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First time writer on the forum. I would love to have some advice from people who have been in my situation (or even those that havent). I have torn myself apart mentally on this decision and need some help!
Background: I am 35 years old and 3 years out of residency. I am happily married with a healthy relationship and two healthy kids (3yoa and 1 yoa). I purchased a practice 3 years ago outright (sole practitioner) from a retiring doc. I have tripled the business in the last 3 years and am currently producing about $2.4million/year. After insurance adjustments I collect about $2million and overhead is approximately 50% so my pre-tax take home is about $1million. I have no reason to think this will change but of course worry about it frequently.
Debt: I currently have $380k in student loans remaining (4.25% for 8 more years), $300k in home mortgage (worth $360k, 3.5% for 27 more years), $400k on a waterfront lot (worth $550k, 4.25% for 13 more years), practice buy-in loan at $230k (now worth $1m, 5% interest for 5 more years) and two car loans that are currently about $50k total (1.9%, 3 years from paying off both and will likely not buy another car for a LONG time and if so will do so with cash). So you don’t have to do the math, this totals out to be $1.35m averaged at about 4% (all fixed interest).
Cash: I have about $750,000 in cash (more on why that's not invested later) and $220,000 in retirement accounts. I have about $4milliion in life insurance and $180k/year in disability insurance. We maximize all of our tax-deferred accounts and I additionally put in $10k/month into Vanguard retirement account. Once expenses are set, I will dump every extra nickel into this account as it comes in and budget for any big expense.
Problem/Question: The lot that we own we are planning to build our dream home. We are currently in a 3br house that is nice but we will outgrow. We have put in $50k into architect fees, engineering fees, etc and have house plans specific for this lot that we love. We will enjoy the water very much so it’s not just a “bigger house” – it’s a different lifestyle altogether. Construction bids came in at $1million, so the total investment is $1.5million. We are logistically ready to build our forever home and will, without question, be building on this lot in the next 3-5 years (if not now). This process has been delay after delay. The reason we have so much cash is that we qualify for a “private wealth” loan if we have $500k in liquid assets (even though we have debt). This loan is 3.625% fixed for 30 years (after a 4.5% interest only construction phase). We had this $500k sitting there thinking we would sign the loan paperwork soon and, after a few months of delays, we are now sitting on $750k in cash in basically 0% return savings/checking accounts (Sickening). Our plan is to sign the construction loan documents and pay off student loans and invest the rest or pay down other debt. The reason we are considering building right now is because we can lock in a low-interest rate for 30 years (on a home we know we will build relatively soon) and our monthly payments remain the same – this is mainly because our lot loan is on a 15-year note, so when we sell our current house and wrap up our lot loan into the construction-perm loan (for 30 years), it will be almost exactly the same as what we pay now to have both separately. Obviously, this isn’t “apples to apples” comparison but for the sake of our day-to-day life it is not a huge sacrifice nor does it affect our ability to accumulate cash. We will have to bring $150k in cash to close, for a loan of $1.275m (have lot equity), bringing our cash down to $600k. After paying $380k student loans we’ll have $220k left. Our overall debts would effectively be increased by about $120k (because we will add the $1.2million loan but remove the lot loan and the current house loan and pay off student loans), for a total debt amount of about $1.5m, most of that at 3.625% fixed for 30 years and the remainder being my practice buy-in which is to be paid off in 5 years.
My question is as follows: Is this a smart decision to build now? For some reason, I am not stressed about making the payments on our house and lot separately, but the thought of combining them adds significant stress, even though payment amount per month does not change. Part of this is because I am not far removed from living off $20k/year and I see this house as such a huge extravagance. I worry that it would stress me out at work. The nature of my practice is that I am only booked out 4-5 weeks, so I am always worried about new patients coming in (I’m not sure this will ever change regardless of this decision). Signing on to a 30-year note worries me, even though payments would total $7k/mo (P&I, taxes, insurance) which is a small portion of my income. I could always open a satellite office in nearby towns and be busy, and as long as I keep myself busy I should make a similar amount.
Now that you have some kind of thought process one way or the other, I'll add another level of complexity….I own the building that I work in! It was purchased for $800,000 (owe $700k, 4.25% for 17 more years) and I have two apartments in the building in addition to my practice. My portion of the mortgage is $2500/month paid by my practice as "rent"(I net $2k/mo off the apartments total after management fees). I compartmentalize this debt because I would be paying $3k/month for similar office space and am simply leveraging this inevitable business expense to own an appreciating asset. It will be a great retirement supplement down the road. However, when I list this on my “debt” it means I will have about $2.25m all at about 4% interest if we build. That means I’m paying about $90k/year in interest alone. Of course, most/all of it is appreciating assets and the appreciation *should* offset the interest paid.
If you’ve made it this far, thank you! This got a little longer than I expected. I feel as I make educated decisions on my finances and we want to do what's right, but I will admit I am not by any means “frugal”. We don't care about fancy stuff, but do eat out regularly and buy clothes, etc. I want to make sure I am putting myself in the position to amass a good amount of wealth and take advantage of my income. I don’t want to be the richest retiree, but want to get there as soon as possible. Any insight you can provide will be very much appreciated.
**WCI just emailed me the post he wrote “The Value of Patience”. If you haven’t noticed the similarities, I am Dr. #1. I have copied my response to that email below as it may provide some clarification on a few things…
I totally agree with you on just about everything. I will say that we aren't as bad with finances as I probably came across (doesn't everyone say that, though?). I purchased my truck through my business (6 months in) and mainly because I drove a two-seater '81 Jeep Scrambler for years and we just had a kid. My accountant told me that with section 179 deduction that I would have a huge write-off (I did, and will probably drive it for 15 years. Vehicles don't really get me too excited). We bought our current house when my wife had a $100k salary (she since quit when things started to get really busy at work and more kids came). The rental market here is inflated (for reasons I won’t go into) and there were no good rentals when we bought. I grew up in the neighborhood and knew it was a great house.
As far as the boat goes, we aren't in a hurry to get one. I was just pointing out what we could do with the cash to have a little "bump" in lifestyle compared to the massive jump of a house - something to scratch our itch. I've got my eye on a $30k boat and will definitely not buy on credit (although, of course, that's exactly what I'm doing when I have other debt, regardless of what my receipt from the boat dealer says).
Background: I am 35 years old and 3 years out of residency. I am happily married with a healthy relationship and two healthy kids (3yoa and 1 yoa). I purchased a practice 3 years ago outright (sole practitioner) from a retiring doc. I have tripled the business in the last 3 years and am currently producing about $2.4million/year. After insurance adjustments I collect about $2million and overhead is approximately 50% so my pre-tax take home is about $1million. I have no reason to think this will change but of course worry about it frequently.
Debt: I currently have $380k in student loans remaining (4.25% for 8 more years), $300k in home mortgage (worth $360k, 3.5% for 27 more years), $400k on a waterfront lot (worth $550k, 4.25% for 13 more years), practice buy-in loan at $230k (now worth $1m, 5% interest for 5 more years) and two car loans that are currently about $50k total (1.9%, 3 years from paying off both and will likely not buy another car for a LONG time and if so will do so with cash). So you don’t have to do the math, this totals out to be $1.35m averaged at about 4% (all fixed interest).
Cash: I have about $750,000 in cash (more on why that's not invested later) and $220,000 in retirement accounts. I have about $4milliion in life insurance and $180k/year in disability insurance. We maximize all of our tax-deferred accounts and I additionally put in $10k/month into Vanguard retirement account. Once expenses are set, I will dump every extra nickel into this account as it comes in and budget for any big expense.
Problem/Question: The lot that we own we are planning to build our dream home. We are currently in a 3br house that is nice but we will outgrow. We have put in $50k into architect fees, engineering fees, etc and have house plans specific for this lot that we love. We will enjoy the water very much so it’s not just a “bigger house” – it’s a different lifestyle altogether. Construction bids came in at $1million, so the total investment is $1.5million. We are logistically ready to build our forever home and will, without question, be building on this lot in the next 3-5 years (if not now). This process has been delay after delay. The reason we have so much cash is that we qualify for a “private wealth” loan if we have $500k in liquid assets (even though we have debt). This loan is 3.625% fixed for 30 years (after a 4.5% interest only construction phase). We had this $500k sitting there thinking we would sign the loan paperwork soon and, after a few months of delays, we are now sitting on $750k in cash in basically 0% return savings/checking accounts (Sickening). Our plan is to sign the construction loan documents and pay off student loans and invest the rest or pay down other debt. The reason we are considering building right now is because we can lock in a low-interest rate for 30 years (on a home we know we will build relatively soon) and our monthly payments remain the same – this is mainly because our lot loan is on a 15-year note, so when we sell our current house and wrap up our lot loan into the construction-perm loan (for 30 years), it will be almost exactly the same as what we pay now to have both separately. Obviously, this isn’t “apples to apples” comparison but for the sake of our day-to-day life it is not a huge sacrifice nor does it affect our ability to accumulate cash. We will have to bring $150k in cash to close, for a loan of $1.275m (have lot equity), bringing our cash down to $600k. After paying $380k student loans we’ll have $220k left. Our overall debts would effectively be increased by about $120k (because we will add the $1.2million loan but remove the lot loan and the current house loan and pay off student loans), for a total debt amount of about $1.5m, most of that at 3.625% fixed for 30 years and the remainder being my practice buy-in which is to be paid off in 5 years.
My question is as follows: Is this a smart decision to build now? For some reason, I am not stressed about making the payments on our house and lot separately, but the thought of combining them adds significant stress, even though payment amount per month does not change. Part of this is because I am not far removed from living off $20k/year and I see this house as such a huge extravagance. I worry that it would stress me out at work. The nature of my practice is that I am only booked out 4-5 weeks, so I am always worried about new patients coming in (I’m not sure this will ever change regardless of this decision). Signing on to a 30-year note worries me, even though payments would total $7k/mo (P&I, taxes, insurance) which is a small portion of my income. I could always open a satellite office in nearby towns and be busy, and as long as I keep myself busy I should make a similar amount.
Now that you have some kind of thought process one way or the other, I'll add another level of complexity….I own the building that I work in! It was purchased for $800,000 (owe $700k, 4.25% for 17 more years) and I have two apartments in the building in addition to my practice. My portion of the mortgage is $2500/month paid by my practice as "rent"(I net $2k/mo off the apartments total after management fees). I compartmentalize this debt because I would be paying $3k/month for similar office space and am simply leveraging this inevitable business expense to own an appreciating asset. It will be a great retirement supplement down the road. However, when I list this on my “debt” it means I will have about $2.25m all at about 4% interest if we build. That means I’m paying about $90k/year in interest alone. Of course, most/all of it is appreciating assets and the appreciation *should* offset the interest paid.
If you’ve made it this far, thank you! This got a little longer than I expected. I feel as I make educated decisions on my finances and we want to do what's right, but I will admit I am not by any means “frugal”. We don't care about fancy stuff, but do eat out regularly and buy clothes, etc. I want to make sure I am putting myself in the position to amass a good amount of wealth and take advantage of my income. I don’t want to be the richest retiree, but want to get there as soon as possible. Any insight you can provide will be very much appreciated.
**WCI just emailed me the post he wrote “The Value of Patience”. If you haven’t noticed the similarities, I am Dr. #1. I have copied my response to that email below as it may provide some clarification on a few things…
I totally agree with you on just about everything. I will say that we aren't as bad with finances as I probably came across (doesn't everyone say that, though?). I purchased my truck through my business (6 months in) and mainly because I drove a two-seater '81 Jeep Scrambler for years and we just had a kid. My accountant told me that with section 179 deduction that I would have a huge write-off (I did, and will probably drive it for 15 years. Vehicles don't really get me too excited). We bought our current house when my wife had a $100k salary (she since quit when things started to get really busy at work and more kids came). The rental market here is inflated (for reasons I won’t go into) and there were no good rentals when we bought. I grew up in the neighborhood and knew it was a great house.
As far as the boat goes, we aren't in a hurry to get one. I was just pointing out what we could do with the cash to have a little "bump" in lifestyle compared to the massive jump of a house - something to scratch our itch. I've got my eye on a $30k boat and will definitely not buy on credit (although, of course, that's exactly what I'm doing when I have other debt, regardless of what my receipt from the boat dealer says).
We bought and renovated the lake house while still living in the first house. We were closer to paying off the practice loan and had no building loan or car loans. I would advise you to decide either way so all the cash is not needlessly sitting there waiting. Either put off the house and pay down some loans to decrease your monthly interest payment. Or, get moving on the house so you can proceed with your plan. The monthly cost (financially and emotionally) of your analysis paralysis is too high to stay there.
) Get through the build which will inevitably cost you way more than you're anticipating, so it will be great to have so much cash flow with no debt. Then, when it's done, move in and sell your current place after you're all settled in.
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