Congratulations! Matching into residency is an accomplishment and the true beginning of life as a physician. For many, the question of where to live during residency will not include purchasing a home because of the outsized prices of homes in the vicinity. Think San Francisco, New York, and Los Angeles. But for others in smaller towns, purchasing is a real option.

That begs the question: should you buy or rent your home during residency?

My answer to that question is, yes, you should buy your home during training if you can. Wealth building can start during residency, particularly for residents who live in cities with affordable real estate markets.

The Residency Payoff Approach: Freedom Through Real Estate

What if you could use your living expenses during residency to create passive income? This doesn’t sound like reality. Most people don’t accumulate substantial savings in residency.

But everyone has to live somewhere during residency. Unless you own your personal residence, the cost of shelter during residency is just another expense.

The residency pay off plan goes like this:

1. Match into the best residency program you can. Determine the real estate situation in the city. If the city or a very close suburb has a real estate market in which you can buy a modest home for $250,000 or less, proceed to step two.
2. Get to know the city where you’ll be training in the first few months of intern year; if you can, sign a six-month lease.
3. Work. Learn. Save. Try to put aside at least $10,000.
4. Buy a modest home as early as you can in medical training. If possible, buy a home that can house roommates, such as a two or three bedroom home.
5. Purchase the home with a physician mortgage.
6. Live in your home during residency, ideally with roommates.
7. Pay extra toward your mortgage. Beat the mortgage amortization table and build real equity.
8. When you graduate, you can (1) continue to rent your home to other resident physicians, allowing you to continue to quickly pay off your mortgage; or (2) sell the home and realize your profits

The Residency Payoff Plan In Detail

Unlike many other jobs, you can’t necessarily pick the city in which you will do your residency. (You can choose it if you rank only one place, but very few people do this.) Instead, I strongly recommend making your rank list such that you train in the very best place you can.

In medicine, we have a very short apprenticeship during which we hone our craft. Don’t shortchange your education at the crucial moment.

What if that means you match in a high cost of living city where the average two bedroom condo is in the million dollar range?

So be it. You’ll make up for it elsewhere in your financial plan.

If, however, you match into one of the numerous training programs in less expensive cities across the US, then think early and hard about executing the residency payoff plan.

Physician loans allow resident physicians to purchase real estate with low or no money down

How do you buy a home if you haven’t got any money?

The same way as the rest of us. With a mortgage.

Physicians have the unique advantage of a mortgage product called a physician loan which allows us to purchase homes with lower down-payments. Some programs allow no down-payments. Many of the programs are open to resident physicians.

What will you need to get the mortgage? Typically you’ll need to have your contract for residency, recent bank statements, and tax returns. The lender will likely require you to have a few months of cash reserves set aside somewhere. This means about two or three months of mortgage payments. That’s why it’s important to ensure you’ve saved at least $10,000 before starting the purchase process.

Don’t skip this step. You won’t be able to close on a home loan with no money in the bank, even if you can close with no money down. Physician home loans depend on the reliability of physicians and their income. But most lenders won’t close without seeing evidence of cash reserves.

And you won’t be financially secure unless you have some savings working for you.

Wait to buy until you understand the neighborhoods and the city

Buying a home is a large transaction which is expensive to accomplish and expensive to undo. Don’t make a mistake in choosing your neighborhood.

Wait until you know the town well, at least 3-4 months into living in the city, before making your offer and buying. The last thing you need is to close on a home and regret it in a few weeks when you realize there were better options only a few blocks away.

Buy a modest home that can house roommates

This will not be your dream house. This will be an investment property AND primary residence during training. Think of it as a dormitory. Choose a safe neighborhood with a home you can comfortably afford. If you can already comfortably afford the home AND purchase a property large enough to accommodate roommates, even better.

Successfully closing on a home mortgage requires some organization but is a straightforward process.

Pay Extra Towards The Mortgage To Supercharge Debt Payoff

It used to be that mortgages were borrowed at 3% or 4%, rates comparable to many refinanced student loans. Now that rates are closer to 6% for a 30 year fixed loan, the idea of debt payoff is becoming more attractive to more people.

But I think all of that is false. Home mortgages are a loan product that’s structured to extract high total interest from the borrower in the first few years of having the loan. Mortgage payoff helps reduce the total interest paid, which can be substantial even at rates of 3 or 4%.

I’ve shown what the amortization table, or debt payoff calendar, looks like for a home loan of $180,000 borrowed at 6% interest. If no extra payments are made, more than $200,000 of interest is paid over 30 years.

For a medical resident who’s planning to live in the home for 3-6 years, a standard amortization table over that period only permits $15,000 of principal payoff after 5.25 years.

But by adding an extra payment of $500/month consistently through the same period of time, magic starts to happen. We effectively convert the mortgage into a 14 year loan that costs half as much in interest: $87,000 now versus $200,000.

What’s more, the home has some equity and can be now used as (1) The beginning of an investment property portfolio; or (2) Store of savings, now that you’re ready to sell.

What to do with the home after graduation

You could sell the property and put cash in your pocket (or toward other debts like student loans). The downside to any property sale is the significant transaction costs which can reduce the total cash outcome for the seller.

Instead of selling the home, consider keeping it as an investment property. Keeping the home until it’s paid off has several advantages. First, you know the home and neighborhood extremely well and whether it’s a good choice for management locally or far away. Second, you’ve already done some of the heavy lifting in the early years of loan payoff. At the current pace, the home will be clear of debt in less than ten years. And there’s no reason not to pay it off faster.

The Bottom Line

Paid off rental properties are one avenue to achieving real financial independence. All physicians should seek to be financially independent because it’s very achievable for us. Being financially free creates options.

The residency payoff method seeks to neutralize housing expense during residency and set the foundation for a life of financial independence.

Thanks for reading!