It’s that time of year again. Med students are getting ready to graduate and young physicians are about to start their first doctor jobs or move up in the current ones. Some folks will have to move across the country and others may only be moving a few hours away. Regardless of which camp you are in, one question inevitably ensues: What should you do about housing?”
As most of us know, inflation has skyrocketed this year. Rent prices are higher than they’ve ever been. Homes are selling for more than they are worth. It’s a catch 22. Either you struggle to buy a home in this crazy market, or you resort to paying ever-increasing rent amounts on an apartment. Here are some things to consider before you make your decision:
1. How much can you afford to spend on housing?
This is the first question you should honestly ask yourself. As someone who has contemplated the rent vs buy question almost yearly, I’ve come to learn there is a difference between what you’d like to spend on housing and what you can comfortably afford. Don’t confuse the two. The general rule of thumb is to spend no more than 1/3 of your gross income on housing. This may be a bit more challenging in these current times of rapid inflation and rising housing costs. It may also be challenging for those of us living or planning to move to high-cost-of-living areas. Keep in mind that if you end up spending more than a third of your income on housing then you may have to cut back in other areas. It may even prevent you from meeting some of your savings goals, being able to take the vacations you desire, or buy the type of food you’d like. Take some time to write down all of your sources of income and use that number to determine what you can reasonably afford to spend on housing each month.
2. What is the average rent price in your area?
Once you figure out what you can afford to spend on housing each year, try to determine what you’d reasonably spend on different types of housing—the first being rent. Go to apartments.com or Zillow and get an idea for how much rent is in your area or the city you will be moving to. Does a one-bedroom cost $1,000/month, $2,000/month, or $3,000+? Look at newer places and at older styles. Consider different areas of the city. Although prices are subject to change, doing this type of research will help you determine what you can expect to spend for an apartment monthly. (It may also help you decide if you should consider getting a roommate or not).
3. What would it cost to buy a home in your area?
Once you get an idea for rent prices in the area, take a look at home prices as well. Many folks see the rising rent prices and automatically assume it is better to buy a home. That assumption is not true. Rent may be high, but home prices and estimated mortgage payments may be even higher. Even if the mortgage is affordable, there are other home buying costs to consider. You may need a down payment which can often be at least 3 to 5% of the total home cost. You also have to account for the transaction costs of buying a home (attorney fees, inspections, appraisals, etc), yearly property taxes (which can be up to 1% of the home value), homeowners insurance, homeowner’s association fees, and maintenance costs. These costs can add hundreds if not thousands of dollars to your monthly housing costs each month. Be sure you have a good idea for what your total housing costs would be if you were to purchase a home.
4. What are your future plans?
Another decision that could alter your decision to rent or buy is your future plans. Although no one has a crystal ball (or at least not a working one), take a few moments to contemplate what your life may look like in the next few years. Do you plan to stay in your current city or is there a good chance you could move? Renting gives you more flexibility and the transaction fees of buying a home may be hard to recoup if you live in it for less than 5 years. Do you foresee a change in your family size? Oftentimes, the type of house you may like or the area you may choose to live in as a single person is vastly different from what you would choose if you were married with had children. Lastly, is there a good chance you could have a change in your income? Are you fairly confident that you’ll get an income boost which will make things more affordable? Or, maybe you or your spouse will cut back on work to focus more on family which will result in an income drop or increased expenses? Although it is hard to predict what will happen, taking a few moments to contemplate your future plans could drastically change your decision to rent or buy in this market.
To summarize, the decision to rent or buy may not be as easy as you think. As stated above there are several things you should consider before making your decision. Being honest with yourself about what you can reasonably afford is key. Choose wisely.
Should you turn your starter home into an investment property?
Contrary to popular belief, not all homes make good investments. An ideal real estate property will provide you with extra cash in your pocket each month or allow you to increase your net worth in a tax-efficient manner. Some homes have both of these benefits, but many homes have neither. You can evaluate where your starter home falls on this spectrum by asking yourself these 6 questions:
1.Do the numbers make sense? Before you list your home as a rental property you must “run the numbers.” The first calculation you should make is the “cash-on-cash return.” The cash-on-cash return helps you determine how much money you’ll make on the investment based on how much money you spent to buy the investment. In other words, it will help you see whether investing money into this starter-home-turned-investment-property is more lucrative or less lucrative than putting your money into something else like index mutual funds. The second thing you need to calculate is your monthly cash flow. Computing the monthly cash flow will help you see how much money this rental property will put in your pocket each month after you pay the mortgage and account for repairs and other taxes and fees. Some properties have a high cash-on-cash return and positive cash flow. Others do not. Run the numbers for yourself to see if your home provides an ideal cash on cash return (at least 10%) or enough monthly cash flow to make it worth your while.
2.Are you planning to make expensive aesthetic changes or upgrades? If you purchase a home and pay the mortgage each month, you will build “equity” or value in that home. However, the more money you spend on upgrades and costly aesthetics, the less equity you may keep. Don’t get me wrong, there are certain upgrades that may add value to a house, but oftentimes when we purchase things that are more aesthetically appealing, we do so for our own self-gratification. As a result, many of the upgrades people make to their homes (modern cabinets, renovations to a basement, the addition of a pool, etc.) cost more money than they add in value to the home. Increasing expenses (through costly upgrades) without an identical increase in home value, decreases the overall profit you could gain from using the home as an investment property.
3.What is the housing market like in your area? Before you purchase a starter home with the intention of using it as an investment property, look at local housing market trends. Have houses been going up in value or down in value? Is it sellers’ market, in which houses are being sold for more than they are worth? Or, is it a buyers’ market in which the supply of homes exceeds demand, so houses are being sold for less than they are worth? Purchasing a home in a sellers’ market makes the home more likely to be a cash-flow negative investment property. Purchasing a home in a buyers’ market makes the home more likely to be a cash-flow positive investment property.
4.Will you be able to secure (and afford) two mortgages? In an ideal world, you’d rent out your starter home to a reliable tenant and use that rent money to pay down the mortgage. You may even ask the bank for a second mortgage to purchase a larger home for yourself in the meantime. Unfortunately, life doesn’t always go as planned. Asking the bank to loan you money for a second home when you haven’t paid off the first home and may also have a significant amount of student loan debt may be more challenging than you realize. Plus, it may take a few months to find a reliable tenant and there’s a good chance this starter home will have an occasional vacancy between renters. Do you have enough money to cover costs during these transition periods? Can you afford to pay the mortgage on the starter home while you find a tenant AND pay the mortgage on the other home you live in? If the answer is no, then planning to maintain two houses may not be financially feasible.
5.Can you or someone you trust effectively manage the property? Managing a rental property as someone’s landlord is no small feat. You have to be diligent about collecting the full rent on the due date. You also have to be available to receive and coordinate maintenance requests at inopportune times. Do you think you have the time, experience, or energy to do this yourself? If not, you may want to consider hiring a company to do it for you. Keep in mind that paying for a management company may significantly decrease your monthly cash flow.
6.Have you already maxed out less-cumbersome investments? If you’ve never owned a rental property, let me be the first to let you know, it’s a lot of work. Securing responsible tenants who will make on-time payments requires more background work than you may realize. Spending hours negotiating the buying price and loan terms with real estate agents and loan officers can last a lot than you may have anticipated. Unless your return from this investment is significantly better than what you could get elsewhere, it may make more sense to max out other investments (like your employer retirement accounts and Roth accounts) first.
The decision to turn your starter home into a rental property should not be taken lightly. For some people, renting out their home may be a lucrative investment strategy. For other people, renting out their home may require more time and money than they can provide. Thoroughly evaluate whether turning your starter home into an investment property is the right decision for you.
Your living situation can affect your net worth, here are things to keep in mind:
As we continue to grow and mature, our living situations may change. Some of us may go from living in college dorms to moving into our first apartment. Others of us may go from sharing apartment space with a roommate to buying a house with our spouse. As we progress through life and make these changes, we must remember that our living arrangements can impact our finances and overall net worth. Here are some things to keep in mind:
1. Be weary of buying a home that’s too big. As someone who relaxes by watching HGTV, I love looking at nice houses. Many of my physician colleagues live in mansions and I marvel every time I walk into their homes. Although it’s perfectly fine to want to purchase a home, think twice before getting one that is too big. Despite how much the bank may lend you, there are lots of other costs associated with buying and up keeping a home that can add up to quite a lot. For example, a larger home usually comes with a higher mortgage payment, higher yearly property taxes, and high insurance costs. These expenses can prevent you from being able to save or invest money at an optimal rate. Plus, a larger home and more space, means that you need to furnish more rooms and purchase more items fill up that space. With more expenses come less savings and less saving/investing can severely impact your ability to increase your net worth.
2. Be weary of an apartment/home that’s too expensive. Similar to not purchasing a home that’s too large, also be careful not to rent an apartment that’s too expensive. In most cities, there are apartment homes that are fairly cheap, reasonably priced, and extremely expensive. Be careful of the later. It can be tempting to rent a place in the middle of the city with the high-rise apartment, scenic views, a rooftop pool and modern amenities but be mindful of cost. I know many people who rent apartments like these which costs them almost 3 times as much as other apartments in the same city and are over twice as much as the average mortgage price in their area.
While it’s okay to “pay for convenience” be mindful that doing so may preclude you from being able to spend money on other things or save the down payment needed to purchase a home, pay off your student loans at a reasonable rate, invest money for retirement, or take the types of vacations you’d enjoy. The general rule of thumb is to not spend more than 30% of your gross (pre-tax) income on housing. While that may be quite challenging for those who live in high-cost-of-living areas like Seattle or New York, it provides a general framework we can use to determine which apartments we should think twice about renting. Although most people sign leases for 1 year, committing to such a huge fixed cost can be a financial catastrophe if our income changes, the coronavirus pandemic has made this even more true.
3. Be weary of a work commute that is too long. Along with the size and cost of our housing, we also need to be mindful of the distance our home is from the places we go to most. Having an affordable place an hour away from our job might save us money in rent but cost us a lot more in gas and car maintenance. It may also take away valuable time we could spend with our families or decrease the time we could spend working on other side projects that could help us bring in even more money. Jonathan Clements’ in his book How To Think About Money, mentions that long work commutes can be one of the main things that actually decrease our overall happiness in life. This suggests that finding housing that is too far away from our jobs can even affect our mental health and well-being.
4. Consider a roommate. Those who are single might want to consider having a roommate. Although this can get a little challenging as we age and begin to want our own space, it is something I urge everyone to think about, especially if they are still young and unmarried. Having a roommate will allow you to split the rent and will cut all of your other housing costs in half. Although having to share an apartment with someone else can be inconvenient at times ask yourself if you this inconvenience is worth saving an extra $500 to $1,000 per month. For me, it is. I’m a resident physician who lives with a roommate.
I share an apartment with one of my co-workers. We each have our own bedrooms and bathrooms but share a common living room and kitchen. Since we both work 60 to 80 hours a week, we are rarely in the apartment at the same time which makes things a lot easier. Plus, sharing this space allows us to split all the bills and saves us each over $1,000 per month. With this extra money I’m saving, I’ve been able to invest a lot more towards retirement, put away cash in an emergency fund, and save money to go on international vacations. Having a roommate is one of the best financial decisions I’ve made as a resident.
5. Consider house-hacking or renting a room. For those who have a spouse or may purchase a home soon, consider house hacking. House hacking is when you rent out part of your house to another person. Typically, this is done when people buy a duplex or a multifamily property with multiple units or apartments. They may live in one of the apartment units on one side of the duplex and rent out the other side. This is more ideal for singles or young couples who prefer their own living space but still want to save some money on the rent or have some additional income coming in on the side. Other people may decide to buy a place that has an extra bedroom and rent out that room during certain times of the year for a few weeks at a time. While this may not be ideal for everyone, it may be a good option for those trying to find ways to decrease their housing costs.
6. Consider a rental property. For those who live in single-family homes with their spouses or who have their own place and love their person space, another option is to consider a rental property. Perhaps there is an affordable home in your city you could purchase, fix up, and rent out to others. Maybe you already have a home but are thinking of purchasing a newer one to have more space for your growing family. Instead of selling it, consider renting it out to someone else. Renting out a home can be a great way to build wealth since it allows you to use the renter’s monthly payment to pay off the mortgage and save a portion of the leftover money for yourself. There are lots of other responsibilities associated with becoming a landlord, but this process may be something to consider.
My point? Our living situations can affect our finances in a number of ways. We should be careful of buying a home that is too large, renting a place that is too expensive, or finding housing that is too far of a commute to our jobs. We should also consider living with a roommate, house hacking a duplex, renting out a room, or purchasing a rental property. Tell me, what living arrangement do you have currently have and how do you think it’s impacting your finances?
3 Main Ways the Rich get Richer (and you can too)
Want to Invest in Real Estate? Consider REITs
As we continue to mature and focus on our careers, we may start to prioritize building wealth. Many people use retirement accounts and the purchase of stocks and bonds to grow their money over time but there are other ways to build wealth. Another type of investment to look into is real estate. Although there are many different types of real estate investments, one option to consider is real estate investment trusts also known as REITs.
What are REITs? Real Estate Investment Trusts (also known as REITS) are large funds that are full of real estate investments. These investments can be single-family homes, multifamily homes, apartments, or commercial buildings. Just like you can purchase an individual stock from one company, you can also purchase an individual REIT, which is a small share of a company that owns various forms of real estate. I prefer to invest in stocks via index funds and I also prefer to invest in REITs through index funds. A REIT index fund is a large fund full of smaller REITs that are each invested in many different types of real estate. When you invest in REIT index funds you are a partial owner of several different types of real estate investments, just like when you invest in other index funds you are a partial owner of several different types of stocks or bonds.
Why are REITs a good option? REITs are another type of investment option that can help you make a profit on your money, especially the money you have in retirement accounts. Many people use their employer-sponsored 401Ks or IRAs to invest in various types of stocks and bonds. REITs give you a chance to add index funds that are full of real estate deals. Adding real estate to your investment portfolio can make your portfolio more diverse (since you’re adding another investment class), increase your profits (since they have the potential to make you even more money each year), and add increased protection for your investments (since it can shield your money from some of the day-to-day changes and volatility of the stock market). For example, there may be times when certain stocks and industries lose some of their value, but real estate prices don’t change as often. Regardless of the economy, everyone needs a place to live.
How do REITs compare to other types of real estate? REIT index funds are very large real estate funds full of smaller real estate deals and each of those smaller deals are invested in many different types of real estate. By investing in REIT index funds, you own a small part of hundreds if not thousands of real estate deals. Unlike investing in real estate directly by purchasing homes or buildings alongside other investors or with your own money, when you invest in REITs you are much more removed from the daily operations of the properties. You are not making decisions on which properties to purchase, how to manage/renovate them, or when to sell them. Because you have less responsibility, you make less profit than more direct investors. However, you also have less risk. If one property fails to sell in a timely manner you are not out of hundreds of thousands of dollars. REITs give you a chance to get started in real estate and diversify your portfolio in a safe, less-aggressive, more “hands-off” way.
How do they compare to other types of index funds: REITs are similar to other types of index funds that are full of stocks and bonds. Because they are so similar to these other investments, you can usually add REIT index funds to your retirement accounts or purchase them the same way you purchase other index funds. In terms of investment returns, the percentage return on your profit can vary from year to year, but over a longer span of time, REITs tend to do pretty well. Over the past 5 years, investors who had REITs made over 15% profit on their money, those who invested solely in index funds with stocks made an average of 10% profit of their money. Past performance doesn’t guarantee future returns, but REITs can certainly be a good type of investment to have in your portfolio.
FYI: If you’d like to learn more about REIT index funds check out Vanguard, Fidelity, or other investment institutions. If you’d like to read about individual REIT stocks to consider, check out this article.
5 Steps To Take As You Get Started in Real Estate
1. Determine your niche or area of interest. When it comes to real estate investing there are many different types. Some people choose to buy old homes, renovate them, then resell them at a higher price. Others choose to purchase single family homes and rent them out to tenants for years. While a few others may choose to pool their money together and invest in an apartment building over a certain length of time. Whether it’s one of these 3 methods or another one, the first step to take before you actually invest in real estate is to determine which area of real estate investing would be best for you.
2. Educate yourself on the struggles and achievements of people in that industry. Once you pick a type of real estate investment to focus on, your next step is to educate yourself on the pros and cons of people in that industry. Learn about common mistakes to avoid and hurdles you may have to overcome. If you’re going to invest money into a deal you want to know as much as you can about it and be prepared for the good and bad that may occur. It’s hard to adequately fix an issue you didn’t expect or prepare for, so be proactive. Listen to podcasts, read books, skim blogs, and network with people who have experience in that area so that you can learn from their experiences and increase your chance of success when you start making your own investments.
3. Determine your goals and criteria. Despite our best intentions, not every deal within your target real estate niche will be good investment for you. In order to determine which deals you should invest in and which ones you should pass up, you need some objective investment criteria. For example, some people who focus on single family homes decide to only purchase houses in cities that are close to where they currently live so that managing tenants is a bit easier. Other people who focus on multifamily properties choose to only focus on apartments that are in a certain condition or have a minimum amount of units. Yet and still, other people may be open to different kinds of deals but choose to only invest with certain established investors. Whichever investment criteria you choose make sure you have good evaluation standards as well. Ie. You will only invest if the cap rate is “X” percent or if you have “Y” amount of dollars in cash flow or have an internal rate of return of “Z” or more on your money. Do some research and determine you investment and evaluation criteria.
4. Write down how you’ll gather money for this investment. Just like it’s important to pick your niche and evaluate the investment correctly, it’s also imperative that you know where you’re going to get the money. Do you have enough saved on your own or will you need to pay the seller in money installments via seller financing? Do you plan to get a mortgage from the bank and pay back the loan over many years or do you plan to use private funds that require repayment much sooner? Do you have friends and family who can help you out or do you have some loan you plan to take out from something else you’ve purchased? There are plenty of options, but you need to at least think about which ones may make sense for you depending on the type of investment you want to make and the appropriate amount of risk you plan to take.
5. Start identifying potential deals and practice analyzing them. Lastly, you need to practice evaluating deals. No one wants to invest a ton of money then lose it all in a bad deal. Practice picking out good deals and evaluating smart investments with people who are more experienced. Ask questions about what made a deal good or bad so you can learn how to more efficiently evaluate deals on your own and reduce that chance that you’ll lose money in an investment. This practice will also make you a little less nervous when you finally do invest money for the first time.
What do you think? Are you going to take these steps as you get started in real estate?
4 Things To Do Before You Start Investing In Real Estate
1. Read books to learn the basics. Real estate is a HUGE industry. Not only does it encompass a variety of different niches, but it also includes a myriad of jobs, investment roles, and moving parts. Although the industry itself can be lucrative for many people, it can also be a source of disdain and loss for others. In order to ensure that real estate is the right industry for you (and increase your chances of actually making money instead of losing it), it’s essential that you educate yourself. Learn about the different forms of real estate investing. Study the pros and cons of each type and determine which one would be best for you. If you’d like a more comprehensive guide, you can always check out podcasts and webinars on Bigger Pockets or read books like the ABCs of Real Estate Investing.
2. Start networking to meet people in the industry. Once you’ve become educated on the different types of real estate investments, you should start meeting people. Although you may be very skilled and successful in your own right, real estate is a team sport. As you start to network with others, you’ll learn from their mistakes and achievements which will help you gain more experience. As you continue to interact with people in various settings you’ll gain access lucrative deals and other investments as well. When I started going to real estate meetup groups, I learned about other areas of real estate that I never even considered and got invited to invest into deals I wouldn’t have otherwise known about. Plus, I started to meet people with different skillsets and now have a list of people I can call on for a variety of homes to purchase or sell. I can also find contractors, maintenance men, or interior decorators quicker. In other words, real estate investing is much easier because I’ve met so many different people and groups that have helped increase my chance of success.
3. Listen to podcasts to stay up to date. One of the things that has really helped me over the last few years is podcasts. Although I prefer to learn new information from books and blogs, podcasts are essential for me as well. They reinforce information I may have learned and forgotten from awhile back. They also provide new perspectives on topics and deals that I may not have considered myself. Plus, they help me stay up to date on current information and interview other successful investors which helps me learn from the experiences of others. For example, it was through a podcast that I gained some insight on different ways to invest in real estate without actually getting a mortgage from the bank. It was through podcasts that I learned how other people started investing in single family homes and were then able to scale up to apartment buildings. It was also via podcasts that I learned which type of investments would take more or less of my time and which ones provided more profit in tax-free ways.
4. Join communities to meet other like-minded people. Along with networking with others, reading books, and listening to podcasts, you must do one more thing: surround yourself with like-minded people. It can be very easy to make a goal, but oftentimes it can be difficult to consistently do the work needed to bring those goals into fruition. One of the things that have helped me is joining communities of like-minded people. Whether that’s going to real estate meet up groups or becoming active in online forums, surrounding myself with people who have similar goals and interacting with them consistently has helped create accountability in my life to keep me focused and committed. These communities have also served as a place of inspiration and encouragement to keep me on track. In fact, I’ve had several people that have been gracious enough to hear various ideas of mine and offer their feedback and guidance on what I could do to bring it into fruition, they’ve even connected me to other experts in the field.
My point? If you’re thinking about investing in real estate, it’s essential that you read books to learn the basics, start networking with people in the industry, listen to podcasts to stay up to date and join communities of like-minded people.
What it was like attending my first real estate meetup group
I’ll be honest. When I showed up to my first real estate meetup group in Atlanta, GA I was extremely nervous. I was still fairly new the world of real estate and didn’t quite know what to expect. The idea of going to meetups was first suggested to me by some real estate blogs and other investors I was following online. Many people mentioned them as a great way to make connections with like-minded people who could help me reach my goals faster. I didn’t have much to lose by checking out the group, especially since it was free, but as I pulled into the parking lot, I was definitely nervous. Normally I’m pretty fearless and assertive but moments before I walked into the meeting there was a small voice of doubt I had to suppress and a glimmer of courage I had to cling to in order to actually walk into the meeting. Here are 5 things I was thinking during the meeting:
1. “There aren’t a lot of people who look like me.” When I entered the room, one thing became immediately apparent – there weren’t many people who looked like me. As I scanned the room, I quickly noticed that it was dominated by white men. As an African-American female I stood out like the lone chocolate chip in sea of vanilla. The demographics weren’t exactly shocking to me, but I’d be lying if I said I didn’t feel out of place initially. About 5 minutes later a couple women walked in the meeting. Soon thereafter, the room became a bit more diverse and I became a lot more comfortable.
2. “Wow. There is a lot I don’t know.” The meeting started with an introduction and quickly transitioned into a deep-dive on how to flip houses in a cost-effective manner. I found the material interesting, but several of the details were a little above my head. Although I knew some of the basics, many of the terms have subtle differences which can be a bit tough to keep straight for anyone who isn’t as familiar with the vocabulary. Understanding the difference between an Internal Rate of Rate and the Cash-on-Cash return, definitely caused me a bit of confusion. At first, I was alarmed, but as I continued to sit there and listen to the speaker, things started making a little more sense. I didn’t grasp everything, but I understood a good portion of it and certainly gained more knowledge than I had before I walked into the meeting.
3. “The people here are really smart.” For the second part of the meeting we split into smaller groups of about 10 people. We then introduced ourselves and spoke about our previous real estate experience and our current real estate goals. It was during this session that I was literally blown away. As people introduced themselves, it became obvious that the majority of these people had years and even decades of real estate investing experience. Some of them mentioned previous deals and spoke about things they did to save money on costs and increase profits. I was amazed.
4. “I’m making a lot of connections.” When it came time for me to introduce myself, I decided to take a leap of faith and be honest. Despite the myriad of investing experience that surrounded me in this group, I opened my mouth and admitted that I hadn’t actually started investing in real estate yet. I mentioned that I was, at that time, still a medical student who had a desire to use multifamily real estate investing to achieve my goal of financial independence. Much to my surprise, they didn’t judge me or give me condescending looks of disapproval. Instead, they all applauded my honesty and were extremely encouraging. Several of the investors told me stories about how they found their first deals, different ideas for how to find capital (aka using other people’s money to fund your deals) and a few even offered to walk me though the process. Going to this meeting helped me make several different connections that proved to be extremely valuable.
5. “I’m really glad I went.” Despite the initial nerves, feelings of being out of place, and the realization that I was amongst people who were way more knowledgeable than I was, I am so glad I went to that meeting. Not only did I learn a lot, but I also connected with several people that I never would have met otherwise. Overcoming my fears of going to that meeting, gave me the courage to go to even more meetings. Before I knew it, I became a regular attendee and gained access to exclusive deals and financing opportunities only reserved for people with certain connections. As the old saying goes, “To achieve something you’ve never obtained, you must do something you’ve never done.” Going to my first real estate meetup was a testament to this. Although my life as a resident physician working up to 80 hours a week can make attending these meetup groups a little challenging, I still go when I can and have never regretted it.