Jump to content
Premed 101 Forums

Recommended Posts

Let's assume we entering medical school without debt, saving, income, etc. All we got is $250K LoC and student loan.

 

We have to pay tuition and living costs (mainly rent) at least $15K/year (Quebec, Newfoundland, Manitoba, Sask, etc),

other provinces or cities are higher, maybe around $20~40K/year.

 

We can use $250K LoC to buy a condo or house without mortgage (maybe with some help from family) and rent out a room or two, we become a landlord and collect rent(s) monthly. If the rent income + student loan > tuition + living costs without rent + LoC interest (prime rate, around 2.7% now) + home owner costs (property tax, insurance, etc) , then it's doable.

 

But I will not do it, not only the risk 4 years later we may need to move to other city, but also the troubles as a landlord.

And be careful, once you own a condo/house, maybe your student loan amount will be lower.

 

But for married MD students, using LoC to buy a home for your family is a doable idea.

Link to post
Share on other sites

I'm pretty sure that the majority of banks in Canada aren't going to give a mortgage to someone if their only way to pay it off is with an LOC (using debt to pay debt?). Although as a "future doctor" it wouldn't surprise me if someone found a way to do it. But if you're fortunate enough to have a down payment, or access to funds through family, then buying vs. renting is probably a better long term financial decision.

 

I'm looking to buy property in the Hamilton area, but I've been working for about 7 years and owned a home for 4, so I'm fortunate enough to have some equity to re-invest.

 

Back to the OP question: the bank is loaning you 250K at 2.5% because to them that is a "safe & stable" investment. If you think you can do better than the bank, you're assuming more risk than they are (which has been mentioned a few times above). You might be able to pull off a 7% return, but given the market instability right now I would say it's highly unlikely. But knowing that in the long-term you're going to have a decent income as an MD, it might not matter if you lose the money in the short-term? Smart investing is all about the long-term anyway, so if you can afford to lose 20-50K (or more) in the next four years, then you might be fine to put it into either an RRSP or TFSA.

 

For the record: I have student debt from my MBA that I'm still paying off. It's at a relatively low rate (although still around 3.5 or 4%) but I've chosen to invest my money rather than pay off that debt immediately. So I'm effectively doing the same thing as you are proposing by leveraging my existing debt and gambling that I can get a better rate of return than I'm paying for my debt. I've actually made a decent return on a few of my investments over the past 5 years, but they happened to correspond with an upswing in the market.

 

Given the fact that I can (potentially) access an LOC, I'm considering using some of that money to pay down the remainder of my student loans and then use some of it for property upgrades.

Link to post
Share on other sites

So, I assume you will buy without a mortgage b/c the mortgage company requires disclosure of what you owe (i.e., LOC) and you will not get a mortgage if you use your full LOC or anything close, i.e., using half your LOC will be difficult if not impossible to get a mortgage. And assuming you were able to buy for cash using your LOC, you would have nothing left with which to pay for your ongoing cash flow needs.  

 

 

what if I take LOC out of bank, give it to my parents, and get the apartment under their name and they will be able to get a mortgage as well?

 

I understand the risks but to me, wasting 100k in rent over 4 years seems a very very bad idea?

 

Anyone else care to chime in?

Link to post
Share on other sites

what if I take LOC out of bank, give it to my parents, and get the apartment under their name and they will be able to get a mortgage as well?

 

I understand the risks but to me, wasting 100k in rent over 4 years seems a very very bad idea?

 

Anyone else care to chime in?

 

If you were planning to live there, for starters you would lose the exemption of taxes on sale as owners selling their primary residence are not subject to capital gains tax. Your parents would not be earning income as they would rent to you for free, but eventually it will be rented, so they pay the income tax and when they sell, they pay tax again on the capital gain. Intertwining your finances with your parents at this stage of the game has its own problems. And I assume your parents would cover your living costs and cash flow needs if the bank is suspicious with your unexplained large withdrawal that makes no sense to them and they choose to re-evaluate you as a client. Stick to medicine and stay out of the real estate game until you have your own money to invest as opposed to borrowing money meant for another purpose entirely.

Link to post
Share on other sites

what if I take LOC out of bank, give it to my parents, and get the apartment under their name and they will be able to get a mortgage as well?

 

I understand the risks but to me, wasting 100k in rent over 4 years seems a very very bad idea?

 

Anyone else care to chime in?

 

Ok, obvious question here - why are you paying 25k a year in rent?! If you're this concerned about money, get a cheaper apartment. Even in Mississauga/GTA, there are far cheaper places than that.

 

After accounting for condo fees, property taxes and maintenance costs, even if you were to pay an exorbitant sum in rent, you wouldn't save nearly as much as you think by not paying rent. There are costs of living that you can't recoup, even if you own your own place. You lose money by living, unfortunately, there's no way around that. By jumping through hoops to minimize those costs, you're risking your future financial security. Even if everything turned out ideally for you with your plan, you wouldn't come out very far ahead, if at all. Live conservatively in medical school and residency if you want to keep your debts low. It's boring, but it's the only proven approach.

Link to post
Share on other sites

Ok, obvious question here - why are you paying 25k a year in rent?! If you're this concerned about money, get a cheaper apartment. Even in Mississauga/GTA, there are far cheaper places than that.

 

After accounting for condo fees, property taxes and maintenance costs, even if you were to pay an exorbitant sum in rent, you wouldn't save nearly as much as you think by not paying rent. There are costs of living that you can't recoup, even if you own your own place. You lose money by living, unfortunately, there's no way around that. By jumping through hoops to minimize those costs, you're risking your future financial security. Even if everything turned out ideally for you with your plan, you wouldn't come out very far ahead, if at all. Live conservatively in medical school and residency if you want to keep your debts low. It's boring, but it's the only proven approach.

This.

 

Some classmates of mine spend way too much on rent, even for Vancouver standards. i can only imagine most places elsewhere are at the very least similiar price range, if not LESS than vancouver.  

 

 

Link to post
Share on other sites

The real estate question is always an interesting one :)

 

Some thoughts - I wouldn't think of rent as "wasted money" - that is like saying you are wasting money when ever you buy any service etc just because it is consumed in the process. It is interesting that no one really phrases the money spent on the interest on the mortgage as wasted money ha in the same way. You need a place to stay - paying rent on a place often works out equal or sometimes better than owning.

 

Rule of thumb seems to be you break even on a typical real estate deal in about 5 years post purchase. This is because the closing and selling costs are quite high, and mostly you are paying interest in the first 5 years. That math REALLY depends on the interest rate and the rate the property rises in value (two unknowns).

 

Quite often the rent you pay would be less than the cost of owning - this is simply because landlords are willing (well forced actually due to market pressure) to take their profits form the backend rise in value of the property and the principle paid off on the mortgage rather than purely your rent. In real estate the term "an alligator" refers to the difference in costs for the property to your rent obtained (because it will bit you in the ass if you are not careful, ha!). Plus the places many people would buy are much nicer than a place they may rent (apartments vs condos in may places). When you buy you will be paying effectively a premium (the alligator) mostly likely on the fact that you own a property - your monthly costs go up and that must be considered.

 

Ok, and very importantly - real estate does not always go UP in value. It is quite possible that in the next 5 years the condo market in TO will drop (say if the interest rates rise as an example). One of those buy low, sell high things - well the condos have been jumping in value quite a bit for a long time. We don't know what they will do over the next 5 years, and if it goes down you have two problems - 1) you lost money 2) you won't easily be able to sell as people will panic and all try to sell flooding the market. This is not an abstract risk - real estate has fallen in value before (ha, most recently in the US - quite dramatically actually) and people are not sure if we are immune etc. You have to compare all this to what you would expect to get in return in the stock market by investing your down payment there. When you ever see someone - in anything - saying something is "red hot" you should automatically be suspicious of a bubble and go from there.

 

Also as a side note - you wouldn't buy the house with the LOC. It is possible to get an actual mortgage as a resident or med student in many cases. That would 1) give you a fixed payment you know you can handle in case interest rates rise - that would make you less vulnerable 2) maintain the LOC for other purposes. I for instance have both. 

 

Many people think real estate is a great investment (and it can be), but that must be tempered with the fact that for many people it is the only real investment they have ever made that was held for a long time and received disciplined investments (so the bank doesn't foreclose ha!). That is just saying compound interest is powerful - but we already knew that and it works with many things :)

Edited by rmorelan
Link to post
Share on other sites
  • 3 weeks later...

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
×
×
  • Create New...