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$1.3M - $1.5M ???

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  • $1.3M - $1.5M ???

    I'm requesting some feedback, especially from folks >10 yrs in practice.  I'm 2 years into practice, single specialty group, planning to stay long term.  We have 2 toddlers now, no more planned.  We are renting.  We want to buy our long-term home in an established neighborhood with excellent schools.

    Income is rising -- $600K now.  Those in my group > 5 years make $800K-$1M.  We paid off all debts.  Wife may return to work eventually, but all decisions based on my income.

    We plan 20% down.  Ideal homes in our target neighborhood are going for $1.3-$1.5M.

    This *feels* really uncomfortable.  But I hear that one should stretch a bit when buying their doctor house to avoid moving again in the future.  I also know about WCI's 2x mortgage guideline.  I guess I worry about the opportunity cost of tying up this money and delaying FIRE.  I also know you have to pay for good schools and location.  I don't want my current fear to cause us to make the wrong decision only to realize that this fear is temporary and will go away after a couple more years in practice.

    I would really value your opinions.  How did you handle home purchase price, especially in more expensive areas.  And how did you feel about it 3-5 years later?

  • #2
    I live in a HCOL area, and home prices seemed outrageous when I bought 20 years ago. Now my remaining mortgage feels like a pittance, and the house is worth two and a half times the original purchase price. What hurts are the property taxes. But the point is that restrospectively it seems cheap, but didn't feel that way at the time.
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    • #3
      If your goal is to retire early that sounds like a lot of house. You can afford it of course, but the fact that it makes you uncomfortable leads me to believe you need to do some more deliberation. It's not a math problem at this point, it's the question "Is this worth it to me". There is a big opportunity cost to a 1.5m house.

      It's pretty easy to project when you will be FI if your spending and income are somewhat constant and knowable. If the cost is too high you have your answer.


      • #4
        You might have to choose between an Ideal Home and early Financial independence. Although, with that kind of income, you might be able to have your cake and eat it, too.

        I overbuilt a really nice home at the market peak in 2007 - 2008, and eventually lost nearly a quarter million dollars when we sold. I make half what your partners do, so a loss like that stung.

        If early FI (and possibly RE) is a goal of yours, I would encourage you to live on half your takehome pay.  If you can make it work while still paying the mortgage, property tax, insurance, maintenance and repairs on a home like that, have at it. I wouldn't count on those outsized salaries remaining there indefinitely, let alone rising with inflation. They might, but they might not.




        • #5
          17 years out relocated once. We bought a starter home as early as we could to get into the ownership market and let our dollars work for us.

          But what's comfortable for your finances and robustly conservative cash flow estimates. Work from there on amount of house you should be in. Work with a local doctor banker to get a feel of right sizing the mortgage. With toddlers, your needs will change over the years. The higher income builds up quickly and your current anxiety will be dramatically different in ten years.


          • #6
            Thank you for your thoughts.

            Definitely part of the fear is making decisions based on future income. Maybe I should not assume any increase.

            If I assume same income indefinitely, would anyone feel differently about this level of house?

            I guess there is such a thing as too conservative and I can't tell if I am behaving that way. As far as early retirement goals, I guess I am looking to work until age 55 or so (18-20 years more).


            • #7
              Seems like you're within my guidelines. Just realize if something happens to that high income of yours you'll probably have to move. Do it sooner rather than later if that happens.
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              • #8
                IMHO, you don't need a $1.5M home to get your kids an excellent education.  If that's what your main concern is, at least consider this point of view.

                With that being said, you can technically afford to live in that house.  Whether or not you'll regret it in the future is all up to you.  Which is more important to you? ...early financial independence or a home in a pricey neighborhood?  Is it a status thing you're going for?  That's okay if it is, but it will come at a price.  $1.5 million will eat up $300k for a down payment and then you'll have $1.2 million in mortgage debt.  Those are really big checks to write each month.  Not to mention all the expensive stuff you'll need to buy to fill up your expensive home.  Really spend some time looking at what life will be like with the $1.2 million mortgage and what it will really cost you in terms of your ability to save each month (don't forget to factor in taxes, utilities, etc, etc).  Compare what your life would look like with a much cheaper mortgage.  Stare at those numbers for a few months and see how it feels.  Which one feels right?  That will be your answer.  And there's no wrong answer.  Its all about what feels right to you and your family.

                I know for me and my recent car buying decision fiasco, it was sort of a status thing.  After I really honestly looked at why I wanted the 50k BMW, I realized that I would be just as happy with a 16k Honda.  And I still feel really good about changing my mind and going with the cheaper car that I could buy with cash.  Houses aren't much different.  I kept our mortgage under 300k and I'm still really glad I did (5 years ago).  I really wouldn't want a more expensive house.  I like being able to save as aggressively as we save.  It allows me some flexibility in how much I work as well, which is a nice feeling.


                • #9
                  Buy as much house as you need.  I wouldn't invite any more debt than you're comfortable with, but if you're going to be in debt for something, then it might as well be tax-deductible (on the first $1M) and protected against inflation, since long-term debt (15-30 years) benefits the debtor in times of inflation.

                  If you get 3.5%, for instance, then that will be 2.15% after federal tax deduction in your 39.6% bracket (assuming you haven't hit the phaseout for income), less if you've got a state tax deduction, and even less after adjusting for inflation.  I think the biggest choice will be what your term will be, whether 15 or 30 years.  If you plan on retiring in less than 30 years, I wouldn't advise carrying that much debt into retirement; taxes and insurance will be high enough.  I prefer 15-year fixed if you can afford the cash flow so as to lose less to interest, but then again, you could apply the principle of leverage to a 30-yr term so as not to throw so much at your mortgage principal; since its amortization is simple non-compounding interest and its rate is reduced by tax deductions (and effectively by inflation), and you're more likely to out-gain significantly that in investments over the long-term, even assuming modest gains and LTCGs.

                  Assuming $1,500,000 house with 20% down, 1.5% annual property tax, and 0.5% annual insurance premium (thrown in randomly), and NOT including tax deductions for mortgage interest and property tax, monthly payments would be:

                  • 15-yr fixed at 3.0%: $10,786.98/month

                  • 30-yr fixed at 3.5%: $7,888.54/month

                  Just note that idk if you'll be able to get rates that good with recent changes in interest rates...again, there are myriad ways to do this which depend on several factors related to your overall financial profile and preferences about concepts like leverage, financial independence, retirement date, and so forth.

                  ...that's the long answer.  The short answer is that's *probably* not too much house for someone of your income.


                  • #10

                    ut I hear that one should stretch a bit when buying their doctor house to avoid moving again in the future.
                    Click to expand...

                    This is what concerns me. Don't get too hung up on a doctor house. Unless your income depends on entertaining other partners in your house buy what you feel is necessary.

                    Too much house will mean too much additional costs of furnishings and general upkeep. That, along with mortgage and property taxes will take a good chunk of your income.

                    Children cost a lot while growing up. And you need to start saving for their college education. And your retirement. Can you do all that with and also manage this house costs.

                    I have lived in a moderate house for 13+ years The money saved went into investments. The reimbursement for my specialty has fallen dramatically within the past 7 years. Now I work only 25 hours of week and make 1/3 of your income in salary. But the early frugality has paid off and I earn as much in my passive investments. I plan to now build a $1M home knowing that my finances are set for life.


                    • #11

                      It wouldn't be my choice.

                      It is a personal decision though.  I can't say in black and white terms it is wrong.  Especially if you are in a HCOL area or if it is likely to hold value or appreciate.

                      On the other hand, I could by 5 beautiful houses for that!

                      Remember to allocate 5-10% per year for maintenance, insurance, HOA dues etc.  Expensive houses cost more EVERY YEAR not just initially.  I think 10% is a more realistic number since every repair person that comes to your house will up their bill for sure.  Have you read Millionaire Next Door?

                      Personally I love being FI.  No debt.  No need to work.  I could work part time or not at all.  I like that better than a McMansion with 7 toilets that we need to clean.  But hey, to each his own.

                      Also, what counts is not our opinion but that of your significant other - assuming you want to keep them around.


                      • #12
                        It's all relative and not that crazy. We're in a HCOL and 5 years into practice we bought in that price range and we're not nearly as high income as you. Before that we were cramped in a small apt paying as little rent as possible and hyper saving.

                        But for our area the median new home construction for SFH was north of $1M. That's just the market we're in and although don't like it, we choose to live where we do so it just goes with the territory. It's like getting a rectal exam, you don't like it but comes with the territory as preventative care. Sure if we went to Alaska, could be making a killing with 2-3x the salary and half the cost of living but we don't like the ice or the grizzlies up there .

                        For us it worked out, as our house has appreciated nearly 50% (since we bought 4 years ago). But that's was just pure luck but I did know that the area with their good school district would at worst keep its value (my concern was just NOT losing equity).

                        I will say one thing. You only get mortgage deduction up to $1M loan amount, but even with that because of your income (which is higher then ours), you can't even take advantage of all of it since the itemized deduction will also get phased out due to high income.

                        But that being said the interest deduction does really help (plus property tax) as before that we only rented and our tax liability was through the roof ... the govt really wants you to buy a house with a loan .

                        We did a 30yr fix with 20% down so no fancy stuff like interest only arms or things like that.

                        The other thing to keep in mind is that unlike rent you ARE building equity. So at the end of 30yrs you will have accumulated close to $2M+ (factoring in appreciation) in equity in addition to your nest egg. This is why some people call buying a home a "forced" savings plan .

                        Also it's an inflation hedge (assuming 30y fix) and you can add it as part of your overall investment mix.

                        In other words you view it as an investment and not an expenditure. Also at the end of the day you need to live somewhere.

                        I was super freaked out when we first bought (since it was our first house) but run the numbers a couple of times, make sure you're comfortable and understand all the costs. As I said before what made me dive in was the location we were buying which has excellent schools and safe neighborhoods (don't under estimate what parents will do for their kids!) so I was okay jumping in and it has worked out for us. Also you do see the monthly bill come in (and it's a big amount each month) but again if you view it as an investment and not a straight expense that will make it a little easier to swallow .

                        Congrats and welcome to the wonderful world of home ownership!!!


                        • #13
                          This decision depends on when you want to reach financial freedom.  And it is hard to predict the future, but here is how the housing decisions worked out for us.


                          i bought an expensive home in a high cost area when I first became an attending. At the time in 1990, expensive was 500k, 100k down. We raised our family in that great neighborhood and great school district. When we first bought that big house it felt pretty scary making the leap of faith into that house and mortgage. But over time we paid down the mortgage and sold for 1.25M after 20 years.  Our 100k down payment had turned into 1.25M cash over those 20 years.


                          And then instead of downsizing, which was the original plan, we found a foreclosure, a spectacular house in an ideal location for half of what it was worth prior to the real estate crash. My spouse and the realtor convinced me that even though we were looking to downsize, the deal on this incredible house was too good to pass up. We spent the money from the sale of the first house to buy this next house.  It is now worth 2.4M and given the real estate recovery, houses in this ideal neighborhood are selling like crazy where we are.  So now, that 100k down payment has become 2.4M in equity.


                          We have been very fortunate. I don't have to continue working, but I choose to do so.  I'm in my 50's and have the financial ability to retire whenever I feel I want to. But I did want to give you another perspective that buying an expensive house can sometimes work out well for someone who has plenty of income to afford the house and to invest in retirement at the same time.