First home out of fellowship question

[crashXCI]

Hi all,

Current PGY-4 in child psychiatry, graduating in 2022 and will be relocating back "home" at that time to what is currently a pretty hot housing market. Not quite Denver or Austin levels of hot, but close. I'm hoping to get some thoughts on buying a home after graduating in the context of projected incomes, family needs, and combined student loan debt. Luckily, child psychiatrists are needed and there are several options for attending jobs that I am interested in. Barring totally unforeseen circumstances, we expect to live in this area permanently even if I change jobs throughout my career.

• Both in our young 30s
• Total of ~$325k student loan debt, refinanced privately
• Owe $198k on current mortgage and expect to sell at ~$275k based on comps in the area
• Expected salaries of ~$250k and ~$90k, respectively, upon relocating
• Expect to have three young children at the time of moving
• Combined ~$160k in retirement funds and fledgling 529s for each child

Option 1: Buy a home in our "dream" neighborhood based on proximity to friends/family, builds we like, and familiarity with the area. Homes are currently selling for between $500k and $750k there. Estimated mortgage would be ~$2,000

Option 2: Find a more reasonable house elsewhere in a less desirable area for closer to $250k - 300k. Live there and pay off debt more aggressively instead of paying the higher mortgage.

I've put together a model budget using the above hypothetical salaries. With option 1, we would likely be putting $9,000 per month toward loans, paying them off in 40 months. With option 2, we would be able to pay closer to $11,500 per month, paying them off in 30 months. To me, this still makes option 1 the more attractive one (maybe I'm just stuck in "me want nice house" mode). Fewer moves, more time with friends and family during an important stage in our lives. However, option 2 (or *gasp* renting) seems more in line with the "live like a resident" angle and typical wisdom around here, and taking out a $700k mortgage on top of $300k in debt is kind of terrifying.

Anything I'm overlooking? Has anyone been in a similar position before, and what did you do? Thanks in advance.


Edit: Replies to the below pending mod approval, since I'm a new poster. Thanks everyone for weighing in!

[Tim]

There are other options that I guess you have ruled out. I would suggest you consider them.You are already deep into the lifestyle inflation mode as a resident.

The conditional approach in your post seems to indicate a desire to spend what you optimize spending for "wants" rather than "needs".
* Planning on churning houses is not efficient.
* Not one mention of retirement savings or your budget.

Yes, everyone has been in a similar position and wants a doctor's forever house. Well not everyone, some chose different values.

Welcome to the forum. Please don't take this personally, it is directed towards your plan only.
Rent for 1 yr maybe 2.

[PedsCCM]

How long has it been since you lived in this area? Things change and even with family still there, you may be surprised at the suburb/township/neighborhood you end up wanting to live. We rented a nice home for the first year and are incredibly glad that we did as the area we eventually bought in was not somewhere we would have initially considered. Then you have unknowns like what the job/group will be like once you actually start. Non-competes may make changing within the city difficult, etc etc. Buying immediately seems great but there's significant risk to that decision and renting is a much closer financial decision than most people assume.

[Tim]

Mortgage not more than 2x gross.
Comp -taxes -20% of gross for retirement = spending (this includes SL, house down payment and everything else).
Rent for 2 yr preferable (one yr possible) if its intended to be permanent.
Planning on moving is going to cost you about 15% of the purchase price (in 6% and out 10%). Best to avoid if you can swing it.
The 3 kids plan and wife income is your choice. The spouse income could be problematic. She might work to sustain the house. Choices to be made.

Listen you your brain. "Me want nice house" is telling you something. Giving into what could be an emotional surrender rather than establishing a good financial plan for the transition. It could work if all the cards fall into place. If you change jobs even locally, likely a different neighborhood and schools.

[ENT Doc]

Option 3: Rent?

[wideopenspaces]

Do you have childcare expenses? I don't see how the numbers add up if you do. Personally I would rent until the SL are gone, having 1M in debt on that income with 3 little kids would stress me out. Make sure you have term life insurance for you and your partner. Disability is important as well.

[crashXCI]

* Not one mention of retirement savings

I did mention our current retirement savings. $130k in post-tax accounts and $30k in tax-deferred.

or your budget.

Yes, we follow a current budget based on my residency salary and her current salary, and I have one mapped out for post-grad, based on the above projected take-home of $325k (though we hope to be grossing more). The loan payment figures above already account for all other "needs" -- taxes, utilities, groceries, car maintenance, life/disability policies, maxing backdoor Roth IRAs and tax-deferred accounts each (nets at ~16% of total pay going to retirement), and contributing $750/mo to each 529. This assumes we set aside our profits from selling this house as an EF. I'm driving a 10-year old F150 that I love and am hoping to get to >200k miles before replacing in 5-7 years once we're out of debt.

How long has it been since you lived in this area? Things change and even with family still there, you may be surprised at the suburb/township/neighborhood you end up wanting to live. We rented a nice home for the first year and are incredibly glad that we did as the area we eventually bought in was not somewhere we would have initially considered. Then you have unknowns like what the job/group will be like once you actually start. Non-competes may make changing within the city difficult, etc etc. Buying immediately seems great but there's significant risk to that decision and renting is a much closer financial decision than most people assume.

Thanks for sharing your experience! We moved away 4 years ago and come back to visit several times per year. I'm glad to hear that the flexibility of renting allowed you to find the right place for you. It's definitely possible that the same thing happens to us.

Rent for 1 yr maybe 2.

Option 3: Rent?

Seems to be the majority answer. I've read the book, and re-reading it today drives home how strongly WCI believes in not buying when you graduate. I feel stuck between acknowledging the wisdom here but also feeling driven by other factors -- not wanting to move a growing family multiple times in 2 years and not wanting to miss out on building equity in a thriving market chief among them.

"Within just a few years of residency graduation, your student loans can be paid off, you can have a portfolio worth several hundred thousand dollars, and you should own at least 20%–30% of your dream home with the remainder financed at a very low rate." -- this has been my 5-year goal since I started thinking about our plans post-graduation. I guess I don't believe that buying a home immediately after fellowship is incompatible with this. But the points above are well-taken. I really do appreciate everyone's thoughts. Lots to consider in the coming year!

Do you have childcare expenses? I don't see how the numbers add up if you do. Personally I would rent until the SL are gone, having 1M in debt on that income with 3 little kids would stress me out. Make sure you have term life insurance for you and your partner. Disability is important as well.

Fortunately, minimal childcare expenses. We're lucky to have grandparent help and wife's shift schedule can usually be tweaked to minimize the need for additional help. I have generous LTDI and term life policies that I purchased early in residency (thankful for WCI guidance on that one!) and will be increasing the life policy's payout amount upon graduation, which is accounted for in our budget. My wife is not insurable after trying for a few years, due to chronic autoimmune conditions. Agreed, 7 figures of debt is horrifying and probably the biggest deterrent for us.

[White.Beard.Doc]

There are a lot of if's that need to line up for it to make sense for you to buy. How do you know the job will work out until you have lived it for at least a year or two? How do you know you won't want to move after you get settled in? If for some reason you know the job will work out and you know that the house will work for the long term, then you could buy. But buying carries all those risks. On the upside, if appreciation continues to be high for a while before the market cools (a cooling market is pretty much inevitable at some point) then buying could work out. But in past years after outsize appreciation, the market didn't just cool, it dipped down.

We bought after renting for a year when I was a new attending. By year 2 of attendinghood, we were able to afford a nicer house that worked for our growing family for the next 20 years. We would not have been able to buy that nice home a year earlier as a new attending. Renting worked out well because we bought once and didn't have the high transaction expenses of buying one house and then moving up to another.

[WorkingToFish]

Do you have childcare expenses? I don't see how the numbers add up if you do. Personally I would rent until the SL are gone, having 1M in debt on that income with 3 little kids would stress me out. Make sure you have term life insurance for you and your partner. Disability is important as well.

Yeah I would be interested to see how OP figures they can put 9k toward loans even with a mortgage on a 500-750k home and three kids on a 340k combined salary.

You suspect your mortgage will be 2k on a 500-750k home? Physician loan? Or large down-payment? I am assuming the former. Your mortgage alone may be 2k but add in insurance property taxes and I bet you are closer to 3k or higher. Maybe 4k on a 750k home.

[dayman]

Option 2 doesn't sound very appealing - still has the potential downside of buying at first job during an extreme seller's market, and it's not really where you want to live anyway. Option 1 is emotionally appealing but I can't endorse a 700k mortgage at your income and student loan burden.

Assuming there are any reasonable rentals, I like the idea of renting now with a goal of buying in your preferred neighborhood when you can afford it. I say this as someone who is a few years ahead of you, currently buying in my "dream" neighborhood after living somewhere much cheaper.

[Tim]

529’s don’t count towards retirement. Earmarked for the kids’ education.

(EE contribution+ ER contribution)/ (Gross Comp+ ER contribution)= Retirement Rate

Simply a clarification. My mom told my spouse the week our 1st was born:
”Two is tough. The third is a back breaker.”
I would think this through relying on family support. It’s not that they wouldn’t want to help. Ten years minimum assisting raising 3 kids is a huge load. The reality is, grandparents already raised kids. I would suggest you count only your income if you are contemplating a 30 yr loan. Your spouse and child care seem to be required to make numbers work. Think about that. Do you really want to lock them in to your house payment?
Mall signs point to this big purchase needing everything to go right. That is a rare for anyone.

If you rent two years, you will be in a much better place to make financial decisions NOT based on emotions. You are creating a heavy lift, needlessly.

Constructive suggestion only. A different way of viewing the risk.

[Gamma Knives]

Seems to be the majority answer. I've read the book, and re-reading it today drives home how strongly WCI believes in not buying when you graduate. I feel stuck between acknowledging the wisdom here but also feeling driven by other factors -- not wanting to move a growing family multiple times in 2 years and not wanting to miss out on building equity in a thriving market chief among them.

I'd argue building equity is not guaranteed. The property market is hot right now. Perhaps it is due for a correction? Or perhaps not? To me it feels like the last real estate bubble where many people felt like they had to buy because prices were going up so quickly.

In your situation, renting is the safest choice. Buying a house could work out but has more risk. Obviously things like being close to friends and family are important. How important versus other factors is up to you. Money isn't everything but is what we can give you the best advice on.

[crashXCI]

Again, I really appreciate everyone's input. Just to add, I don't mean to sound argumentative -- I'm learning a lot (and definitely still have a lot to learn!) in this process and am thankful for those of you ahead of me that are weighing in. I'm fortunate to be getting so much constructive feedback a year ahead of making this decision!

You suspect your mortgage will be 2k on a 500-750k home? Physician loan? Or large down-payment? I am assuming the former. Your mortgage alone may be 2k but add in insurance property taxes and I bet you are closer to 3k or higher. Maybe 4k on a 750k home.

Not what I was saying -- the 2k figure is the difference between a 250k and 650k physician loan with the same interest rate (IIRC the mortgages were $1500 and $3500 per month). Admittedly this was solely based on a simplified online calculator, but it did figure in property taxes and annual insurance premium. Rentals in the safer parts of town we would consider are around $2000 / month.

Yeah I would be interested to see how OP figures they can put 9k toward loans even with a mortgage on a 500-750k home and three kids on a 340k combined salary.

This is what I got running through it again. Some figures were a little different this time but generally the same (with the caveat that this is mostly based on online calculators and extrapolating some expenses based on what we pay for a family of 4 right now):

Gross monthly pay: $28,000
Federal income tax: $4,700 (effective tax rate 17%)
No state income tax
FICA: $1,200
Pre-tax withholding (med/dental/vision insurance, 401k contribs): $3,550

Take home: $18,550/mo

"Contributions" (Roths, 529s, life/disability premiums): $2750/mo
Utilities: $700/mo
Other expenses (car maintenance, cleaning, child expenses, misc spending, gas, eating out): $2100/mo
Groceries: $1000/mo

= $12,000/mo left to split between mortgage and loan repayment

With a $1,500 mortgage, $10,500 goes to loans. With a $3,500 mortgage, $8,500 goes to loans. I'm totally open to the idea that I'm calculating some of this wrong, but used the best data I could find.

[billy]

How are the non competes for your new job? What are your student loan rates?
Rent. Prioritize retirement savings. 20% gross towards retirement. Even if you have to sacrifice the 529s for a few years. What if another Covid like event happens and you get furloughed a month into your first attending job? You have (conservatively speaking) a net worth of negative 100k right now. And still need to find a buyer for your house to get to that number. In another 2 years you will be in a better position to buy.

[crashXCI]

This has stimulated some really productive family talk today. Something that came up earlier: renting for $2,000 per month vs. a $3,500 mortgage allows us to save $1,500 more per month. Does that extra $1,500 really accelerate our savings / other finances in a massive way? Obviously I'm aware of the other downsides of shackling ourselves to a large mortgage as discussed above. I guess I'm not seeing the math behind "rent = massive nest egg in 2 years"