Buy home or Invest

[needadvice]

Let me start by saying, I wish I had read the book and found this website few years back. Still better late than never.

We are 2 physicians (internists) just turning 40s with one 9 year child in school

We have no loans.

We have combined income of $5,00,000 annually

Our only investment is individual 401k plan though our employer which we have been maximizing for last 3 years.

We bought a Lot to build house. We are paying $2000 property tax and $900 association fees for it annually even though we haven't started building a house. Why? Because we don't have green card yet and may take 2-3 years for it. Want peace of mind with green card before building and investing in house. Now I wish hadn't bought the lot. Learning from mistake.

Have $6,00,000 in savings account. I wish I had read the book and found this forum years back.

Now we are wondering what to do? We will build dream house after few years. It will cost us $5,00,000 - $6,00,000 for it

At present we are renting duplex apartment for $1600 per month.

Should we invest? If yes, how much? Where to start investing it?

When we build house, should we take mortgage or just pay it off with cash in hand. By the time we build house, even after paying for house, we will have 1,00,000 left as we keep earning. So why should we pay for mortgage?

Not putting money in college plan for my child as not allowed to because not a permanent resident/ green card yet.

Would like to have nest egg for retirement and pay for child's college education, if we can

We plan to work till 65 - I guess should still be able to work as internist or atleast do out patient clinic till that age. Hopefully!


My spouse is thinking about changing job too and then won't have 401K anymore. Also she may make less money based on productivity in the beginning till her practice gets busy. So combined income may decrease initially. These changes may come up.

Would love to hear from forum members.

Thanks in advance.

[jfoxcpacfp]

1. Set aside 20% down for your home and get the best deal on a mortgage possible (when the time comes). You should get a mortgage because rates are cheap and an investment account, properly diversified and managed, should be used for funding retirement, not a house.


2. Fund back-door Roth IRAs for each of you.


3. Invest any remaining money that you will not need in the next 5 years in a well-diversified equity mutual fund portfolio, rebalanced annually. For a comprehensive explanation of how and why, read Simple Wealth, Inevitable Wealth. (You can ignore the areas that advise working with a planner - that's not why I recommend the book.) Major brokerages, such as Schwab, require a SSN and a permanent residence, so that should be no problem.


4. If your wife is planning on going solo, set aside $$ to fund the business unless you qualify for financing at a reasonable rate and prefer to go that route. Plan to spend 2 - 4x what you expect. Be sure to work with a CPA and/or fee-only financial planner who is experienced in working with businesses, particularly medical practices.


5. I'm pretty sure resident aliens can have 529 accounts with a permanent address and SSN, so don't understand the issue there.


6. Quit beating yourself up over buying the lot. You made what you believed to be the right decision with the information at hand. If you don't want the lot, sell it, even if it has decreased in value. Otherwise, by keeping it, you are "saying" that this is the best place to put your money. Where you put down roots is a consequential decision and you should not build there if you really don't want to live there.

Good job on saving - I hope you continue to do so in the future.

[lernd]

Couple of quick things from someone who built a house 2 years ago:

1.  You are going to need a construction loan not a mortgage if you plan on financing the cost of home construction.  Definitely shop around, particularly at local savings banks/credit unions.  We found all the "national" banks were not really set up for construction loans and didn't know how to handle them.  One national bank rejected our application because "they didn't do kit/model homes."  Our home was not a kit home, it was custom designed (it happened to be a post-and-beam construction and I think that's what confused them).  Another wanted to charge us a 1% disbursement fee for each disbursement (loan payouts spaced over the course of the construction).  Ultimately we chose a local credit union and they were great to work with.  The VP of the credit union (who handled our loan) explained to me on the day the house was finished that there really isn't a lot of standardization in construction loans (unlike mortgages) and you really need to find someone who has experience with it because otherwise, you can get ripped off and sometimes into trouble (if disbursements don't come at the right times etc.).  When you get your construction loan, you don't want to pay a fee per disbursement, and you want interest only during the construction phase.  Often, what happens is once the certificate of occupancy is finalized (the home is finished, you can live in it), the construction loan rolls into a mortgage for whatever value you borrowed and a pre-determined interest rate.  To obtain the loan, you will need all the plans for home construction, and estimates from contractors (some banks will actually want a signed contract with the contractor in which case you'll need a contingency in the contract with your general contractor) in addition to all the information you would need for a mortgage (W2s, assets etc).

2.  There are overruns on everything (time, money) with home construction.  Plan accordingly.  If you get estimates from a few contractors, make sure you are comparing apples to apples (for things like finish work, appliances) - the cheapest estimate isn't necessarily the least expensive.  Contractors will often give you an "allowance" for things (like kitchen cabinets, fixtures), make sure these estimates are on par with what you want and not grossly underestimated.  With construction, you're going to need a lot of landscaping when all is said and done, make sure you've budgetted for the outside stuff as well.

3.  Actually take the time to nail down the little things.  Stuff like where light fixtures are placed, outlets and light switches; which way a door swings might not seem to matter, but actually do when you're living in the house.  If you are building from scratch, you have complete control, take advantage of it!

[needadvice]

Thanks for the reply.

Why do you suggest paying 20% down payment and taking mortgage and investing remaining money?

I guess I will have some benefit on income tax filing with mortgage. But won't that be off set by paying interest on mortgage loan?

I don't know what will be my rate of investment return after taking into account taxes, fees and inflation along with benefit on income tax vs paying interest on mortgage loan?

Can you give me better insight.

Thanks.

[needadvice]

For )5 college plans - it asks are you US citizen or Permanent Resident which means green card holder if you want to contribute. I am on work visa waiting to become Permanebt Resident, hopefully in few years. Hence I cannot contribute.

[needadvice]

To jfoxcpacfp

I looked into other states college 529 plans. They don't have above requirement. But if I contribute in some other states plan, then I won't get benefit on my state income tax during filing.

[Zaphod]

Lots of threads on mortgage vs. invest. Try the search function for a more in depth discussion.

[jfoxcpacfp]

needadvice wrote:

To jfoxcpacfp

I looked into other states college 529 plans. They don’t have above requirement. But if I contribute in some other states plan, then I won’t get benefit on my state income tax during filing.

Click to expand...

You would still get the federal benefit of tax-free growth and income, though.

needadvice wrote:

Thanks for the reply.

Why do you suggest paying 20% down payment and taking mortgage and investing remaining money?

I guess I will have some benefit on income tax filing with mortgage. But won’t that be off set by paying interest on mortgage loan?

I don’t know what will be my rate of investment return after taking into account taxes, fees and inflation along with benefit on income tax vs paying interest on mortgage loan?

Can you give me better insight.

Thanks.

Click to expand...

20% is the minimum you must pay to avoid paying mortgage insurance. I'm not saying this is the best route for you, but, invested properly, you should do better over the long term than the 3.5% you'll pay on mortgage interest. Plus, you'll get preferential long-term capital gains and dividend treatment. If these concepts are new to you, I second @Zaphod's suggestion to read further on the forum.

[needadvice]

Thanks Zaphod and jfoxcpacfp

I felt like an intern with my first post. But now I feel like medical student year 1.

Now I need to find out more about "federal benefit of tax-free growth and income" as I thought it only had state tax benefit.

My investment is 401K. I checked I am getting 0.06% and my spouse 1.6% return on it. So I need to learn how to get better return on 401K and back door Roth IRA that I plan to start and to look for Mutual fund.

I feel so lost in this vast sea of finance! Got to keep reading!

[needadvice]

So far I have learned very basic.

Now I need to how how to invest in 401K or how to choose among variable options when investing in 401K, Roth IRA or Index Mutual Fund (as book says).

Need to find tutorials on those.

Thanks.

And thanks to lernd too.

[needadvice]

I want to start by learning how good is my 401K?

I have John Hancock with 1.5% fees and rate of return 0.06%. It was in loss previously. My spouse has Mass Mutual

Can you direct me where can I learn more about nuts and bolts of 401K plan - to see how good or bD or how expensive it is. And how to choose my investment in it. At present I chose number 3 of 1-5 plans - moderate among to low to high in risk factors.

Thanks.

[jfoxcpacfp]

You can 1) do a ton of reading on this site and educate yourself with some of the recommended books or 2) you can pay a fee-only Certified Financial Planner. It is either going to take time or money. I would recommend both. If you decide to work with a financial planner, the more educated you are in the beginning, the more successful the relationship will be for both of you.

[Docbeans]

I wont be of much help since I have done a lot of the things you have (including buying the lot!), until I found this site. I just wanted to say that even though you feel awfully lost right now, you will be ok. Soon. It will take you less than 3-4 months to read up enough to make your basic decisions. Then you take 1 thing at a time and read more in-depth about it if you need to and rectify your situation. In about a year, you will be in a much much better place. Been there, done that. If you are smart enough to go through med school and training, personal finance is definitely doable. That said, Johanna is right- if its not your thing (and you'll figure that out pretty soon), get help from a fee-only financial planner- there is even a recommended list of CFPs on the site. All the very best!

[needadvice]

Thanks Docbeans

Thanks everyone