My prior posts were about Buying a House and Closing Costs. Also, there was one about awhile back about The House Buying Itch – Medical Student Edition.

There was a comment from Fred that says:

“So, let’s say that you came across this blog a little too late. You are a first year attending (entering second year) and bought a house and you realize the position you are in isn’t right for you. How do you decide how to rent or sell? If renting, how much should one charge above the mortgage payment? What’s a fair amount to pay a property manager? What’s an acceptable loss if selling? What’s a good long term strategy, overall? Should one keep paying a mortgage into an empty house if you can’t rent it (but still can afford the mortgage)?”

I replied with:

“Hi Fred. Sorry for the late reply. Lots of good questions here. In fact, these questions are so important that I will try to dedicate a whole blog post to this topic later. However, I don’t want to keep you hanging so I’ll try to give you what I think is good advice. Please note, I have not been in this situation, but almost was during my first job. For that reason, I have previously considered if this situation were to happen to me. The first thing to do is to decide *for sure* that you want to leave your current job and find another one. Then you need to decide where this new job is and if it *really is* better. Remember… the grass is always greener on the other side… The second thing to do is to understand that with the small time period of owning a house and either needing to rent or sell it, you will almost be certainly looking at a loss, unless your rent is able to cover the cost of the mortgage. Now, I will answer your questions with very short answers, which I will elaborate on later in future post.

1) Rent vs. sell: it depends on your situation, but in general selling is trying to cut your losses whereas renting is trying to turn your mistake into an income property (but this could be a second mistake).

2) How much to rent for isn’t up to you, it’s up to the rental market in your area. Even if you wanted to cover your mortgage, the rental market may not allow for it. This is heavily dependent on how your house loan is structured and how much actual equity you have in the house.

3) There is no fair amount for a property manager, and this will vary by region. However, in the end you get what you pay for. If you want a property manager to take care of all the problems so you never hear about them (ie. good) then it’ll cost you probably 8-12%. However, this is also region dependent as well. But you can see that 8-12% of your rent each month going to a manager cuts into your bottom line to “cover your mortgage”.

4) What constitutes an “acceptable” loss will vary by individual. However, I would guess if you were able to sell the house for the same price you bought it for, and only be paying for the closing costs (as a buyer and seller), in this small 1 year time period, then you did pretty well for what could have been a very expensive mistake.

5) Long term strategy depends on you. If you fancy yourself a property manager then by all means make it into an income property and sell it when the market is hot. However, I can not think of many reasons to keep a mortgage on an empty house unless you think you can sell it for a big profit someday to offset the cost of paying a second mortgage all those years. In that sense, you are keeping this house as a “second home” or vacation home” and those things my friend are for rich people who require the convenience of having a home while on vacation because they don’t like to stay on their yacht.

I’ll try to make this into an actual post later with more details. However, these questions are quite complex and the idea of having an income property is also very complex. If you can’t tell, I’m not a huge fan of income properties this early in your career. However, some of my colleagues would disagree with me. It really depends on your own individual risk tolerance, as well as if you are single or have a family and kids to support. In general, the more dependents you have correlates negatively with your risk tolerance.

-Sensei”

My reply ended up being significantly longer than I planned when I initially hit the “reply” button mostly because this is a very difficult subject and there are so many variables involved.

First things first.I want to reiterate the first part of my reply. Before you decide to leave a job, you must really sit down and write down the pros and cons of the job and decide if they are really as bad as you think. The grass is always greener on the other side. Once you have 100% decided that you can no longer be happy at your current job then you should set to work reaching out to your network to land a job prior to leaving your current job. There is some finesse required here. Future job prospects will want references from both your current and prior jobs. (This includes residency and fellowship if your career isn’t that long). Landing your next job prior to leaving your current job is very important. Having a lapse in income at this stage of the game can hurt you significantly, especially with the looming probable loss from selling a house so soon after buying it. Most jobs will have a 3-6 month lead time in order to do “credentialing”. Remember “the file” I talked about before? I hope you kept it up to date. 

This 3-6 month lead time also is important because your current job may have anywhere from a 30 to 180 day or in some cases even a 1 year “termination clause”. In medicine the whole “two weeks notice” thing does not apply because we are so subspecialized that we can not be replaced in “two weeks”. The only exception to this rule are academic positions because those are usually 1 or 2 page contracts which essentially have no termination clauses, so you can be terminated or you can leave at any time. In essence, academic contracts are “daily contracts”. You could just get called in the middle of the night and just be told not to come in tomorrow… this is unlikely to happen, but the contracts for academic positions, in my limited experience, are written this way because “everyone gets the same contract” whether you are an assistant professor in Neuroradiology or if you are an assistant professor in BioStatistics. Every assistant professor is the same and being a doctor does not change the contract.

Physician contracts are pretty complex, and you really should have legal help when negotiating yours. I will talk about looking for your first job (and second one) and physician contracts in a future post.

Ok, now that you have decided 100% that you are leaving your job and you either have a few leads or have already signed for another job, you should have about a 3-6 month lead time before you. Now you need to sit down and look at problem at hand. This 3000 sq ft weight that is anchoring you to you first job. Take a deep breath… you will almost certainly be losing money.

If you’re lucky, you’ll be able to sell for about the same amount you paid for it and just be out the closing costs. If you remember, closing costs are between 2-5% of the total cost of the house. However, that is for the buyer. For the seller, you are looking at 1.7% of sale price + the brokers commission of 5-7% of the sale price (this is location dependent). So if we ballpark it, you’re looking at between 7-9% in the sale price for closing costs on the front end and back end combined.

So then… when people say they “broke even” selling their house… did they really?

Let’s say your house is 500k. You were lucky and only paid the low end of closing costs buying the house, which is 2%… so $10k. Now, you sell the house a year later for $500k and you pay those closing costs again, and the low end again, so another 7%, or $35k. So, the total for your closing costs on the low end is $45k… and $60k for high end. Let’s just call it 50k because it’s a round number in between the two extremes.

Now you know I don’t like saying “50k” or “10k”… it’s FIFTY THOUSAND DOLLARS, to live in a house… for a year. Ok, just to be fair, let’s subtract what you might have paid in rent. However, rents vary widely across locations. So this is very specific to you. Just for the sake of illustration let’s use $1500. $1500 x 12 months is $18k. So the difference is that you are left with is THIRTY TWO THOUSAND DOLLARS. That’s a good amount of money to “lose” in one years time.

Just to continue beating this dead horse a bit more… let’s say you stayed two years but everything else is the same. $50k – $36k (two years rent) is $14k… painful but not horrible. Now moving on to three years, everything still the same, $50k – $54k… so negative $4k. After three years it’s not quite as bad, which is why a lot of people use 3-5 years as a rule of thumb as the minimum for staying in a house. However, we aren’t taking into account the interest you paid on the mortgage, property tax, or even the small tax break you get. This is simply just for closing costs versus what you would have paid in rent.

The rest of my reply deals with renting. I do not have the adequate experience to advise on renting all that much, as I do not have my own rental property. However, I do know that Your Mileage May Vary (YMMV). Depending on where your house is located, the rental market may be hot or it be cold. You would need to do your own research into what you could actually rent for and for how long. Do people in your area stay for a few months and move again, or do they stay for a year or two? People like to use the phrase “The rents pays half (or all) my mortgage.” The Income Property guy always uses this phrase at the end of the show and it’s always a significant amount of money and everyone is happy. However, they don’t talk about how they arrived at how much their mortgage costs and your mortgage costs are heavily dependent on your loan structure, length of loan and how much money you put down initially.

For example, if you buy a house for 500k, put down 200k , so your loan is 300k over 30 years… your monthly mortgage is about $2000 a month. So if you can rent for more than that, then yes “The rent pays my mortgage”…. if you can rent it 100% of the time. Every month your rental is empty, you are paying that $2000 a month. Now, if you have the same $500k house and you put down 100k, so your loan is 400k over 30 years, then your payment is $2500 a month. Renting for $2500 a month might be considerably more difficult in your area, which would make 100% rental time more difficult.

Now then, if you are using this property for investment, that is different. The thought process is that you want to keep and hold the house and are willing to pay a certain amount a month over whatever your rental will cover in order to keep it. That is a difficult question to answer, and like I said, is dependent on your risk tolerance. In general, I think the idea of buying a home for investment is only something you can consider doing after you have established your primary residence… for most people.

The idea of hiring a property manager makes the profit margins even less. If your mortgage is $2000 a month and you rent it for $2000 a month, but your property manager takes $200 a month for managing things, then it becomes more difficult for “the rent to pay my mortgage”. However, as I stated above, this might be acceptable for you if you are buying the house as an investment.

You will need to define your own risk tolerance. I have friends who do very well spreading their money over multiple properties, but…

As I stated before: “In general, the more dependents you have correlates negatively with your risk tolerance.”

I may come back to the idea of an income property in a later post, or if we’re lucky a friend of mine will offer his experience(s).

TL;DR

Make sure you really want leave your job.

Make sure you have some lead time to sell your house and buy a new one.

Finding your first job (and second one), and negotiating a physician contract are complex, I will dedicate a whole post to each subject later.

Closing costs are taken buying the house AND selling the house.

If you are lucky and sell your house for what you bought it for, then just paying the closing costs isn’t horrible, and you are better off the longer you were in the house.

Renting a property is not as easy as you might think, and is heavily dependent on your location.

Property managers make your profit margins even smaller… but you may be ok with that.

***this post was republished later because my publicize didn’t cross post to Twitter, Facebook, and LinkedIn

-Sensei

Agree? Disagree? Questions, Comments and Suggestions are welcome.

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