Odd (good) financial situation starting residency - how much house to buy?

[Gas_Doc]

awesomesauce wrote:

I appreciate the feedback. Sounds like we should scale back our plans.

 

Nonetheless, it still feels “weird” to me that (assuming nothing goes massively wrong), SO will have a ~$300k/yr job in 5 years – a salary that easily (and reasonably) buys a $1M house – yet despite being able to make a ~50% downpayment, we would be ill-advised to buy a “stepping stone” house along the way to that “mansion”.

I know the more prudent folks here advocate for retirement savings and equity investments, but, well, we didn’t train for this long just to retire as soon as possible. And what else is there to do with that kind of money? Some people like boats, we like houses.

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I'm sorry, but there are so many things wrong with this mentality. I'm going to break down each thing because I just can't help myself:

"SO will have ~$300k/yr job in 5 yrs - a salary that easily (and reasonably) buys a $1M house"" 
- I can tell from this statement that your wife has not been in medical practice long (though I'm cheating because you said she's an MS4). The further long in training she gets, the more people she will meet that didn't travel along the professional plan they had initially devised. There are all sorts of things that could derail your 5-year financial plan: pregnancy, illness, family emergencies, failing boards, burnout, change of specialty, change of program, etc. You cannot rely on a hypothetical income 5 years from now. Also, because a banker (who's livelihood is based on closing as many mortgages as possible) says you can afford a house doesn't mean you should buy that much house.

 

"despite being able to make a ~50% downpayment, we would be ill-advised to buy a “stepping stone” house along the way to that mansion."
- It's not about the down payment, it's about your lack of household income when you move. Why do you feel the need to trade up to that "stepping stone" house? Even assuming everything works out perfectly for your wife professionally over the next five years (ie doesn't change specialties, no academic hiccups), do you really think you will be that much happier in the $750k house than you would in a $400k house? You have to keep in mind the strain on your everyday finances (mortgage payment trumps going out to eat) not to mention the over-leveraged place you put yourself into.

 

"I know the more prudent folks here advocate for retirement savings and equity investments, but, well, we didn’t train for this long just to retire as soon as possible."
- Your wife may (will?) feel differently in 15-20 years when the overnight calls start to take a toll and your kids take up more of her sparse free time.

 

"And what else is there to do with that kind of money?"
- You said it already: go out to nice restaurants! How does an impromptu trip to the The French Laundry sound the next time you are in the Bay Area for a medical conference? Or how about a 2-week trip to Australia and New Zealand for you and the kids? The financial freedom required to do things like this are a lot easier when you aren't house-poor.

[awesomesauce]

Gas_Doc, I appreciate the comments, and will take them to heart. I suspect part of the issue is that we paid off a mortgage on a $300k house before we turned 30 (and while SO was in medical school), so my general expectations about how our financial and housing prospects will scale upwards in the future are...optimistic? This may be just an intellectual disconnect in my head, though - my high-paying job is what enabled our current situation, but it feels like this is just a hobby for me while I wait out SO becoming a "real doctor".

[Zaphod]

awesomesauce wrote:

East coast wrote:

Curious as to how you made the math work to presume a bank would loan that amount for a house at that price point given an income of $50-$60k? I think Allonblack and EH hit the nail on the head.

 

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Well, assume a resident’s income of $50k/yr, and assuming we “supplement” our income over the next 5 years with the $300k we make selling our home, that gives us another $50k/yr (I realize a bank may not be OK with this). A 5/1 ARM on a $600k loan is <$3k/mo in payments. Seems very reasonable? And that assumes I don’t work and SO doesn’t moonlight.

 

I don’t mean to argue with anyone – I genuinely appreciate the wise advice, and realize that I’m suggesting something that is probably generally seen as financially imprudent. But let me ask: if a (hypothetical, different) resident went and got a “doctor loan” to buy a house, is he really using it to buy a $150k fixer-upper (because that’s all he qualifies for at a $50k/yr income)?

We’ve lived frugally as “grad students” for over a decade and have some net worth to show for it – I have a hard time believing that the next house we can buy is nearly the same house as can be bought by a resident with $300k in debt.

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This is just a terrible idea. Bank wont do it anyway thank goodness. Its not financially imprudent its akin to lighting money on fire and paying someone for the pleasure. Doesnt matter what you believe things should be, this attitude will get you in trouble very fast.

Yes, thats what a resident can get, and residents shouldnt be buying houses anyway, its a poor move with the risk:reward probabilities way skewed to risk, the only person making any money on the transaction for sure will be the real estate agent.

With your outlook on what is reasonable and admitted spending proclivities you will put yourself into a hole matching other docs who werent paying attention fast.

[Zaphod]

awesomesauce wrote:

Gas_Doc, I appreciate the comments, and will take them to heart. I suspect part of the issue is that we paid off a mortgage on a $300k house before we turned 30 (and while SO was in medical school), so my general expectations about how our financial and housing prospects will scale upwards in the future are…optimistic? This may be just an intellectual disconnect in my head, though – my high-paying job is what enabled our current situation, but it feels like this is just a hobby for me while I wait out SO becoming a “real doctor”.

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You will be disappointed. 300k with some serious taxes just doesnt go that far. Why would you just give up your good paying job in residency, you should still be knocking it out then.

[The White Coat Investor]

awesomesauce wrote:

I appreciate the feedback. Sounds like we should scale back our plans.

 

Nonetheless, it still feels “weird” to me that (assuming nothing goes massively wrong), SO will have a ~$300k/yr job in 5 years – a salary that easily (and reasonably) buys a $1M house – yet despite being able to make a ~50% downpayment, we would be ill-advised to buy a “stepping stone” house along the way to that “mansion”.

I know the more prudent folks here advocate for retirement savings and equity investments, but, well, we didn’t train for this long just to retire as soon as possible. And what else is there to do with that kind of money? Some people like boats, we like houses.

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I disagree that a $300K salary = $1M house. I generally recommend having a mortgage no larger than 2X your gross, so a $300K salary would mean something closer to $600K unless you have $400K to put down.

I also disagree that $300K is "~50%" of a $1M house (maybe you were referring to the $750K house?) I know how long and how much effort and sacrifice it took me to come up with my first $200K. It's a lot of money.

If you prefer to work longer, take fewer/cheaper vacations, drive crummier cars, skip the boat, and have a sweet house, you can do that. But the idea that you should spend a lot because you eventually expect to have a higher salary is the idea that keeps most docs from accumulating wealth. 5 years is a long time.

[Hatton]

This attitude that you deserve something that you really cannot afford is deadly.  It is akin to the morbidly obese patient that states I deserve this dessert because I have been good today.

[awesomesauce]

Zaphod wrote:

awesomesauce wrote:

Gas_Doc, I appreciate the comments, and will take them to heart. I suspect part of the issue is that we paid off a mortgage on a $300k house before we turned 30 (and while SO was in medical school), so my general expectations about how our financial and housing prospects will scale upwards in the future are…optimistic? This may be just an intellectual disconnect in my head, though – my high-paying job is what enabled our current situation, but it feels like this is just a hobby for me while I wait out SO becoming a “real doctor”.

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You will be disappointed. 300k with some serious taxes just doesnt go that far. Why would you just give up your good paying job in residency, you should still be knocking it out then.

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...what taxes? No capital gains tax on <500k (married) on primary residence.

[Zaphod]

awesomesauce wrote:

Zaphod wrote:

awesomesauce wrote:

Gas_Doc, I appreciate the comments, and will take them to heart. I suspect part of the issue is that we paid off a mortgage on a $300k house before we turned 30 (and while SO was in medical school), so my general expectations about how our financial and housing prospects will scale upwards in the future are…optimistic? This may be just an intellectual disconnect in my head, though – my high-paying job is what enabled our current situation, but it feels like this is just a hobby for me while I wait out SO becoming a “real doctor”.

Click to expand…

You will be disappointed. 300k with some serious taxes just doesnt go that far. Why would you just give up your good paying job in residency, you should still be knocking it out then.

Click to expand…

…what taxes? No capital gains tax on <500k (married) on primary residence.

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I meant on a 300k/y salary. Capital gains will only be above what you paid for it, ie the appreciation, everything else is really just return of capital minus a hefty transaction fee.

The other thing to remember that as you move away from the median/average home prices in your area you are taking an illiquid asset and making it much much worse by then limiting the amount of people who could even consider buying your property. Higher priced homes are sometimes on the market a long time, only a few can buy them naturally and you just wont be able to necessarily cash out asap if you wanted and they do carry high holding costs. Buyers being more wealthy can also be on average a bit smarter and more shrewd and will negotiate and dont have the pressures necessarily of needing to get into a place at a certain time. Im currently looking for just such a situation myself, an overextended owner who has to leave a nice place where I can offer a heart breakingly low sum in a slow market that they will initially be mad about but maybe have no other options. If they balk, big deal, I dont have to go anywhere and can wait.

One of my partners did this a couple years ago as well, his neighborhood apparently hated him for a bit for having a terrible comp in the area.

[Gas_Doc]

Zaphod wrote:

One of my partners did this a couple years ago as well, his neighborhood apparently hated him for a bit for having a terrible comp in the area.

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That's awesome.

[awesomesauce]

> Capital gains will only be above what you paid for it, ie the appreciation,

 

Unless I'm radically misunderstanding, I believe there is an exemption on the first 500k of capital gains for a married couple selling a primary residence.

[jfoxcpacfp]

awesomesauce wrote:

> Capital gains will only be above what you paid for it, ie the appreciation,

 

Unless I’m radically misunderstanding, I believe there is an exemption on the first 500k of capital gains for a married couple selling a primary residence.

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That's correct and you are not radically misunderstanding. I'm sure Zaphod is aware of the $250k exemption per spouse if the home has been your primary residence for 2 of the last 5 years. One of the few great tax loopholes available to ordinary citizens. Maybe he was simply generalizing about LTCGs.

I must confess to agreeing with the group on this one. Even though some people like boats and some people like houses and you can get a loan doesn't make it practical or reasonable. I happen to like French chalets...

[awesomesauce]

Consider me the new owner of some significantly adjusted expectations...

 

So what's the right answer? With a $300k downpayment and assuming a single salary of $50k, what's a reasonable loan amount on a 5/1 ARM? (I'm stuck on the ARM because this seems like the ideal situation for an ARM - much higher future earnings potential and large downpayment).

 

(I'm also stuck on the idea of buying, not renting - our big hobby is home improvement and DIY projects - we really want to buy, even with the understanding that lots of money is lost in transaction costs)

[jfoxcpacfp]

awesomesauce wrote:

our big hobby is home improvement and DIY projects

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Wow, why not find a "deal" that needs a lot of TLC? That's a great hobby to have (definitely not one of my talents and I'm envious). You could work on generating tax-free gains while your wife is in residency and you are the SAHD and be way ahead of the game when she is a new attending. By then, you just might be able to afford that dream house, depending upon how well you choose now.

The next 5 years will pass before you know it. Which would you rather say, looking back, in 5 years? "I'm so glad we bought a million dollar house when I quit my job!" or "I'm so glad we are in such an awesome financial situation to celebrate the beginning of my wife's career!"

[Gas_Doc]

awesomesauce wrote:

Consider me the new owner of some significantly adjusted expectations…

 

So what’s the right answer? With a $300k downpayment and assuming a single salary of $50k, what’s a reasonable loan amount on a 5/1 ARM? (I’m stuck on the ARM because this seems like the ideal situation for an ARM – much higher future earnings potential and large downpayment).

 

(I’m also stuck on the idea of buying, not renting – our big hobby is home improvement and DIY projects – we really want to buy, even with the understanding that lots of money is lost in transaction costs)

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If you are dead set on using the $300k from your sold home to fund your future home, why not buy a home that has serious fixer-upper potential? With such thinking, you could buy a fixer-upper with good bones for $300k and put $200k down. Use the other $100k for renovations. With that reno budget plus some sweat equity (which you say you enjoy), I wouldn't be surprised if the home was worth $500k when all is said and done (assuming you buy a house with a lot of reno potential to begin with). The 5/1 ARM still makes me very nervous since you are relying on that attending income increase when your balloon payment kicks in. If anything happens during the next 5 years (ex. pregnancy that delays graduation for a year), you are stuck with a balloon payment on a resident salary. In my above example, the monthly payments between a 5/1 ARM and a 30-year fixed are only $40/month ($408 vs $448). I'd certainly be willing to pay an extra $40/month for that added security.

All that being said, if I was in your position and insisted on buying, I'd rather buy the $300k house with big-time rehab potential with the traditional 20-25% down ($60-75k), renovate as I see fit (less than $100k), and use the rest to max out my and my wife's retirement accounts for the next 5 years and still have an emergency fund in cash. Just my 2 cents.

[Gas_Doc]

The other thing to think about, since you won't be working a 9-5 job and you say you are quite handy, is to buy a duplex, triplex, or quad and rent out the other unit(s) to supplement your living expenses. An owner-occupied rental property could provide a lot of sweat equity and certainly keep you plenty busy at home.

Here's an example of a pretty sweet duplex in my town that is already renovated that would provide a very nice standard of living for a resident and his/her spouse as well as rental potential. I could see a place like this going for $150k cheaper if it was in disrepair, which could work into my $300k example in my previous post.