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Wrong to put 40%+ down on home?

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  • Tim
    replied
    Originally posted by sesamebean123 View Post

    Here goes:

    To give a bit of background, we currently rent a 2 br but because of personal reasons (mostly because we have to kids who can run around now), we need a 3 br. In our area, 3 br rentals in our neighborhood for what we are looking for that is comparable to the unit we are looking to purchase is $3,800 - 4,000 (we'll say $3,800 to be conservative). Unrecoverable costs is $3,800 x 36 = $136,000 for 3 years.

    Cost of house, estimated, $700,000 (would likely sell for less anyways as this is their asking price), with 40% down, results in taking $420,000 mortgage. Monthly payment on principal/interest alone is $1,700. With property tax, HOA, and insurance, total monthly payment comes down to about $3,000 per month or about. The bottom line here is $2300 of this is unrecoverable if we assume ~$700 a month goes to principal payments. Compared to some other comps, this home is actually about 100k undervalued because of some quirks and would require about 30k of work to make it totally move-in ready for us (I won't factor this in as unrecoverable as I believe this will add a good amount of equity into the home). Just for reference, recent comps in this area for the home we're looking to purchase + improvements were considering have sold for $840-850k. Closing costs are about 30k (unrecoverable). In terms of major repairs and maintenance, yearly, I am estimating 0.5% as the HOA is responsible for all exterior issues.

    Unrecoverable costs for 3 years (assuming we stay here, minimal 3 years, probably more)
    Renting: $3,800 x 36 = $136,000
    Buying: $2,300 x 36 + $3,500 * 3 + $30,000 = $123,300

    Difference here is $12,700 in favor of buying, though almost a wash, but of course would be more in favor of buying the longer we stayed. We would be staying here minimum of 3 years. Some will also bring up the point about opportunity costs - e.g. would we invest our downpayment. Likely, we wouldn't do anything beyond an HYSA or CD for our downpayment amount because we plan on using it in the next 3 years or so likely wouldn't be investing it in stocks anyways. So, minimal opportunity loss and suspect that it will be similar growth as the real estate in this area.

    Home prices in this area has been steadily increasing over past several years, and is stabilizing out, but we figured if we put in the work up front with improvements, the value of the home will increase given similar comps. Even if we do move out, we will likely opt to rent it out as an investment property later for ~$3800 - 4000/mo rent. Hypothetically, if we were to sell in 3 years, because of recent comps, even if we were to sell for $800k with the improvements, if you subtract out the original closing costs and sellers fees (~8% in our area), we would still break even. I understand this is an assumption and nothing is guaranteed.
    Breakeven? Rent is your maximum, Monthly payment is minimum. This is a bet without a significant payoff.

    Odd's are you will have additional costs. Do you think you will sell the house on the day fellowships ends? No repairs, no landscaping, no furniture and the list goes on.

    Leave a comment:


  • billy
    replied
    Don't count on the "its a good investment property to rent out" as a scenario later on- buying a house to live in vs to rent are two very different calculations. Without even including the added hassles of renting it out, I believe people try to get around 1% of the house value in rent when evaluating a rental property- do you think you can charge 7-8,000 /month for rent?
    You're going to do what you're going to do, so good luck, but go in with your eyes open on more than just the best case scenario.

    Leave a comment:


  • ENT Doc
    replied
    Originally posted by sesamebean123 View Post

    Here goes:

    To give a bit of background, we currently rent a 2 br but because of personal reasons (mostly because we have to kids who can run around now), we need a 3 br. In our area, 3 br rentals in our neighborhood for what we are looking for that is comparable to the unit we are looking to purchase is $3,800 - 4,000 (we'll say $3,800 to be conservative). Unrecoverable costs is $3,800 x 36 = $136,000 for 3 years.

    Cost of house, estimated, $700,000 (would likely sell for less anyways as this is their asking price), with 40% down, results in taking $420,000 mortgage. Monthly payment on principal/interest alone is $1,700. With property tax, HOA, and insurance, total monthly payment comes down to about $3,000 per month or about. The bottom line here is $2300 of this is unrecoverable if we assume ~$700 a month goes to principal payments. Compared to some other comps, this home is actually about 100k undervalued because of some quirks and would require about 30k of work to make it totally move-in ready for us (I won't factor this in as unrecoverable as I believe this will add a good amount of equity into the home). Just for reference, recent comps in this area for the home we're looking to purchase + improvements were considering have sold for $840-850k. Closing costs are about 30k (unrecoverable). In terms of major repairs and maintenance, yearly, I am estimating 0.5% as the HOA is responsible for all exterior issues.

    Unrecoverable costs for 3 years (assuming we stay here, minimal 3 years, probably more)
    Renting: $3,800 x 36 = $136,000
    Buying: $2,300 x 36 + $3,500 * 3 + $30,000 = $123,300

    Difference here is $12,700 in favor of buying, though almost a wash, but of course would be more in favor of buying the longer we stayed. We would be staying here minimum of 3 years. Some will also bring up the point about opportunity costs - e.g. would we invest our downpayment. Likely, we wouldn't do anything beyond an HYSA or CD for our downpayment amount because we plan on using it in the next 3 years or so likely wouldn't be investing it in stocks anyways. So, minimal opportunity loss and suspect that it will be similar growth as the real estate in this area.

    Home prices in this area has been steadily increasing over past several years, and is stabilizing out, but we figured if we put in the work up front with improvements, the value of the home will increase given similar comps. Even if we do move out, we will likely opt to rent it out as an investment property later for ~$3800 - 4000/mo rent. Hypothetically, if we were to sell in 3 years, because of recent comps, even if we were to sell for $800k with the improvements, if you subtract out the original closing costs and sellers fees (~8% in our area), we would still break even. I understand this is an assumption and nothing is guaranteed.
    Let's just say I don't think you are incorporating all relevant facts. Also, there's a reason you are getting a "steal" - it will probably require more CAPEX to correct issues. Stuff will randomly come up as well. Take a look at this model I created a few years ago. Only change the yellow highlighted cells in the B column. Let us know what you find. Keep in mind, even if the rent option is favored slightly over the buy option for a 3 year period this does not account for other costs not mentioned, such as tying you down to the area (worse negotiating position), the pain of selling, and the possibility of significant random CAPEX costs.

    Rent vs Buy.xlsx

    Leave a comment:


  • CordMcNally
    replied
    Originally posted by sesamebean123 View Post

    Here goes:

    To give a bit of background, we currently rent a 2 br but because of personal reasons (mostly because we have to kids who can run around now), we need a 3 br. In our area, 3 br rentals in our neighborhood for what we are looking for that is comparable to the unit we are looking to purchase is $3,800 - 4,000 (we'll say $3,800 to be conservative). Unrecoverable costs is $3,800 x 36 = $136,000 for 3 years.

    Cost of house, estimated, $700,000 (would likely sell for less anyways as this is their asking price), with 40% down, results in taking $420,000 mortgage. Monthly payment on principal/interest alone is $1,700. With property tax, HOA, and insurance, total monthly payment comes down to about $3,000 per month or about. The bottom line here is $2300 of this is unrecoverable if we assume ~$700 a month goes to principal payments. Compared to some other comps, this home is actually about 100k undervalued because of some quirks and would require about 30k of work to make it totally move-in ready for us (I won't factor this in as unrecoverable as I believe this will add a good amount of equity into the home). Just for reference, recent comps in this area for the home we're looking to purchase + improvements were considering have sold for $840-850k. Closing costs are about 30k (unrecoverable). In terms of major repairs and maintenance, yearly, I am estimating 0.5% as the HOA is responsible for all exterior issues.

    Unrecoverable costs for 3 years (assuming we stay here, minimal 3 years, probably more)
    Renting: $3,800 x 36 = $136,000
    Buying: $2,300 x 36 + $3,500 * 3 + $30,000 = $123,300

    Difference here is $12,700 in favor of buying, though almost a wash, but of course would be more in favor of buying the longer we stayed. We would be staying here minimum of 3 years. Some will also bring up the point about opportunity costs - e.g. would we invest our downpayment. Likely, we wouldn't do anything beyond an HYSA or CD for our downpayment amount because we plan on using it in the next 3 years or so likely wouldn't be investing it in stocks anyways. So, minimal opportunity loss and suspect that it will be similar growth as the real estate in this area.

    Home prices in this area has been steadily increasing over past several years, and is stabilizing out, but we figured if we put in the work up front with improvements, the value of the home will increase given similar comps. Even if we do move out, we will likely opt to rent it out as an investment property later for ~$3800 - 4000/mo rent. Hypothetically, if we were to sell in 3 years, because of recent comps, even if we were to sell for $800k with the improvements, if you subtract out the original closing costs and sellers fees (~8% in our area), we would still break even. I understand this is an assumption and nothing is guaranteed.
    A few things:

    1.) I would be surprised if a home on the market is $100k undervalued and need only $30k in updates and that home stays on the market for longer than a few days.

    2.) I very strongly suspect you will spend much more than $3,500 on interior repairs and maintenance every year on a $700k home.

    3.) I would consider the scenario you put out as more of a best case scenario. Even with that said, you're hoping to break even after 3 year since you may very well be moving after 3 years. Trying to break even isn't what I would consider an argument to buy. In addition, buying a home will make you more likely to want to stick around instead of move which could make you take a less than optimal job.

    Nonetheless, it's clear you're going to end up buying so enjoy your new house!

    Leave a comment:


  • Bev
    replied
    As you say, nothing is guaranteed. Just do it and move on!

    Leave a comment:


  • sesamebean123
    replied
    Originally posted by ENT Doc View Post

    Care to show us your math?
    Here goes:

    To give a bit of background, we currently rent a 2 br but because of personal reasons (mostly because we have to kids who can run around now), we need a 3 br. In our area, 3 br rentals in our neighborhood for what we are looking for that is comparable to the unit we are looking to purchase is $3,800 - 4,000 (we'll say $3,800 to be conservative). Unrecoverable costs is $3,800 x 36 = $136,000 for 3 years.

    Cost of house, estimated, $700,000 (would likely sell for less anyways as this is their asking price), with 40% down, results in taking $420,000 mortgage. Monthly payment on principal/interest alone is $1,700. With property tax, HOA, and insurance, total monthly payment comes down to about $3,000 per month or about. The bottom line here is $2300 of this is unrecoverable if we assume ~$700 a month goes to principal payments. Compared to some other comps, this home is actually about 100k undervalued because of some quirks and would require about 30k of work to make it totally move-in ready for us (I won't factor this in as unrecoverable as I believe this will add a good amount of equity into the home). Just for reference, recent comps in this area for the home we're looking to purchase + improvements were considering have sold for $840-850k. Closing costs are about 30k (unrecoverable). In terms of major repairs and maintenance, yearly, I am estimating 0.5% as the HOA is responsible for all exterior issues.

    Unrecoverable costs for 3 years (assuming we stay here, minimal 3 years, probably more)
    Renting: $3,800 x 36 = $136,000
    Buying: $2,300 x 36 + $3,500 * 3 + $30,000 = $123,300

    Difference here is $12,700 in favor of buying, though almost a wash, but of course would be more in favor of buying the longer we stayed. We would be staying here minimum of 3 years. Some will also bring up the point about opportunity costs - e.g. would we invest our downpayment. Likely, we wouldn't do anything beyond an HYSA or CD for our downpayment amount because we plan on using it in the next 3 years or so likely wouldn't be investing it in stocks anyways. So, minimal opportunity loss and suspect that it will be similar growth as the real estate in this area.

    Home prices in this area has been steadily increasing over past several years, and is stabilizing out, but we figured if we put in the work up front with improvements, the value of the home will increase given similar comps. Even if we do move out, we will likely opt to rent it out as an investment property later for ~$3800 - 4000/mo rent. Hypothetically, if we were to sell in 3 years, because of recent comps, even if we were to sell for $800k with the improvements, if you subtract out the original closing costs and sellers fees (~8% in our area), we would still break even. I understand this is an assumption and nothing is guaranteed.

    Leave a comment:


  • ENT Doc
    replied
    Originally posted by sesamebean123 View Post
    We're looking to purchase a home while I just started fellowship in a fairly-ish HCOL area. Yes, I know what some folks will say about buying a house during training, but we would be losing a ton on money on renting in our area - we have done the math. We have a good amount of savings from a previous sale of a home and thus have the ability to put down more downpayment. Since I am still in training, our combined income is around ~140k in the time being so we are concerned about taking out a larger mortgage and our monthly payments are higher because we have HOA fees. Our income will increase greatly after 3 years after completion of fellowship and could also increase if my wife decides to transition back to full-time work (currently she is part-time because of obligations with children). Cost of home is ~$700k so we were considering putting 40-50% down, which still leaves us with a pretty healthy emergency fund. Given how low interest rates are now, would anyone entertain putting down less? If so, where would you advise investing the remainder of the cash if it may need to be used less than 5 years from now to achieve better return than mortgage rates?
    Care to show us your math?

    Leave a comment:


  • billy
    replied
    I'd say at least 80% of the posters who post about buying during training have already made up their mind on buying.
    On top of the real estate question though (potentially breaking even, losing money on sale vs making money on sale, repairs, no repairs, etc) a huge reason most of us say rent while training or the first few years of your job is because buying ties you down to your area, decreasing your leverage and opportunities when looking for jobs. Can I put an exact price on it? No, but I have seen enough people either stay at miserable jobs bc they bought a house and have a non compete, or never look outside of their immediate area after training for better offers/compensation bc the commute would be too long, etc. And those are the reasons I would always advise someone NOT to buy a house until they are certain their job is stable AND the right fit. Which medical school and residency are neither.

    Leave a comment:


  • HandFellow
    replied
    I think Jfox is right that you are in a great situation regardless what you do.

    but as someone who lost a lot of money purchasing a house during training, be careful. The housing market can turn and you could end up with a large amount of your down payment gone. Or you can end up with a nice house in one city while living and working in another city. The safer play is to rent for the duration of your training. However, it sounds like you made out well with your last house so you learned a different lesson than I did.

    Leave a comment:


  • EntrepreneurMD
    replied
    Not wrong to put down 0, 10, 20, 40, 100% down on a house. Depends on where you are with your risk tolerance, cash flow and net worth (assets that can be sold if finances get tight).

    Implications and risks are different - borrowing 0% or 100% when you have millions is not the same as doing so early on in one's career. However whether you have 0 or millions, you can only stretch yourself so far if you choose debt. Limits are both financial and emotional.

    Leave a comment:


  • IlliniGopher
    replied
    OP update. "We put in an offer. Thanks everyone."

    Leave a comment:


  • billy
    replied
    also, HOA fees can and will go up. I think that makes it even worse as opposed to just buying your own house (which I also disagree with during training). Just to play devil's advocate, what are rents going for in the area for a similar sized/location/etc dwelling?

    Leave a comment:


  • StarTrekDoc
    replied
    OP - while doing the math is one thing, reality of house ownership <5 years is just plain hard - even in setting of known land appreciation. closing costs really eat into it and transition costs on carrying when the least wanted in transition to attending career.

    Also money in the house vs money in the market of similar (REIT) vs index broad market can be argued better short term spent in the same equation.

    If you were mid-career, 50% down on mortgage would carry a different conversation.

    Leave a comment:


  • Brains428
    replied
    I'm not sure if Peds figured this, but 560 would be in jumbo range for some areas (maybe not yours). You might have to put down more, which you are willing to do.

    I think renting is always the best option until you definitely stay in an area for >5 years. But, as long as you understand the risks (read- potential for loss), then do as you wish.

    Leave a comment:


  • CordMcNally
    replied
    How are you losing money by renting? You get shelter and a fixed monthly housing cost (basically guaranteed shelter insurance). Don't go down the 'renting is throwing money away' mindset. Will you possibly pay a small premium for that in the end? Maybe. This is just another 'my situation is different' post.

    Leave a comment:

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