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House advice! Please help!

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  • House advice! Please help!

    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).




  • #2
    I won't reply here as I already have by email (and used his question as fodder for an upcoming post which I then sent to him but unfortunately won't run for 3 or 4 months.) I told him I bet you guys would give him the same answer I did, but I encouraged him to ask the hive mind.
    Helping those who wear the white coat get a fair shake on Wall Street since 2011


    • #3
      since you are worried it seems that you are debt averse.  That being the case I'd blow away your debt before I started construction on the house.  at your income and spending levels that will happen very quickly.


      • #4
        I think you have made a lot of excellent individual decisions regarding finances and long term maximization of your net worth. There always comes a point though where that one more decision in rapid succession starts to put strain on the viability of everything, either mentally or fiscally. It sounds as if you are approaching that point. Its really no big deal to relax for a minute and consolidate things for a year or two and let things get safer.

        I would do something with that 750 though, it certainly could have been in some low vol stock/bond fund mix, muni bonds earning something or even an online savings account.

        Your income is excellent and spending under control so just a matter of time before you're on top, dont overload the debt servicing needs and make an easy situation very stressful. You dont want something external to your control like a recession to have such a massive power over so much of your life. Idk how much of a slowdown you'd anticipate but something to think about as well. You dont want to be dumping appreciating assets below cost just because you had too much at once. Position sizing is important with all bets.


        • #5
          With $1M rolling in per year, and $750k in cash, you can afford to be pretty lavish.  $50k for just a set of plans sounds pretty rich.  But perhaps there's more to it.

          Obviously if your business goes under, you'll feel pretty stupid starting construction now, but if you've run the numbers and feel comfortable, why wait?  $7k/mo is peanuts compared to your earnings.  $50k on car notes is also peanuts.

          The stress of building can be pretty daunting, millions of decisions, lots of costs and delays.  If your wife can help out with this, and if you have a good builder, it should help a lot.  Set a budget and try to stick to it as close as you can.  Overruns on this and that add up, can add several hundred thousand to a build like that.

          FWIW, we are planning a $1M house in the coming years with less than half your income.

          Obviously get that $600k working for you as soon as you can, even if it's just paying off debt.


          • #6
            So, we did a version of what you are doing but with smaller overall numbers  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.


            • #7
              The additional debt is fine...on paper.   How's the psychological stress of the past three years?  You're heavily leveraged, but that's totally fine during the growth phase and the numbers crunch out fine.


              --how stressful is the practice at the current rate and the feasibility of maintaining that current state for next 10 years.

              You're getting a taste of custom home build stress--and that's just the beginning planning/bids.  You haven't even begun permits and digging -- rocks/foundations/plumbing -  weather --  then the finishes -- and the dock for the lake.  and then all the furnishings to add on top -- all these blow up the budget and more importantly -- the stress can be damaging if not balanced well with the family and your work.    It WILL be your 3rd job (1st is practice, 2nd is properties/debt management).




              • #8
                don't overthink it!

                you are fine with your savings rate.  your plan is sound.   there are always other alternatives.

                the best thing you can do is maintain a healthy body and mind so you can face building, permitting, challenges with a smile.  as long as you work hard in your practice, and maintain your savings rate, you are golden.


                • #9
                  Oy, that's a lot of debt.  My only concern is your practice and stability.  As a one-man band, you carry more risk than someone in a bigger group.  What happens to your practice if you have to take 6 weeks off?  Or if reimbursement gets suddenly hacked?  It's akin to holding a lot of stock in one company.  You have wonderful so far, but one bad break and it all comes crashing down.  That's what keeps me up with my group practice (losing hospital contracts specifically).  Would you have enough DI insurance for all those debts if you become disabled?  You may need to go up on this. Financially, you certainly can handle all of the proposed payments currently.  There is risk involved however.

                  This "private wealth" loan seems like a big holdup in this scenario.  I'd shop around and see what you can get.  The difference between a 3.65% vs 4.0% 30 year mortgage is roughly $70k on a $1M note (and that doesn't even reflect mortgage interest deduction, AMT, etc) over 30 years.  Not that big really in this scenario.


                  • #10
                    I would like to know your monthly fixed expenses. ( If you posted it already, sorry, I missed it ).

                    You can certainly afford a 1.5 million dollar home.  ( Where I live that wouldn't buy you a starter home in a lesser neighborhood )

                    It will definitely take twice as long to build ( or longer )  and will probably cost 50% to 100% more than you anticipate, so factor that into your plans.

                    Personally, I would pay off my other debts before starting this project.  You should be able to retire the other debts within a year or two.  Illness, accident, disability, recessions, all can show up at any time.   That's why I wouldn't take on so much debt at once. It should be easy for you to get rid of the other debt over the next year or two on your income.

                    Meanwhile, you can finalize the house plans.  You will have thousands of small decisions to make about paint color, drawer handles, moldings, light fixtures, etc.  They will interfere with your life.  Make sure you will have the time to deal with them and make sure that you deal with as many of those now as possible.  Trust me.  Every other day your builder and / or wife will be calling you with urgent decisions that have to be made NOW.  You have to give input, or there will be recriminations later.  You may think that this is hyperbole.  It's not.  Urgent issues pop up all the time during building, and you will have to make decisions.  You will often have to run down to the building site to see the problem and make a decision.  ( e.g. as the framing goes in, it looks like the architect put a door in the wrong place, which was only apparent after the framing was in. All the options for moving it are bad.  Which bad option do you prefer, or would you like to try to do a major revision on the plans.  You have to go down there to see what the builder is telling you )

                    I've heard that many couples divorce as a result of building projects, so do your best to minimize stress.  if you don't think you can handle the project, look for an existing home to buy.  It's a lot easier than building.  Under no circumstances should you think about selling your current house until you have actually moved into the new one.  There will be last minute delays and you may not get the occupancy permit.  Occupancy can be delayed weeks waiting for a door lock or plumbing part ( I've seen this happen to friends ).

                    If you plan on living in that house in retirement, make sure it's wheelchair friendly ( e.g wide doorways, roll in shower ).  If it's multi-story, make sure it has an elevator, or at least have an elevator shaft in the plans ( the shaft can be built as closets for now ).  You might also consider a solar city / tesla solar roof tile system. Since you're building from scratch, it's less expensive than a retrofit.  They aren't very cost effective yet, but you'll have power if the grid goes down.


                    • #11
                      I agree with the last two posters.  I worry it is too much debt with essentially a new practice.  You seem to be killing it now at 35 but what about 45, 55.  Do you want to work as hard as you are now doing down the road.  If you build this house now you are essentially stuck working like a fiend for the foreseeable future.  I would pay off some of the debts and save for retirement for a few years before starting the project.


                      • #12
                        In my humble opinion, you need to just get rid of the debt.  You are way too numb to the amount of debt you have.

                        You have no reason you NEED to build right now.  Your kids are tiny still and you guys are living comfortably I presume.  You make enough each year that you can wipe your slate clean in 2-3 years AND still have the ability to save up the insane amount of cash that you have now.  Right now, you should take your 750k and get rid of your car loans, your practice loan, and your student loans.  Then, I would work on paying off the loan on your land and practice building as well.  That way you have nothing but a mortgage (which will provide some tax relief).  Then, save up the cash you need to put down a large down payment on your "dream" home (a term I hate by the way)  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.

                        That is by far the least stressful way to handle this.  In 2-3 years you'll be living in dream home and no debt except the single mortgage.  There's a reason you said "...I have no reason to think this will change but of course worry about it frequently."  It's because your subconscious mind is telling you that if anything ever happened to your ability to practice and earn, you'd have a lot of debt and no way to pay it.  It's unsettling to be that far in the hole even when you have such high income potential.  You'll rest a lot easier when the debt is under control.

                        Also, you are WAY under-insured in my opinion.  A 4 million dollar life insurance policy is too small for someone earning what you earn.  Also, only 180k in disability?  If you become disabled that would mean you would have to sell everything you have and learn to live on just 180k/yr.  The point of disability insurance is to replace a significant portion of your income so that you DON'T have to make drastic changes to your lifestyle if you are disabled.


                        What's your specialty by the way?


                        • #13
                          Thanks all for your responses. It is good to have some insight especially on the construction process itself and additional expense along the way. If I had a magic ball and knew that construction would not cost more than proposed then I would feel more comfortable. I will say that our plans are very specific and all the big questionable items are accounted for – everything is picked out, soil tested, foundation planned by engineer, etc. Hopefully no big surprises.

                          As far as those people suggesting I reduce debt, I will still be able to throw money at debt at the same rate as I am now (except for the $150k I’ll need to close on house) because my monthly payments will not change and will actually be reduced $4600/mo after student loans are paid.

                          Our expenses are fairly low all things considered. We have a $2200/mo house payment, $3600/mo lot payment and $4600/mo student loan payment (I know that’s not “low”). Over and above that we don’t spend excessively. That shows because in 3 years (the first one bringing home $400k, second $600k and third around $1m) we have been able to accumulate not only the $750k in cash but also the $100k we put down on the lot and the $200k in retirement. All in all we have “saved” $1million in 3 years. Not to mention the $50k we spent on an architect, which is a one time expense, and $50k on office renovations that were necessary.

                          When I want to talk myself into it, I just think that we’ll have a $7k/mo house payment and the only other debt is my practice buy-in ($220k remainign) which is tax deductible. Way easier than what we’ve been doing for the past 3 years! I’ve saved a significant amount having even more expenses than that. The commercial building really in my mind doesn’t affect my decision-making. Maybe it should, but again I would be paying the same amount in rent for office space and I can’t imagine a scenario where my practice could not even afford rent. Apartments have long-term renters.  If something catastrophic happened (i.e. disability) then I could just as easily stop payments on the building as I could stop paying rent, as the building is collateral for that loan. Not something I would ever want to do but we’re talking about worst-case scenario.

                          One option I have considered is to put the $750k in a CD or online bank (one that has 2% growth) almost as a personal line of credit until the house is built in the event of a catastrophic event. This would give me at least 3+ years of expenses and certainly I could figure out what the issue was with my business in that amount of time (satellite office, etc.).  Not to mention, I am working 4 days a week now.  If I got so slow that I was working one then I should take home $250k still and have time to explore other locations and ways to increase revenue.

                          I am still torn but all the info is helpful. Keep it comin!


                          • #14
                            there are always big surprises when building.

                            good luck.


                            • #15

                              . I will say that our plans are very specific and all the big questionable items are accounted for – everything is picked out, soil tested, foundation planned by engineer, etc. Hopefully no big surprises.
                              Click to expand...

                              That's how all building projects start out.  

                              I am still torn but all the info is helpful. Keep it comin!
                              Click to expand...

                              You are simply overextended, and there's absolutely no reason why you need to build that house right now.

                              Given your expenses, you need more insurance.  If all goes well, you will be fine, but real estate investors go broke all 

                              the time when things stop going well.  Lots of things can go wrong in your practice and your life.  You choose not to acknowledge that.

                              You'll probably be ok, but I wouldn't take the risks that you're assuming here.  There's no need to risk your financial well-being and that 

                              of your family, but of course it's your decision and your family.


                              The advice so far has been unanimous.  You don't seem to want to accept that advice.

                              There's an old saying : "When everyone tells you that you're drunk, you'd better lie down".

                              Good luck.