the prospects for Chicago real estate for the next 5 years, but the potential disadvantages of purchasing real estate with the doctors' loan vs renting are described by folks more knowledgable than me - namely emergdoc on his blog.
http://whitecoatinvestor.com/personal-f ... gage-loan/

Many of my colleagues in residency/fellowship did well with short time frames with buying homes early last decade and, some did quite poorly mid/late decade, so it is good that you are aware of these potential risks and seem to be flexible about staying, renting it out, etc, but that could also be a headache at the same time.

Good luck.
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kingsnake
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by kingsnake »

I would suggest renting. Benefits of renting is no home owners liabilities and stress, no insurance premiums, interest, property tax etc. From a social standpoint maybe youll want to move during residency depending on where your friends live. There is no guarantee youll make a profit in 5 years. I bought a 2 bedroom 2 bath condo for a 3 year fellowship...sold 4 years later for a 30K loss. Id rent.
awval999
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by awval999 »

I would wait until your first attending job. You don't know where life is going to take you post residency.
kiligi
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by kiligi »

I don't know how much you know about the Chicago real estate market, but it is significantly lagging behind the rest of the country when it comes to housing recovery. The state of Illinois in general is not in the best financial health, and I think that is affecting the housing market. Most people are still quite hesitant to pull the trigger on buying, but at the same time prices have risen from the bottom of a couple of years ago (so you won't be getting bargain basement pricing).

As someone who has lived in Chicago and the Chicago land area for over 20 years, I would not counsel anyone to buy a property here if they planned on trying to turn around and make a profit within a short time frame. And I wonder if you are taking transactional costs into account when you are looking at this idea.

I would suggest renting a condo or apartment for at least the first year. If renting for a year makes you think that buying would lose some of its financial sense - realize that buying doesn't have that much financial sense in the first place. Also, that will give you a chance to figure out what neighborhood or suburb you really want to live in long term.
kitteh
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by kitteh »

DAK wrote:I would suggest renting. Benefits of renting is no home owners liabilities and stress, no insurance premiums,
renter's insurance.
kermit88
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by kermit88 »

I bought a condo when I moved to Chicago for my internship. I moved out one year later to live with my future wife (who had a larger place of her own). I still rent out the condo to this day, in part because it was bought in the spring of 2007 and remains underwater. However, transactional costs in real estate, especially in Chicago (transfer tax, closing costs, 6% real estate agent commission) make short-term (even 5 years) ROI very difficult in real estate.

The larger point is that if you are young and single (as I assume you are), why would you want to tie yourself down with a mortgage? At this point, you don't know in 5 years if you will be married, have children, leave Chicago for a job, or (god forbid) need to change residencies or specialties. You are going to be busy enough in residency without needing to worry about the headaches of real estate ownership.
DrPeppaPig
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by DrPeppaPig »

Rent. Don't even think about buying. You'll be way too busy to want to deal with the issues of owning a home. My wife insisted we buy during residency and it was a huge mistake.
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by kingsnake »

renter's insurance.
I rented for 12 years prior to starting fellowship. (college,med school,residency)
I never had renters insurance, then again during those years I had no valuables. Never had any issues.
staythecourse
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by staythecourse »

kermit88 wrote:I bought a condo when I moved to Chicago for my internship. I moved out one year later to live with my future wife (who had a larger place of her own). I still rent out the condo to this day, in part because it was bought in the spring of 2007 and remains underwater. However, transactional costs in real estate, especially in Chicago (transfer tax, closing costs, 6% real estate agent commission) make short-term (even 5 years) ROI very difficult in real estate.

The larger point is that if you are young and single (as I assume you are), why would you want to tie yourself down with a mortgage? At this point, you don't know in 5 years if you will be married, have children, leave Chicago for a job, or (god forbid) need to change residencies or specialties. You are going to be busy enough in residency without needing to worry about the headaches of real estate ownership.
Can't say it any better and agree 100%.

Just like in investing one can NOT control return you can only control risk. There are MANY risks I see of owning vs. renting. Do the least risky and just rent.

Good luck.
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by apex84 »

Where are you looking to buy? There are parts of Chicago where inventory is down significantly & others which might still be a buyer's market. I think it only makes sense to buy if you really think you will stay in the place longer than 5 years. The transaction costs of real estate are high, renting is more trouble than its worth (if you move from Chicago and are starting a new job, you will not have the time to be a landlord), & paying assessments & real estate taxes while you're waiting for a place to sell is not much fun.

My folks helped me buy a place when I started med school and that worked out OK, but I ended up using the same condo for med school, grad school, residency, and fellowship. That was 15 years, so in retrospect, buying was better than renting.

Chicago is a great place to live, but the job market for physicians is competitive due to the sheer number of training programs here. Everyone I know who wanted a local job was able to stay, but it often means working in the suburbs. I stayed in academics, so I'm in the city.
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by rayout »

What kind of specialty are you pursing and what is the local market for that specialty? Realize the more specialized you are the harder it is to transition a job locally. My uncle is a radiologist and has had to move once or twice to a different state per decade (he is a radiologist). Hospital groups are continuing to consolidate which increases the risk for turn over if you work for a smaller independent hospital or physicians group.
irwinmfletcher
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by irwinmfletcher »

I live in Chicago (have owned and rented) and I would rent for the reasons noted above. You may change your mind in the next five years.

Renting has more optionality than buying, which has tremendous value in your situation.
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by spotty_dog »

I know two families who were fairly happy with their decisions to buy during residency. One had a 7-year training program (and scrambled to sell their house before moving for fellowship, they ended up closing early and having no place to live for a few months), the other stayed in the same general location (same house) for 14 years of MD-PhD and residency training and is still there as an attending. Everyone else carried at least two mortgages for at least a few months to a few years while their property stagnated in a slow market, or became unintended landlords, or had to hold their underwater property until they came up with the cash to close on a sale. This is NOT what you want to go into your first attending job with, especially if you are already carrying student loan debt to boot.

And frankly, you need to get used to living within your means. If you can't put 20% down and pay the mortgage on a 15-year fixed with less than 20% of your gross, plus put a little aside annually for home maintenance, IMO you can't afford the house. Not even if you "will" be able to afford it in 5 years! The habit of reaching for just a little more luxury is one that needs to be nipped in the bud if you are ever going to build wealth post-residency. Yes, it's nice to have a home to call your own (even if the bank owns most of it). But if most people with a median salary in your area don't have it, you can't have it either. Not for a few years after training either.

Live like a resident. Especially when you ARE a resident!
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by Alex Frakt »

I've lived in Chicago since '96 and would also advise renting in your situation. In addition to the reasons given above, Chicago is a city made up of neighborhoods with very different characteristics. There's no way to know what areas would suit you best without spending some time here to see them firsthand. Also, if you are moving to the city proper, you are not going to be able to buy a house for 250k anywhere you would actually want to live. Realistically you would be looking at studio and 1BR condos, so don't forget to tack on assessments when comparing mortgage payments to rental rates.
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by stan1 »

Rent within walking distance of the hospital you'll be working at, if possible (or a 10 minute drive if its a suburban hospital with easy parking).
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by White Coat Investor »

I would have made good money buying in residency (2003-2006 in Arizona). But that would have been thanks to the housing bubble. Without that, buying in residency is almost certainly a mistake. Minimal if any tax benefits, serious transaction costs, an almost sure need to sell in just 5 years, very busy with relatively low, fixed income. It just doesn't make sense. In my married life I've owned, rented, owned, rented, and now owned again. Trust me when I say that owning isn't some magic panacea that gives you happiness and wealth. You can be just as happy and just as wealthy renting for a period of 5 years. Especially when you're working 80 hours a week and you're broke.

By the way, the costs of ownership are much more than a mortgage payment. Real estate investors budget 45% of the rent collected goes to pay for non-principal and non-interest costs. Consider that your principal and interest payment may only be covering 55% of the cost of owning that home. Now is buying still cheaper than renting?

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Re: New Doctor: Rent or Buy Home in Chicago?

Post by newdoc »

I'm almost fully convinced to go the rental route. Just to be sure, with regards to all the dismal scenarios of home-buying, here's my thinking:

If I rent a livable apartment, I'd be probably paying around $2000 per month. After 5 years (60 months), that's $120,000.

If I buy a condo using a $250,000, 7-ARM physician's loan, the monthly payment will be lower, assuming an interest rate of around 2-4% which is what medical school graduates I know have been getting recently. Having researched on realtor.com, $250,000 can indeed get a highly desirable condo in a highly desirable location in Chicago; (I've included transaction costs in that 250K). Monthly payments on said condo using the aforementioned loan would be around $1400 (including HOA costs plus taxes plus insurance plus maintenance).

After 5 years, that's $84,000--36K saved through avoiding rent. In resale, even if I only pull a $10,000 profit, that's 36K saved through avoiding rent plus 10K in mortgage payments that I've now gotten back. Even if I'm forced to take a loss of say $20,000, that's still $16,000 (120K – (84K + 20K)) that I've saved through avoiding rent--16K that I could then use to pay down my student loans! Only if I take a loss of over $36,000 do I begin to lose from having bought instead of rented. How likely is this to happen?

The point of doing a 7-year ARM is that it gives me 2 years to sell (after my 5 years there is up) while possibly renting out the condo in the meantime. Would a nice condo in a desireable location really take over 2 years to sell, even in Chicago? Even if I couldn't sell in those 2 years, and the mortgage interest rates shoot up at the 7-year point, my salary by that time will be enough to cover this liability. Even so, I still could just rent out the condo for profit.

What am I missing in all this?
Last edited by newdoc on Sun Mar 17, 2013 9:22 pm, edited 1 time in total.
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by ossipago »

A new definition of "livable"? A smaller apartment? You're going to be working very long hours, and living in a major U.S. metro. How much time are you going to be spending in your residence, really? Get a cheaper apartment - a studio or share - instead of spending $2000+ a month, would be my recommendation.
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by newdoc »

ossipago wrote:A new definition of "livable"? A smaller apartment? You're going to be working very long hours, and living in a major U.S. metro. How much time are you going to be spending in your residence, really? Get a cheaper apartment - a studio or share - instead of spending $2000+ a month, would be my recommendation.
The numbers themselves aren't the main point. Even if I shrink the numbers, which is certainly possible, the principle still stands. The way I see it is: the only way I end up losing in this game is if I lose money on resale AND the money lost in resale is enough to make home-buying more expensive than renting. My main question is: Is the possibility of taking such a loss on a home resale great enough to make the risk and hassle of home-buying not worth it?
Last edited by newdoc on Sun Mar 17, 2013 9:15 pm, edited 1 time in total.
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by rr2 »

Are you doing a proper comparison? Is the same or similar condo that costs $250K to buy rent at $2K/month? Rental yield = 9.6%. I would be surprised if this is true.
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by newdoc »

rr2 wrote:Are you doing a proper comparison? Is the same or similar condo that costs $250K to buy rent at $2K/month? Rental yield = 9.6%. I would be surprised if this is true.
Absolutely. While this is by no means necessarily reflective of the average, there are indeed many great condos in Lincoln Park, a very desirable part of Chicago, selling for around 250K. A comparable rental in that area is easily 2K-3K or more.
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by ossipago »

Residents are time-strapped. You may or may not make a profit, but you know one thing for sure: Buying takes up way more time than renting. Do you really want to spend your scant spare time dealing with board meetings or appliance breakdowns? Much less spend even more of your time filling out paperwork to buy, sell, and/or rent out this place? I don't see how it's much of an advantage.
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by rr2 »

newdoc wrote:
rr2 wrote:Are you doing a proper comparison? Is the same or similar condo that costs $250K to buy rent at $2K/month? Rental yield = 9.6%. I would be surprised if this is true.
Absolutely. According to realtor.com, there are some great condos in Lincoln Park, a very desirable part of Chicago selling for around 250K. A rental in that area is easily 2K-3K or more.
You are now saying that a $250K condo rents for 2K-3K or more. That is fantastic. I wonder why real estate investors haven't jumped all over this. I wouldn't trust realtor.com for rental estimates. craigslist.org would be a better resource for rents. Then look in zillow.com for recent sales figures. That will give you a better estimate.
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by mlipps »

rr2 wrote:Are you doing a proper comparison? Is the same or similar condo that costs $250K to buy rent at $2K/month? Rental yield = 9.6%. I would be surprised if this is true.
I agree. Unless you're looking at living in the burbs, which is something I know nothing about. But in the city proper I can't think of anywhere you can buy for $250k that has rents of $2k.
Alex Frakt wrote:I've lived in Chicago since '96 and would also advise renting in your situation. In addition to the reasons given above, Chicago is a city made up of neighborhoods with very different characteristics. There's no way to know what areas would suit you best without spending some time here to see them firsthand. Also, if you are moving to the city proper, you are not going to be able to buy a house for 250k anywhere you would actually want to live. Realistically you would be looking at studio and 1BR condos, so don't forget to tack on assessments when comparing mortgage payments to rental rates.
I did have to object to this one though. ;) There are houses for sale here in Rogers Park often at those prices, although most of them are fixer uppers. I love living here :)
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by newdoc »

rr2 wrote:
newdoc wrote:
rr2 wrote:Are you doing a proper comparison? Is the same or similar condo that costs $250K to buy rent at $2K/month? Rental yield = 9.6%. I would be surprised if this is true.
Absolutely. According to realtor.com, there are some great condos in Lincoln Park, a very desirable part of Chicago selling for around 250K. A rental in that area is easily 2K-3K or more.
You are now saying that a $250K condo rents for 2K-3K or more. That is fantastic. I wonder why real estate investors haven't jumped all over this. I wouldn't trust realtor.com for rental estimates. craigslist.org would be a better resource for rents. Then look in zillow.com for recent sales figures. That will give you a better estimate.
I'm using realtor.com to look at buying prices and apartmentguide.com to look at rental prices. Both are pretty reliable. Again, I by no means mean to suggest that 250K is somehow an average purchase cost; it actually seems to be on the low end for an area like Lincoln Park. But there are indeed many nice condos in the area selling for that amount, and there are comparable rentals renting for $2-3K+, i.e. more than mortgage payments on a 250K loan. Go to those websites and see for yourself.
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by rr2 »

newdoc wrote:
rr2 wrote:
newdoc wrote:
rr2 wrote:Are you doing a proper comparison? Is the same or similar condo that costs $250K to buy rent at $2K/month? Rental yield = 9.6%. I would be surprised if this is true.
Absolutely. According to realtor.com, there are some great condos in Lincoln Park, a very desirable part of Chicago selling for around 250K. A rental in that area is easily 2K-3K or more.
You are now saying that a $250K condo rents for 2K-3K or more. That is fantastic. I wonder why real estate investors haven't jumped all over this. I wouldn't trust realtor.com for rental estimates. craigslist.org would be a better resource for rents. Then look in zillow.com for recent sales figures. That will give you a better estimate.
I'm using realtor.com to look at buying prices and apartmentguide.com to look at rental prices. Both are pretty reliable. Again, I by no means mean to suggest that 250K is somehow an average purchase cost; it actually seems to be on the low end for an area like Lincoln Park. But there are indeed many nice condos in the area selling for that amount, and there are comparable rentals renting for $2-3K+, i.e. more than mortgage payments on a 250K loan. Go to those websites and see for yourself.
According to zillow.com, the median sales price in Lincoln Park for condos is $350K. If you can, find a building you are interested in. Research both rents and sales prices. This will give you a proper apples-to-apples comparison.
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by campy2010 »

newdoc wrote:
rr2 wrote:
newdoc wrote:
rr2 wrote:Are you doing a proper comparison? Is the same or similar condo that costs $250K to buy rent at $2K/month? Rental yield = 9.6%. I would be surprised if this is true.
Absolutely. According to realtor.com, there are some great condos in Lincoln Park, a very desirable part of Chicago selling for around 250K. A rental in that area is easily 2K-3K or more.
You are now saying that a $250K condo rents for 2K-3K or more. That is fantastic. I wonder why real estate investors haven't jumped all over this. I wouldn't trust realtor.com for rental estimates. craigslist.org would be a better resource for rents. Then look in zillow.com for recent sales figures. That will give you a better estimate.
I'm using realtor.com to look at buying prices and apartmentguide.com to look at rental prices. Both are pretty reliable. Again, I by no means mean to suggest that 250K is somehow an average purchase cost; it actually seems to be on the low end for an area like Lincoln Park. But there are indeed many nice condos in the area selling for that amount, and there are comparable rentals renting for $2-3K+, i.e. more than mortgage payments on a 250K loan. Go to those websites and see for yourself.
Make sure you include HOA fees, special assessments, property taxes, and maintenance in the cost of the condo for a proper apples to apples comparison.

ETA: apartmentguide.com tends to have listings for the corporate owned apartments that are nicer, on average than the general housing stock. I was surprised at your quote of $2-3k a month for an apartment in Chicago, given that is approaching rental prices of more expensive cities in the US. A quick search on Craigslist turned up several nice 1 bedroom apartments in the $1500-$1600 range, which is probably reasonable housing expenses for the salary of a medical resident. $250k mortgage + HOA + taxes would probably be a stretch on a resident's salary, unless you have family money supporting you. Rent a cheaper apartment and save/invest the difference.
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by DTSC »

Yet another factor is that not all new MD's who enter a residency program actually finish in that program. Sure, most do, some don't. People sometimes find that they actually don't like the work and/or lifestyle of their chosen specialty. Some like the specialty, but can't stand the people they have to work with and transfer out. Some burn out. A few flunk out.

With regard to renting - if you're in a 5 year program, it's probably a surgical specialty. They will work you hard. You will most likely spend more hours in the hospital than your apartment. You'll spend even fewer *waking* hours in that apartment as you'll just come home and crash. You certainly won't be doing much entertaining there. Any potential boy/girlfriend won't be enticed by your fancy digs, but more by your future earning potential (and of course your sparkling personality). IMO, unless you are lucky enough not to have any student loans, $24K per year is waaaayyyy too much to spend for rent (or mortgage). Just get a cheap place in a quiet neighborhood where you can sleep in peace, because that is what you'll want to do there. In fact, see if any of the other new interns want to share an apartment with you. Most likely you and he won't be on the same call rotation and won't have much opportunity to step on each other's toes (unless they snore so loud you can hear in the next room). It sure ain't like Grey's Anatomy.

Just 2 cents from a former resident.
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by White Coat Investor »

rr2 wrote:Are you doing a proper comparison? Is the same or similar condo that costs $250K to buy rent at $2K/month? Rental yield = 9.6%. I would be surprised if this is true.
I'm getting emails from a chicago based real estate company that suggests it may be true.

"Turnkey high yield duplex properties earning 19 to 21% Cash on Cash
returns in World Class City."
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by rr2 »

EmergDoc wrote:
rr2 wrote:Are you doing a proper comparison? Is the same or similar condo that costs $250K to buy rent at $2K/month? Rental yield = 9.6%. I would be surprised if this is true.
I'm getting emails from a chicago based real estate company that suggests it may be true.

"Turnkey high yield duplex properties earning 19 to 21% Cash on Cash
returns in World Class City."
If so, I am surprised investors are not lining up to snatch up these properties. I can see 10% in a multi family older low priced building in the south side, but in Lincoln Park with median condo prices of $350k?
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by bertie wooster »

I think he's being sarcastic.
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by Valuethinker »

Rents have been inflated by the fact that due to damaged credit history, career risk, or just genuine caution, a lot of first time buyers just have not bought.

But that will/ is unwinding and there will be actual new housing shortages in some parts of USA due to lack of construction in last 5 years. No bank is in a hurry to lend to a developer, especially not condos.

However I think the consensus is a good one. OP should most probably rent for a year, see how career, neighbourhood, building etc. goes. It's a big decision to be made during the full on commitment of a residency.

I caution the OP against buying an unusually cheap unit for a given area -- usually there is a reason, be it a troubled building etc. Such are hard to resell. There are a lot of people with cash who have the time to scout genuine bargains, networked with the agents, so its hard to beat these insiders.

And housing repair and renovation is stressful and time consuming-- does not work with the sort of career being undertaken, usually.

I say this in the unfortunate knowledge that, in a lot of US metropoli (can't speak to Chicago), prices could shoot up 10% as the housing recovery takes hold.

But that's not a reason to make such a large financial decision so early on in life. Doctors are well paid in their full careers, and so can usually afford the housing they desire.
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by celia »

OP, Please pay attention to the posters here that are talking about things other than dollar amounts. Consider your time, or lack of it, outside of work.

Time = Money.


Do you want to spend your non-work time taking care of a property you own or be free to do what you want?

As there was a suggestion about renting out a room to another intern, you could change that around and look for a room to rent from an intern-owner.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
Old Guy
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by Old Guy »

Spend some time reading cribchatter.com.
spotty_dog
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by spotty_dog »

newdoc wrote:I'm almost fully convinced to go the rental route. Just to be sure, with regards to all the dismal scenarios of home-buying, here's my thinking:

If I rent a livable apartment, I'd be probably paying around $2000 per month. After 5 years (60 months), that's $120,000.
Looking at FRIEDA, you are going to be grossing $46-50K per year. $2000 rent is 50% of your gross income. You will be putting how much toward IBR on your loans? And how much toward retirement? Don't waste the precious Roth space you're getting at your current income level. You can't afford to spend that much on housing. "Livable" sounds like "suitable for a dawkter who will soon be a surgeon", amiright? Get out of that mindset. Seriously.
If I buy a condo using a $250,000, 7-ARM physician's loan, the monthly payment will be lower, assuming an interest rate of around 2-4% which is what medical school graduates I know have been getting recently. Having researched on realtor.com, $250,000 can indeed get a highly desirable condo in a highly desirable location in Chicago; (I've included transaction costs in that 250K). Monthly payments on said condo using the aforementioned loan would be around $1400 (including HOA costs plus taxes plus insurance plus maintenance).
Is your credit as good as those other new MDs? Also, any loan that is giving you that low a payment has got to be amortized so you are paying nothing but interest. So at the end of 5 years I suspect you will "own" as much housing as if you'd rented. This isn't an investment, this is taking on debt for the perk of saying that the house is "yours". Well, don't forget to set aside at least 1-2% of the purchase price each year for maintenance, so that's $2500 to $5000 x 5 = $12500 to $25000 of your "profit".
After 5 years, that's $84,000--36K saved through avoiding rent. In resale, even if I only pull a $10,000 profit, that's 36K saved through avoiding rent plus 10K in mortgage payments that I've now gotten back. Even if I'm forced to take a loss of say $20,000, that's still $16,000 (120K – (84K + 20K)) that I've saved through avoiding rent--16K that I could then use to pay down my student loans! Only if I take a loss of over $36,000 do I begin to lose from having bought instead of rented. How likely is this to happen?
"Taking a loss" in this case means bringing that cash to the table. Where you gonna get $36,000 cash after 5 years of residency? Are you putting the money "saved" into a liquid investment that is keeping its purchasing value for 5 years? Six hundred dollars per month you're going to stick in a lockbox where you can't get it for retirement savings, or entertainment, or unexpected home repairs? So really your budget during residency will be exactly as if you rented the condo that was already too expensive for a resident's budget. There went that part of the financial argument.
The point of doing a 7-year ARM is that it gives me 2 years to sell (after my 5 years there is up) while possibly renting out the condo in the meantime. Would a nice condo in a desireable location really take over 2 years to sell, even in Chicago? Even if I couldn't sell in those 2 years, and the mortgage interest rates shoot up at the 7-year point, my salary by that time will be enough to cover this liability. Even so, I still could just rent out the condo for profit.
And it'll never be vacant and the tenants will be awesome and the management costs won't eat into your share and major repairs won't occur while you are across the country trying to establish a practice and pay down your loans and get your net worth positive for the first time in your life and maybe even start a family?
What am I missing in all this?
Home ownership is risky, uncertain, and expensive. Residency is grueling, all-consuming, and not lavish. This is not a recipe for successful real estate speculation.
Last edited by spotty_dog on Mon Mar 18, 2013 5:14 pm, edited 1 time in total.
kiligi
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by kiligi »

I would be extremely skeptical of "nice condos" being listed at $250K in Lincoln Park.

A couple of issues that might be something to think about:

1. Are the condos you are looking at truly in Lincoln Park? I have read a ton of real estate ads that state a neighborhood that the property is on the fringes of, not actually part of. When I lived in Wicker Park - right on the park, I would often see real estate ads advertising "Wicker Park" locations that were west of Western Ave (not considered Wicker Park or Bucktown) or south of Augusta, etc. If the price is that low, it probably isn't Lincoln Park proper, but rather "Lincoln Park adjacent" (best case scenario).

2. Are the condos listed at $250 studios and 1 bedrooms? Because those are tough to resell, and also won't really give you the ability to rent a room out.

3. Is parking included in said condos? Parking is at a premium in Chicago, especially in Lincoln Park and on street parking can be super tough to find consistently. Monthly parking can easily run $150 a month (and up), and often parking spots in condo buildings are sold separately from the units, so you can expect to spend $15-30K for a spot in addition to the cost of a condo. Condos without parking are much less desirable for obvious reasons...have you spent a winter in Chicago with the attendant street cleaning rules that require moving cars continuously?

4. How much are the monthly assessments? Are you prepared for a special assessment that could run into the thousands if the monthly assessments are artificially low?

I would suggest hooking up with other new residents (you must have a list serve or facebook page by now) and look into renting a 2 or 3 bedroom apartment for the 1st year with a couple of other residents. You can easily find a 2 bedroom nice apartment for $2400 which would be $1200 a piece or a 3 bedroom for $3000 which would be even better at $1K a piece. You are looking at Chicago real estate with the rosiest glasses I have encountered in the last couple of years. Stop thinking that as a new medical resident you have knowledge that old time Chicago residents (and property owners) don't have. Rent. With roommates.
ziszew
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by ziszew »

newdoc wrote: $250,000 can indeed get a highly desirable condo in a highly desirable location in Chicago
newdoc wrote: Go to those websites and see for yourself.
Having gone through the reality of purchasing a condo within the last few months here in Chicago (and having lived/rented in multiple neighborhoods over the last 15 years), I'm going to have to agree with all of the other locals and say that the internet math doesn't add up.

To keep it short, there is a very large downside to your purchase plan with very little upside. The loss of flexibility alone isn't worth it for you at this stage in your life and career.

Focus on your current most valuable asset: you (and your new career). Owning a condo will be one large distraction and stress you don't need.

(Sorry to be blunt)
DTSC
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by DTSC »

ziszew wrote:
newdoc wrote: $250,000 can indeed get a highly desirable condo in a highly desirable location in Chicago
newdoc wrote: Go to those websites and see for yourself.

$250,000 can get you a condo in Naperville, 30 miles west in the suburbs. In Lincoln Park? If it sounds too good to be true...
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newdoc
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by newdoc »

Thanks for the discussion everyone! I think I'm going to rent. For someone with a pretax income of roughly $50K, how much can I reasonably spend on housing?
spotty_dog
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by spotty_dog »

I ran your figures through a paycheck calculator: http://www.paycheckcity.com/netpaycalc/ ... ulator.asp

You will be taking home roughly $3000 per month. I'd aim for about 1/3 of that to go for rent. (I'm super conservative on this stuff and would personally aim for 20%, but with high COL this might be more achievable.)
mlipps
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by mlipps »

spotty_dog wrote:I ran your figures through a paycheck calculator: http://www.paycheckcity.com/netpaycalc/ ... ulator.asp

You will be taking home roughly $3000 per month. I'd aim for about 1/3 of that to go for rent. (I'm super conservative on this stuff and would personally aim for 20%, but with high COL this might be more achievable.)
Depending on what hospital you're working at in Chicago/the burbs, $500/month w/roommates or $750 or so for a studio is totally doable. It's not THAT expensive here, unless you want it to be.
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ram
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by ram »

Rent
- an old doctor
Ram
DTSC
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by DTSC »

newdoc wrote:Thanks for the discussion everyone! I think I'm going to rent. For someone with a pretax income of roughly $50K, how much can I reasonably spend on housing?
Depends on how much you have in student loans!
ziszew
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by ziszew »

newdoc wrote:Thanks for the discussion everyone! I think I'm going to rent. For someone with a pretax income of roughly $50K, how much can I reasonably spend on housing?
As little as you can (seriously)

Look for roommates, etc. to defray the cost. You're going to be using your place for a bed/shower and little else. The closer to you primary hospital the better (you were mentioning Lincoln Park in other threads, good if you're young but so is downtown if you're Northwestern/NIH/RIC etc) and you're going to be spending a good chunk on the car you need. After saving for retirement, car, emergency fund, student loans, and "going out" money (you're young and should be getting out when you can, it's a great city), the less you spend on where you sleep the better. It should be quiet and dark, after that not much matters (see: getting out)
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newdoc
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by newdoc »

Wow, this forum is the best! Everyone knows so much about everything, and it's really focused on the exchange of useful information. I've found this to be a trend amongst business/finance-oriented people.

Anyway, after a few days of research, I've decided that I'm going to get a roommate and rent a place for which we each pay roughly $1100. I think, all things considered, this is a fair price point for me. Does anyone disagree?

(To the doctors among you, is it advisable to have a roommate as a resident from a social perspective?)

Now, the problem I'm running into is parking. It seems that Chicago charges for home parking anywhere from $175-200 or more! I'm looking for apartments in South Loop. With regards to both car safety and expediency necessary as a doctor, can I get away with just street parking in this area or should I bite the bullet and pay for parking? Does anyone have any clever ideas for having a car while avoiding/minimizing parking costs as a whole in Chicago?

Thanks
irwinmfletcher
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Re: New Doctor: Rent or Buy Home in Chicago?

Post by irwinmfletcher »

I live in Chicago and would recommend that rather than looking for apartments, look for a condo that the owner can't sell. Make sure parking is included. These folks are much easier to negotiate with than an apartment landlord, and the places will be nicer as the neighbors are owners rather than renters.

Also, make sure you lock up your renewal options from the start. Say a 1 year lease with 4 1 year renewal options at maybe a 2% at most increase per year.

I am currently doing just that--renting a 2200 sf condo, with parking included.

There are tons of condo buildings--just look on realtor.com and select rentals in the zip code you want to live in. Can try craiglist too.
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