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

[jfoxcpacfp]

Zaphod wrote:

Close enough. All I am saying is that your capital gains are not what you sell it for. A capital gain is a gain on/above the capital you put into it. A simplified way to show that in your specific case would be this. All payments and interest- 250k Sell at high end of comps- 300k Capital improvements- 30k So looking at just your payments and capital improvements of 280k and sale price of 300k, not counting insurance, taxes, and transaction fees (some are excludabele or adjusted for IRS purposes, but not what Im doing here really) your capital gain is only 20k. Everything else is a return of capital you put in, aka, savings. The IRS version may be a little better (adjusted basis, etc..pub 523)

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Actually, the "basis" is the cost of $190k + improvements $50k (rounding up) for a total of $240k. Interest has no bearing - it was deducted on schedule A when paid (if itemizing). If awesomesauce sells for $300k, the LTCG will be $60k less commissions, fixing up expenses, and closing costs. All of which is nontaxable, anyway, so I'm having some difficulty understanding your "nuanced" point.

Possible you may be inadvertently substituting the term "capital gain" for "cash flow"? That would make sense to me. If that is the case, then you will have to make an allowance for the benefit of living in said house rather than paying rent over the period of ownership.

[awesomesauce]

I understand how capital gains are calculated. I agree that, in general, markets are expected to return more than the 3-4% I was paying in mortgage interest, so it would have been better to invest the money in equities, rather than paying down the mortgage early (is that correct)?

If so, I know. A lesson for next time.

[Zaphod]

awesomesauce wrote:

Zaphod wrote:

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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Why dont we do this to illustrate what Im saying which is coming off more nuanced in text than planned. What did you pay for the house (down payment and all payments total), and how much do you think you could easily sell it for?

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I’m not sure I understand the question.

Our present house was bought for $190k. All payments and interest totaled $250k (until we paid the loan off). Talking with real estate agents and discussing comps, we think we could easily sell for between $275k-300k. We did significant work on the house, but total renovation costs were <$50k.

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Close enough. All I am saying is that your capital gains are not what you sell it for. A capital gain is a gain on/above the capital you put into it. A simplified way to show that in your specific case would be this.

All payments and interest- 250k

Sell at high end of comps- 300k

Capital improvements- 30k

So looking at just your payments and capital improvements of 280k and sale price of 300k, not counting insurance, taxes, and transaction fees (some are excludabele or adjusted for IRS purposes, but not what Im doing here really) your capital gain is only 20k. Everything else is a return of capital you put in, aka, savings. The IRS version may be a little better (adjusted basis, etc..pub 523) but it still wont be close to 300k. Sale for anything less than 290 and you will undoubtedly come out behind. Money almost certainly would have been put to better use in the market instead over the same time period.

Does that make sense?

[awesomesauce]

Zaphod wrote:

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.

Click to expand…

Why dont we do this to illustrate what Im saying which is coming off more nuanced in text than planned. What did you pay for the house (down payment and all payments total), and how much do you think you could easily sell it for?

Click to expand...

I'm not sure I understand the question.

Our present house was bought for $190k. All payments and interest totaled $250k (until we paid the loan off). Talking with real estate agents and discussing comps, we think we could easily sell for between $275k-300k. We did significant work on the house, but total renovation costs were <$50k.

[Zaphod]

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.

Click to expand...

Why dont we do this to illustrate what Im saying which is coming off more nuanced in text than planned. What did you pay for the house (down payment and all payments total), and how much do you think you could easily sell it for?

[Zaphod]

jfoxcpacfp wrote:

jfoxcpacfp wrote:

awesomesauce wrote:

Wow, why not find a “deal” that needs a lot of TLC? That’s a great hobby to have…

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Gas_Doc wrote:

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? 

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You know what they say about great minds, Gas_Doc…

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I dont know, we did this, and we do certainly enjoy fixing stuff up and growing up building things with my carpenter/jack of all father (and having him around to help at times), and working for several years doing maintenance at a 88 unit apartment complex certainly gave me skills to do things...I find I enjoy the time spent less and less and would rather do other things. I do really enjoy landscape, plants, a little garden, but man does home stuff take time and some weekends Im doing nothing else. Its not unenjoyable, I just like other things as well. Idk, its tough as it certainly is a good deal.

Our current house is about as nice as we should let it be in this neighborhood, had to warn the wife we entered diminishing return zone on it recently. Maybe time to move on.

[jfoxcpacfp]

jfoxcpacfp wrote:

awesomesauce wrote:

Wow, why not find a “deal” that needs a lot of TLC? That’s a great hobby to have...

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Gas_Doc wrote:

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?

Click to expand...

You know what they say about great minds, Gas_Doc...

[jz]

I like the WCI advice on limiting one's mortgage to X (2)( annual income).

(2)( $50k) =$100k mortgage + $300k =$400k total home purchase price.

[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.

[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.

[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!"

[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:

> 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.

Click to expand...

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]

> 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.

[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.