Too much house too soon???

[Dont_know_mind]

Although I tend to agree with hatton1 most of the time, I would disagree on this occasion and with almost everyone else on the thread (except the last person).

I am a big fan of real estate as a builder of wealth.

I think if you are keen on the house after weighing up the risks/benefits and it is right for you, then you can certainly buy it at 1X income. You will probably pay it off in less than 3 years.

My wife and I left it for 6 months after I finished fellowship until we bought a place together, but we could have done it earlier and saved ourselves the moving.

We already had 3 properties between us before we bought one together.

I bought a large block of land on my own for 900k in my last fellowship year. I still have it.

We then bought a condo together for 600k. We sold it 5 years later for 950k.

That being said, I did move around a bit in the first few years but I had no issues with non-compete agreements and we stayed in the same area.

If you own no other housing then you are short 1 house.

I think a house is a great start to building wealth, particularly if the area has reasonable capital growth prospects.

Also it is a cheap source of leverage.

Moving with young kids is a hassle. I would value the cost of moving in terms of time and hassle at 1 month's wages for both of you.

Anyway, here is a funny story for you, we bought the condo together and had this plan to go on our honeymoon for a month. We were due to move into the place we bought after we returned from our honeymoon.

Before we left the rental we checked the place to return to the real estate agent. But we still had 1 month on the lease so we returned the keys and left it vacant. Anyway, I had this last minute urge to use the loo for the last time before catching a taxi to the airport. The toilet mechanism must have got stuck so the water was running for the next month. The water bill was horrendous, about $2000. Whatever you do, and this is so important, that I feel I must tell all young people I can about this, make sure you don't flush in haste as I did. Indeed it could be argued that the risks/benefits are tilted towards one not flushing at all in many situations, particularly if one is in a rush.

Seriously though, you sound like you are in a good situation and will probably do well whatever you decide.

 

[Hatton]

I think they can afford the house.  I just think it makes sense to be sure about the job before buying.  You just don't want a house to chain you to a job you hate.

[The White Coat Investor]

Noob to WCI wrote:

Long time lurker to WCI site.

I’m FINALLY about to finish fellowship and have recently signed a contract for a full time position to start in July.  I’m looking to the WCI to tell me if I’m getting too much house too soon.

My spouse is also a physician.  Our combined income will be around 600-650k in year 1.  The only debt we have are my student loans (180k). I plan on aggressively paying off this loan in about 2 years (Thanks to WCI for telling me about SOFI and cutting my interest rate by 50%!). Our assets are cash savings, 403b, and stocks (around $150k).

We are looking at houses around 500k-700k. We have 2 small kids and are undecided if we will be having more.  The cost of living where we will be working is about average but is having a very hot housing market.  I know this home price is still less than 2x our income, which seems to be the quoted range for WCI readers.  But it still make me nervous to take the jump from renting to owning a home at this price range.  Thoughts from the WCI forum?

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Given how well you're doing with everything else (income, assets, debt, total house expense) you can probably buy soon and be fine. Will you be better off if you live like a resident for a few years? Sure. Are you probably still going to be very successful even if you buy your first year out? Almost surely.

One caution, of course, is to make sure you like the job and the job likes you before buying. That would suggest renting for 6-12 months anyway. I bet you could pay that debt off in that time period and be in an even better position to buy.

[DMFA]

You will probably pay it off in less than 3 years. My wife and I left it for 6 months after I finished fellowship until we bought a place together, but we could have done it earlier and saved ourselves the moving. We already had 3 properties between us before we bought one together. I bought a large block of land on my own for 900k in my last fellowship year. I still have it. We then bought a condo together for 600k. We sold it 5 years later for 950k. That being said, I did move around a bit in the first few years but I had no issues with non-compete agreements and we stayed in the same area. If you own no other housing then you are short 1 house. I think a house is a great start to building wealth, particularly if the area has reasonable capital growth prospects. Also it is a cheap source of leverage.

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I'm not totally on board. I'm not sure paying a low-interest debt over 3 years is the best use of the money and offsets the last statement; you're losing your leverage as you pay the note. Even if the house gains that much in value, it's doing so regardless of how much principal is remaining on the note.

A primary residence is not a good wealth-building tool; even Kiyosaki says that in Rich Dad, Poor Dad. It's more of a cash-flow investment than a net-worth investment.

$600k in, $950k back over 5 years = [(950/650)^(1/5)] - 1 = 9.63% compound annual rate of return. Pretty good, esp for property, but not too far away from the historical rate of gain for, say, the S&P 500 (excepting these past ridiculous years).

[mamaham]

RENT.  agree with all above.

we are in year 2 of attending.  very similar situation to you - 2 small kids, started with same debt, lower salary though.  we paid off debt in 12 months.  2 years at your salary to pay off loans is not aggressive in my opinion.  you can easily do it in 1 year and then you will feel so much better.  i was not expecting the feeling of the weight of debt being lifted as so significant, but it is.  however, not all are as debt adverse as we are, so you will get varying opinions on this.

then you can aggressively save for emergency fund and down payment.  by then you will know where you want to live, you will have heard about the neighborhoods, visited them, and seen the schools.  don't rush all these decisions.  don't let people (well meaning family mostly) guilt you into feeling that renting is a waste of money - it isn't.  i have to keep having this same discussion over and over and have to keep telling myself that we are not wasting money.  we are making wise decisions for our future.

we are also in a hot housing market and a little hesitant to buy a house where the prices seem so inflated.  we are saving up and hoping that there is a market correction before we are ready to buy....

[Dreamgiver]

The house is not too much for you, you will be very comfortable making the payment. Main thing, as said above, is that many people leave their first job.

I thought I would never be one of those, since I took a job where I trained for residency and knew the place well. 1.5 years into it and I am looking for a new job. Go figure.

[Craigy]

House sounds pretty cheap compared to your income.

As for the rent vs buy, seems like you're going to be living where your spouse lives, regardless of your job situation, particularly if that spouse if a wife, and particularly if the spouse plans to continue being employed.

If you decide to quit your job, all of the typical WCI forum worries that you'll have to move are probably not applicable, unless you are currently subject to a really bad non-compete.  Even in that case, I'd imagine you'll just end up picking up a long commute.

Buy the house your spouse likes in an area your spouse is going to be happy with long-term.  And be very wary of any non-compete agreements.   

[childay]

Anesthesia84 wrote:

As for mortgage compared to income, it sounds reasonable. We decided to be on the “safe” side and our mortgage is about half of our combined income (350k for 450k house vs income of 650k+) because as a 2 physician couple we felt it might be more likely that someone would have major changes in job structure or something that might “encourage” one of us to take a prolonged time off. Neither of us want to be stuck in a position we hate. We want to have the possibility that someone can stay home indefinitely if needed and minimizing expenses is an important way we are doing that. We also wanted to have the option that one of us could stay home more with the kids if/ when needed.

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We are similar.  Two-physician couple and we rented for about a year to start.

Certainly you are getting good advice here.

[jz]

1) A $500k-$700k home will cost $50k/year for mortgage interest, maintenance and repair, insurance, property taxes;  then add in some principal.  What could you rent for the same $50k?

2) The tax reform proposals will eventually drop all home values.  Wait 5 years to watch housing deflation in action.

[Dont_know_mind]

Craigy wrote:

House sounds pretty cheap compared to your income.

As for the rent vs buy, seems like you’re going to be living where your spouse lives, regardless of your job situation, particularly if that spouse if a wife, and particularly if the spouse plans to continue being employed.

If you decide to quit your job, all of the typical WCI forum worries that you’ll have to move are probably not applicable, unless you are currently subject to a really bad non-compete.  Even in that case, I’d imagine you’ll just end up picking up a long commute.

Buy the house your spouse likes in an area your spouse is going to be happy with long-term.  And be very wary of any non-compete agreements.   

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Craigy is right there.

Happy wife = happy life.

And if you can do that with a house that is 1X income = bargain

Also, if you have no other property, then you are short 1 house that you will have to buy in 1-2 years. So if the houses you want go up 20-30% in that time period, that is a potentially painful.

[mamaham]

jz wrote:

2) The tax reform proposals will eventually drop all home values.  Wait 5 years to watch housing deflation in action.

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why?  I have not hear this mentioned yet as part of the tax reform discussion and haven't thought about it.  interested to hear why you think it will affect home prices in 5 years?

[The White Coat Investor]

mamaham wrote:

jz wrote:

2) The tax reform proposals will eventually drop all home values.  Wait 5 years to watch housing deflation in action. 

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why?  I have not hear this mentioned yet as part of the tax reform discussion and haven’t thought about it.  interested to hear why you think it will affect home prices in 5 years?

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In some areas, only some of your property taxes will be deductible. Also, many people will no longer itemize at all thanks to the higher standard deduction. This essentially increases the costs of ownership, providing downward pressure on house prices since the government is not subsidizing them as much.

[jz]

@mamaham,   As per the proposals, most taxpayers will become standard deductors; the number using  schedule A will be diminished.  Potential and current homeowners will no longer think in terms of property tax deductions nor mortgage interest deductions. The housing market will be much less distorted by tax laws. Owners and potential owners will think less in terms of the distorting tax deductions.  The    rent<----->own  balance will tilt slightly toward renting and against owning.

[White.Beard.Doc]

jz wrote:

@mamaham,   As per the proposals, most taxpayers will become standard deductors; the number using  schedule A will be diminished.  Potential and current homeowners will no longer think in terms of property tax deductions nor mortgage interest deductions. The housing market will be much less distorted by tax laws. Owners and potential owners will think less in terms of the distorting tax deductions.  The    rent<—–>own  balance will tilt slightly toward renting and against owning.

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This tax reform will certainly make living in a high tax state with high property taxes much less desirable from a financial perspective.  In our area, the cheapest property taxes are well over 10k, and a typical doctor house carries an annual property tax bill of 25 to 35k.  So this area is going to get a huge tax increase from the loss of deductibility of state and local taxes.  The counterpoint is that there are so many high paying jobs.  It will be interesting to see how this all plays out over the next few years.

[The White Coat Investor]

White.Beard.Doc wrote:

jz wrote:

@mamaham,   As per the proposals, most taxpayers will become standard deductors; the number using  schedule A will be diminished.  Potential and current homeowners will no longer think in terms of property tax deductions nor mortgage interest deductions. The housing market will be much less distorted by tax laws. Owners and potential owners will think less in terms of the distorting tax deductions.  The    rent<—–>own  balance will tilt slightly toward renting and against owning.

Click to expand…

This tax reform will certainly make living in a high tax state with high property taxes much less desirable from a financial perspective.  In our area, the cheapest property taxes are well over 10k, and a typical doctor house carries an annual property tax bill of 25 to 35k.  So this area is going to get a huge tax increase from the loss of deductibility of state and local taxes.  The counterpoint is that there are so many high paying jobs.  It will be interesting to see how this all plays out over the next few years.

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$30K in property taxes seems so insane to me. Mine are $3660 on my 4400 sq ft monstrosity in the best school district with a 100 mile view. My entire 15 year mortgage, when I had it, was about $30K a year. It's like you're on another planet, or at least another country.