By Dr. James M. Dahle, WCI Founder
In 2019, I received this email.
“My wife is a recently graduated dermatologist. We are debt-free, have a $400,000 mortgage, and a net worth of $1.3 million. I have been working hard while she was in residency. We just purchased a new home in a nice neighborhood for $500,000. What has shocked me is all the other expenses such as $215 per month for homeowner's insurance and the cost of new furniture for a 3,000-square foot house. There is also significant pressure to buy new cars, use private schools, etc. I feel like we can afford to be here, but man, I see how you could get into trouble quickly. As new docs are entering the work force for the first time, it would be nice to see a friendly reminder to have patience. You can have anything you want, just not everything now.”
Well said. Here's a doc starting her career in a remarkably good place—free of student loans and already a millionaire. Despite all of that, this couple is feeling a bit pinched as they upgrade their lifestyle. Now, imagine a more typical recent residency graduate who has $300,000 in student loans, a net worth of negative $300,000, and a $500,000 mortgage on a $500,000 house.
The Real Cost of a New House
Most new homeowners underestimate the cost of owning a house. While there is a certain aspect of investment to it, the home you live in is primarily a consumption item. When you buy a bigger house, EVERYTHING associated with it goes up in price, sometimes dramatically. Here's an example: for a period of time, we owned two houses, a little dumpy townhouse in Virginia and our fancy “doctor home” in Utah. We had to replace both roofs at the same time: $2,300 for the first and $14,000 for the second.
Consider everything that goes up in price with a larger, nicer home:
- Mortgage principal
- Mortgage interest
- Opportunity cost of the home equity
- Property tax
- Heating/cooling costs
- Window treatments
- Furniture
- Carpet
- Paint
- Landscaping
- Cleaning costs
- Lawn and landscaping maintenance
- Snow removal
- Maintenance costs
More information here:
How to Buy a House the Right Way
Upgrades and Renovations Are Pricey
A typical estimate for maintenance costs of a home is 2% of the value of the home per year. This covers things like repainting, recarpeting, replacing broken appliances, and replacing the roof/windows every 30 years or so. It does NOT cover upgrades, updates, and renovations. I have a friend who is a high-end general contractor who bought a house in the neighborhood. It was not a surprise to see him strip the house down to the studs and build it back up into a rather impressive Taj Mahal. Not only does he enjoy that kind of work, but he gets a significant discount on all of the labor and materials (not to mention the business value of that sort of thing).
It's only natural when a neighbor upgrades their house to wonder if you should upgrade your own, especially if you have the means to do so. So, Katie and I looked at our house and property and thought about making some changes. It's a funny thing to look at a perfectly functional toilet, shower, kitchen counter, chandelier, or window and consider replacing it “just to update things.” We actually made a list of all the stuff we wouldn't mind updating on our house and property and ran it by my friend the contractor. He revealed that a project that I thought might be a couple hundred thousand dollars would not only cost more than we paid for our house back in 2010 but more than it was worth now! Talk about sticker shock. The bottom line is that the 2%-a-year figure doesn't even come close to covering the cost of periodic updates.
Keeping Up with the Joneses
Doctors like to think that Big Pharma advertising doesn't affect their prescribing habits, despite all evidence to the contrary. Likewise, homeowners, especially those who are financially savvy, think they're immune to the spending habits of their neighbors. But the truth is they probably aren't. If your neighbors have their kids in private school, you're probably going to put your kids in private school. If your friends and neighbors travel internationally, you're probably going to do the same.
It takes an amazing amount of willpower to drive a Civic when everyone else drives an Audi, a Lexus, or a Tesla. Nobody wants to tell their kid they can't take music lessons, play on a traveling sports team, or have a cell phone when all their friends are doing it. Sacrificing to get into the cheapest home in the nicest neighborhood might be good for resale value, but it introduces terrible temptations for lifestyle spending. Consciously and unconsciously, you're going to spend more living in a nicer neighborhood.
More information here:
How We Became Accidental Landlords
The Costs of Moving (and How to Combat It)
How You Can Survive While Living in a Nice Neighborhood
Here are a few tips to help you continue to build wealth while living in a nice neighborhood.
#1 Get Rich First
The biggest reason doctors don't build wealth is because they skip the “Live Like a Resident” period. “Oh, that doesn't apply to me, I'm a dermatologist,” they might say. Or, “I only have average student loans.” Or, “We've sacrificed for so long; you only live once, and we don't want our kids to suffer.” Forcing yourself to live like a resident for a few years directs a massive amount of your income toward wealth-building activities like paying off student loans, saving up a down payment, and maxing out retirement accounts. It also strengthens your financial muscles to resist spending. Both are useful when it comes to building wealth. But the bottom line is it is far easier to afford to live in a nice neighborhood and even keep up with the Joneses a bit when you have paid off your student loans, have a real down payment, and already have a nice little nest egg.
#2 Don't Live in the Nicest Neighborhood
There will always be a neighborhood you can't afford to live in. Don't buy a house there. Remember that there are people who make more than doctors do and who didn't start their career in their mid-30s owing $300,000 in student loans. Just like a pediatrician can't spend like an orthopedist, you can't live in the same neighborhood as those people. Maybe they're tech millionaires or just hospital CEOs, but don't make the mistake that a doctor can live in any neighborhood they want. In fact, if you tone it down just a little bit, you can be the Joneses everyone else in the neighborhood aspires to be. Buy a house that is 1X your income instead of 2X, much less than the amount the bank will approve for you.
#3 Don't Furnish Immediately
Many are surprised to learn that we had several empty rooms for YEARS after buying our doctor house and that it was still primarily furnished with hand-me-downs. There is no rule that says you must buy all new furniture when you buy a new house. In fact, there is no rule that says you must have furniture (or drapes or a pool table) at all. Take your time.
#4 Don't Renovate Immediately
As noted above, updates and renovations are very expensive. Trying to tackle them before you get rich can destroy your ability to build wealth at all. You can have anything you want but not everything and not all at once. Maybe you should pay off the mortgage before you renovate, and then pay cash for the renovation. “But that will take SOOOO long!” Maybe that's because you bought too much house in the first place.
#5 Get Real About What Makes You Happy
It is natural to think you will be happy when you have a nest egg of a certain size, when you have that flashy car, when you get a boat, or when you finally have that updated bathroom. Guess what? It's not true. There's always going to be another shiny bauble you will think you need. Home renovators, in particular, like to think “when we're finally done . . . ” but the truth is you're never really done. You can always rip that bathroom back out in 10 years and update it again. There is always something that can be done and something that isn't brand new. Studies suggest that strong relationships (relatedness), a sense of being in control of our lives (autonomy), and a sense of competence are what really make us happy. And maybe we shouldn't be happy all the time anyway.
#6 Find Balance
Moderation in all things. You need to build some wealth and financial security. You also never know when you're going to die, and your goal probably isn't to be the richest person in the graveyard. It's OK to spend money on stuff you want. It's not OK to spend all of your money. Make conscious decisions and live as best you can with the consequences.
Have questions about physician mortgages and if they're the best option for you? Let us introduce you to the best doctor mortgage lenders in the business, vetted by WCI and thousands of readers.
What do you think? Have you had difficulty building wealth due to living in a nice neighborhood? How have you struck a winning balance in your life? Comment below!
[This updated post was originally published in 2019.]
I have a 1400 square foot home in the DC area. Recently got my roof replaced for $4,500. My friends, who live a couple of miles away and have a 3000 foot square home, paid $12,000 to get theirs replaced. I would just add to your advice to not buy a massive home if you don’t need it. And many who think they “need” it, still don’t.
I love this post.
My wife and I moved to a modestly priced house given our income in November. This is our “attending house” but cost about 1x our annual salary.
That said, we definitely had some costs when we bought it (upgrading the non-programmable thermostat, fence for our two dogs, etc). We also have a much larger yard with a steep slant to it and I don’t have a lawn mower that can handle that. So, we are outsourcing lawn care for the first time in ten years.
What we DID do is not furnish the house. We currently down have a dining room table, outdoor furniture for our porch, and the couch down stairs would make a college bachelor proud. We also haven’t upgraded a whole lot. Our kids also remain in public school, and we won’t be upgrading our cars (in fact, I’ve thought about doing the opposite on occasion).
Knowing where you are going and WHY will help you stick to the plan. Surrounding yourself with like minded people will help accomplish this, too.
Great reminder, Jim.
Jimmy / TPP
I truly lucked into my current and pretty much “forever home” (all courtesy of finding it on ebay). I didn’t know it at the time but because of this property purchase I was able to really take advantage of geographic arbitrage and that, more than anything, has accelerated my net worth and essentially counter balanced all the other major financial blunders I have made in my life.
The home when I bought it was probably 1.5x my salary and I probably could not afford it while still not being unable to unload the house I had during residency I had bought (one of those financial blunders I mentioned). But now, that purchase price is probably 0.6 of my annual income.
There are still so many expenses that this property generates even after I paid it off fully. Property taxes are very reasonable compared to some places I have heard of (currently around $4100/yr). Insurance adds another $2200/yr or so). Even though I have geothermal, my electricity bill during winter months tacks on about 350-450/mo (although some of that is elevated because I charge my Tesla). Not to mention that there was a period of time where every year I would do a $30-60k property improvement project (that went on for about 9 years and now I have the place pretty much were I want it). So yes it all adds up (I have put in at the very least the original purchase price worth of upgrades to the property since moving here).
We purchased our current house in the early 2000s from a doctor who I’ll call “the cheap bastard.” Some of the work he put in was OK, but most of it was low quality. We have undergone several phases of remodeling: replacing all the rusting pipe, then a carpeted bathroom. We held off the big kitchen, dining room, and bathroom remodel until my wife couldn’t stand it anymore. When we only had 2 burners left on the stove, the cabinets were being held up by tape, and both ovens crapped out, and I suggested using the toaster oven, she finally got the kitchen remodel she always wanted.
Great post. One more thing – Mello-Roos fees. The realtors can surprise you a LOT with this one. Only in California.
https://en.wikipedia.org/wiki/Mello-Roos If you buy a home in CA always ask about this before you sign.
Interesting. Haven’t heard of that Prop 13 work around before.
We (a 2 doctor household) purchased our home from a PA
The home was 1x our income back then, it is currently paid off and 1/3x of our annual income
The poor PA works 7 days/week to continue paying for his new home which is in the same neighborhood and is 2x the cost of our home. He ran out of money renovating our current home (when he lived there) and somehow saw fit to buy a new home that was twice as expensive. We do admit to gawking at the Jaguar and the RR in his driveway too.
Some people get it and some people don’t when it comes to finances
My husband and I are both physicians and we still live in our first house we purchased out of residendency 21 years ago. We have slowly remodeled over the years and remain happy with our home. We live in a LCOL area and paid $215,000 in 1998. Your post makes me smile because we didn’t have formal living room or dining room furniture for at least 10 years. The formal living room was the kid’s playroom complete with hot wheel tracks….. I miss those days! I know we would not have enjoyed the house nearly as much had it been full of formal furniture!
10 years ago, I couldn’t wait to have a big home with all of the luxuries and things that I would always want. I bought in 2010 when the market was at it’s bottom and got a great deal on a 4500 square foot home. Now that I have 2 young kids, the large house is nice to have…but the upkeep and renovation costs are huge. And now I can’t wait for the kids to be old enough to leave so I can downsize the house….even if the downsizing of the house means a more expensive purchase price. Downsizing would save me a ton of money and make my life easier. It’s amazing how our goals and desires change throughout our lives 😉
I was also surprised by the difference between maintaining 1300 sq. feet & 3000 sq. feet. It’s significantly more! Okay for this season of our lives, but I agree – I also look forward to a potential down-size.
This is about what I wished to add. Our kids are gone (mostly) and we’re at the downsizing contemplation phase. We’re still in our 50s- ie even if the Army hadn’t moved us all over this house’d’ve been too big for all but maybe 10 years since residency. I consider that we only needed a big splashy home briefly, and that maybe renting a hall or hotel ballroom for our bigger parties (one doctor family now rents out their oversized place just for that, only 2 miles across the river from me), and going to the All Ranks Club to use their swimming pool, and paying for hotel rooms for all our visitors would be cheaper than getting our place which now has 3 extra bedrooms, double the space to heat and cool that we actually live in, a pool that we repurchase every 5 years in maintenance and repair costs let alone labor, in an area where anyone with our amount of money usually just builds new or wants to live in town.
Low COL area and with Army move and my requirements (acreage, paved road) and husband’s (not a trailer house, move in ready) we were sort of limited to about 5 places when I hit the ground buying in a hurry. I should’ve argued harder for a trailer house- a double wide would’ve been big enough, and with a fallout shelter, cheaper and as safe. And in a single wide I’d’ve saved money building our home onsite and then selling the single wide compared to all the money (we’re now $600 in for $380 purchase and now likely $300 desperate quick sell, $400 if we spend a few years and $100 maintenance to get the better price) for this place.
As a counterpoint, I live in a part of Los Angeles where a small house that isn’t falling over costs north of $1 million, and a small house in good condition costs about $1.5 million. In terms of neighborhood quality, it would probably get a B+.
A few years ago, heady from the rush of about 6 months of attending surgeon paychecks, with a second kid on the way and no room for him, we decided to upgrade to our potential “forever home.”
This was before I started to map a road to FIRE, but our attempt at frugality was to purchase a larger house in an area on the fringes between a gentrified and a really not-so-nice area.
We paid over $1.7 million, and each month the mortgage payment and taxes sting quite a bit. We love the house, though, and are figuring out how to make it to financial independence regardless of this weight.
I don’t think I’ll find any sympathetic ears here, but I do think my story is pretty typical for many of my peers who live in big cities.
Double D,
With the right mindset, you can find your path. It sounds like you have that mindset. Since I also live in a large-ish and growingly expensive city, housing costs can be enormous. Sounds like you already have the right goals going forward, and although the house/tax cost can be large, if you are happy living there, and happy with your work, you will continue to be happy to achieve your FI. The route may be slower but at least you know what you have signed up for.
Thanks Napolean,
Staying in Los Angeles does mean a slower path to FI, that’s for sure. Every so often, I run the idea of moving to lower-cost-of-living area by my wife, but this type of move would essentially mean ending her career. She still enjoys her work, and her income makes up for a lot of the money we would save by moving somewhere else.
So we stay, despite the expensive real estate, the taxes, and the costs for schooling. The sunshine helps.
By my calculations, we optimistically should still be able to get to FI in the next 15 years or so. Unless the inverted yield curve is correct and recession really is headed our way! That might throw a wrench into things, at least for the short term.
– TDD
(shamelessly ripping off the monogram idea from the Physician Philosopher. My name is too long for people to type.)
Yup. A house in a decent neighborhood in LA is 5X a physician’s salary. 1.5 million for a 3 bed 2 bath 1800 sq ft house.
They are building $3-$5 million houses everywhere. Who’s buying them??? Celebrities, private equity vp? Not doctors that’s for sure.
The thing about LA is that the typical physician’s level salary isn’t limited to physicians…a fair amount of banking, entertainment, sports, tech jobs in LA all pay similarly high so houses are bid up even in terrible neighborhoods and even on houses in poor condition. I have to wonder if this is sustainable.
I don’t disagree with the sentiment of the post, but it’s funny to think of a $500k house as expensive. The Darwinian Doctor’s situation above would be a much more typical example.
A $500K house represents an 8X house to income ratio for the average American household. The failure to recognize that as expensive is part of the problem doctors have in building wealth.
In many parts of the country, that’s 2X the value of the average home.
Average home in Indianapolis: $143K
Average home in DFW Area: $244K
Average home in Tallahassee: $185K
Average home in Butte Montana: $155K
Average home in Phoenix: $242K
If you think $500K isn’t expensive, you might be a little out of touch with what most of the country experiences. Heck, even LA has an average of $571K and D.C. is $579K.
You of course have a good point, but “average” can be deceiving. The average price in a major metropolitan area encompasses inner city unsafe areas in addition to super posh burbs. The “average” price in a top 10% public school district (totally reasonable goal for most physician families) in one of the major metro areas you cited is likely much higher. I don’t have the stats but would be interesting if someone does.
But to be clear, for many that follow the WCI site, $500k is a 1X or less annual income ratio. Mortgages in the $500-750 range will have minimal impact on achieving FI for the typical surgeon, medical sub specialist or other high-income professional that otherwise follows the standard recommendations for saving/investing.
Agreed. Sorry you had to put this comment in so many times. I found 6-8 of them in the trash folder. I just pulled one out and added you to the “don’t send comments to trash” list.
I’m well aware. It’s tough being a mere doctor in those areas.
Well, the *median* home price in the US is about $225K.
That certainly makes $500K expensive in my mind since it’s over 2x more than where half the population lives. When you start throwing in additional requirements (best school district in the state, five minute commute, major urban center, free Tesla charging stations on every corner, flying car lanes, etc), you’re no longer talking about buying a typical home in a typical area. Those are additional niceties that some people care about and many do not.
That’s kind of the entire point of the post, no?
Amen. Those who don’t live in VHCOL areas can be deceived by statistics that can be looked up on the internet. When my wife and I looked for a house in the LA area in 2020, we set a few basic requirements: 4 bedrooms or 3 plus an office (we have two young kids, regular family visitors, and we both sometimes work from home), decent school district (7/10+), a reasonable commute for both spouses (~45 min or less), and “move-in ready” (ie. not needing major renovations immediately). The ABSOLUTE minimum that could be spent for this was $1.7M for a very basic house built in the 50’s or 60’s, with “nice” looking houses $2-2.5M+. We ended up spending $1.9M for what was an unusually good value – house itself was rebuilt 10 years ago, oversized lot on a hill with a nice view. House has a few oddities which scared away other buyers, but those are easily fixed. Even with 20% down and a killer interest rate (2.375%), and dual six figure incomes, it’s been a major strain on our budget. We gross over $500k/year combined, but after taxes, retirement savings, childcare, and housing, we live a modest middle-class lifestyle on about $65,000/year for everything else. I drive a 15 year old car, have an 8 year old computer, and haven’t bought new clothes for myself in 10 years. Two vacations per year flying economy and staying with family. Once the kids start public school and with a few years of (hopefully) inflation on earnings, the budget should get much better, but right now we’re still pinching pennies.
There’s no substitute for actually going to look at a few listings before concluding what a reasonable house costs in these areas. That said, this post has really good advice for those in similar situations. There’s no way we could have made this house work without having impeccable finances beforehand – debt-free, great incomes, head start on retirement savings, etc.
We are really out of touch. I didn’t think 500K was expensive either. And I live in Phoenix, where apparently the average home price is half that. Phoenix is very spread out. Buying a less expensive home means either living in a bad area or a long commute for most people, and to me, the longer the commute, the lower your quality of life and health in general. I think the same thing goes for pretty much every big city… location, location, location.
I’m not saying it’s not worth paying more. I’m just saying that $500K still buys a nice home in a large swath of the country. Here’s the first one I found in Gilbert, a Phoenix bedroom community. It’s $365K. Drive til you qualify.
https://www.realtor.com/realestateandhomes-detail/1363-N-McKenna-Ln_Gilbert_AZ_85233_M26161-06356?view=qv
One benefit of these reposts (looks like this one is about three years old), is that we can dig into some of the recommendations and see how they would have panned out. The $365k house referenced is now “worth” $626k (https://www.zillow.com/homedetails/1363-N-McKenna-Ln-Gilbert-AZ-85233/8281605_zpid/ – worth in quotations bc it’s a Zillow estimate).
1) Would have been nice to purchase that in 2019
2) Another example that, wow this market has been crazy. That “affordable” home in 2019 went from being a monthly mortgage of ~$1370 ($60k down, 3.5% rate) to ~$3700 per month ($60k down, 7% rate). And that doesn’t include taxes/insurance/PMI. That’s within $250/month of a one million dollar mortgage from 2021 (at 2.5%).
Going to be rough going for a while for first time homebuyers.
Still, you can’t make decisions based on the future because that is unknowable at the time. You can’t judge a process solely by its outcome when there were many other possible outcomes.
Average price in a top 10% public school district in a suburb of Boston is well over $500K, I would estimate a nice starter home (3bed, 2bath, LR, DR, Kitchen, 1800sq ft., .25acre) is approximately $1mil – with expensive taxes to boot. Another thought to keep in mind is re-sale – google the current article in the WSJ – “A Growing Problem in Real Estate: Too Many Too Big Houses”. Will you be able to sell your home when you want to downsize?
Good article, but it’s “principal”, not “principle.”
Yep. One of my pet peeves when reading about personal finance. along with “piece of mind” and debt “adverse.”
My most frequent error. Thanks. I’ll get it fixed.
Congrats Jim on getting featured on frontpage of Realclearmarkets!!
https://www.realclearmarkets.com/
Interesting. Thanks for sharing. I’m always honored to be listed anywhere near Morgan Housel.
Not a doctor but a software engineer and I enjoy following WCI and PoF since the discussions with larger incomes is more relatable to me.
We recently bought our first house after renting for about 8 years, we have two kids now with a third planned so we knew a 2BR small house wasn’t going to cut it.
I didn’t know anything about FI when buying this house but in this market (Minneapolis) I think we made out well. We were looking for a 2500 sq ft house with at least 3 BR for a family of 5. Most of the houses we came across at our budget $250-300k were smaller than we hoped though were nice houses in nicer neighborhoods.
The houses that we were really gunning for were costing about $425+ in our market. The bank said we could afford a 700K house but even I knew at the time that was ridiculous.
We saw a listing for a 3000 sq ft house, a bit uglier, and definitely a bit dated. It was listed for $310. We went to it and saw it had really good bones; taken care of, totally functional, and big, room to grow. It had a ton of aesthetic issues but we looked past that. We put in an offer and ended up getting a reduced $300 price on it.
Been there a year now and still feel it was a pretty good decision! It may not be a fancy house and it definitely doesn’t look like it, but it has perfect room for what we need now and 10 years in the future. Equivalent houses would’ve gone for $450+.
Knowing what I know now perhaps we would have kept looking but it is what it is. Our neighborhood is mainly older folks and middle class families. It’s great and next to a school and a big park reserve. No Teslas or Audis or Lexuses. Just normal working cars. No keeping up here. Hah!
Watching my friends look for houses, I’ve tried to get them on board with more frugal thinking but you can only do so much. One of the houses my friend put an offer on was a $425 house, fell through but they definitely aren’t targeting the same budget we were. My other friends who targeted $250 ended up paying $350 for a small house that I’m worried won’t really meet their future needs… But they have to make their own decisions.
My hope is while we are earning high we can pay down the mortgage quicker while still maxing out our accounts so that we can alleviate that pressure for the future. Only the future will tell but I’m very happy with our progress and have high hopes for our financial future.
1000 northerners moving to Florida daily because of hi taxes and hi cost of living
David Tepper, billionaire hedge fund guy, left NJ recently to make residence in sunshine state
Tip #7: Read The Next Millionaire Next Door
We bought our forever home 2 years ago. We are furnishing one room at a time and in no particular order. I know some of our friends and family come in and wonder “why do they not have rugs? or anything on the walls?” Some say it, others think it. We are okay with it. We love our house and property and will continue to add what we enjoy before what people think we should have. My husband and I also play a game (just between us) on how to furnish each room with credit card points/miles. So far, we’ve used points on the kids rooms, my office, outdoor furniture and the guest room. We both really enjoy this game 🙂
Seattle here. It’s been interesting to watch the area go from a medium COL to VHCOL over the past 15 years. We moved here from Chicago and were excited it would be cheaper, but not anymore! We live in an adjacent suburb with mostly middle class neighbors (when we moved here 6 years ago – that is starting to change). We bought in 2012 at the market slump for ~500 and our house value has gone up over 70% since then. I sympathize with the LA family – we love our house and neighborhood but it’s pretty modest for what we paid. I can’t imagine trying to get into the market now. We would probably not move here, even though it’s a pretty awesome place to live.
I’m genuinely curious on this (not a snarky comment at all!)… but do prospective home buyers frequently fail to consider additional costs outside of principle/interest in a monthly home payment such as property taxes, homeowners insurance, and possible PMI? Some recent forum comments and conversations with friends make me think this isn’t a very common consideration. For us personally, we’ve always tried our best to overestimate what a home will cost with these additional factors, as well as getting loans with taxes rolled in. I thought it was common sense that online calculators (Zillow, Redfin) require some tinkering and adjustment to nail down a good estimated payment, or that preapproval from a bank can be misleading.
I don’t know that people fail to think about taxes and insurance, but rather other home costs. When we bought our house, I told my husband to anticipate paying about $1,000 more a month more for upkeep. For some reason it didn’t register with him right away. House with a pool? Monthly pool service. House in a strict HOA neighborhood? Yard service/maintenance. Bigger house? Cleaning service costs more. Live in a great neighborhood? Home improvements and just about anyone you contract to do work on your home is going to add a price because of where you live. (not all, but many contractors will).
How many people finance vehicles having no idea what gas, insurance and maintenance will add to the monthly cost?
A large number of the online mortgage calculators don’t include property taxes, insurance or PMI. It’s just principal and interest. By the time someone understands those additional costs, it’s likely they’ve already settled on a budget that seemed affordable and are willing to “stretch” to cover those extra costs when starting to shop for a place.
After similar conversations with many people who have sold their home, I’m also convinced that pretty much all of them think they made money on the sale based solely on the sales price being higher than the purchase price. “Yeah, we just sold our house for $400K and only paid $250K for it. Made a ton of money from it.”
The transaction costs – along with everything else listed in the post while owning the property – just aren’t tangible for them. They literally have no idea what was spent over the years, so the default is to either lowball or ignore those costs entirely.
I finished fellowship this summer and was moving to a new state for my attending job, so I decided to buy instead of renting for a couple years and then moving again. (I despise moving.) The town is a mix of million-dollar mansions and < 100k ghetto; anything in the range of 1x my salary (academics…) would have been in an unsafe area or needed a great deal of work just to be habitable. Or would have been way out in the countryside with a long commute, and the minutes you spend sitting in traffic on the interstate are minutes you'll never get back. I did look at some of those 1-2x salary houses initially, and then realized I had to revise my budget upwards quite a bit.
Luckily I managed to find a safe neighborhood where I can walk or bike for most errands and my commute to work is just 5-10 minutes. The purchase price is 3x my annual salary, but it's new construction and thus doesn't need much in the way of maintenance beyond mowing the yard and cleaning the gutters. It helps that I otherwise live very frugally (drive a high-efficiency Civic which I gas up at Costco once a month or less, buy groceries at Aldi's, rarely eat out), and that my neighbors are all grad students or university professors, meaning there is very little pressure to "keep up with the Joneses."
Some docs do find they need to stretch to 3-4X. Just realize there are consequences to doing so. Just because you live in D.C., San Francisco or another HCOLA doesn’t give you a pass on math.
Scrivener-
I too am in academics but in a well-paid specialty. We bought a 1.5x salary house in Atlanta in an “up-and-coming” area in 2007. Seven years later with our kid approaching school age we had to choose between private school tuition or moving to a more expensive house. We moved in spite of the fact that our home was still 30% below what we paid for it. Although our income had increased substantially in the meantime we bought a house in a good school district that was almost 3x our new income. We were happier putting that extra 20k + per year into a mortgage rather than private school tuition.
Five years later and we still love the area and think the house was an excellent decision. Thanks to the good schools the house has appreciated over 25% since then (our previous house sold again last year for around what we paid for it in ’07). As others have mentioned, there are definitely many costs associated with the larger house and more expensive neighborhood. For us, however, the bigger home with good schools represents a much better value. If you’re constrained by academics or a spouse’s job, you can definitely still make it work. We are on track to retire at 55 if we felt like it. For me it would not be worth living in a cheaper area that would allow retirement at 50.
I completely second your statement.
I don’t get keeping up with the Joneses.
I have no idea what kind of cars my neighbors drive. It is none of my business and I don’t care.
There has been a lot of renovating and tearing down and rebuilding of homes in our neighborhood since we moved in years ago. That has not inspired us to do the same. Those renovations were on other people’s houses, not ours. None of my business what they did, not interesting and certainly no reason to do something to our house.
Put your kids in private school to impress your neighbors? It implies one is more interested in the impression one makes on neighbors than in the quality of the kids education. A bizzare set of priorities but I gather some people share them. I don’t know where my neighbors’ kids went to school and, again, I cannot think of a reason to care.
Dead thread I know but republished today… if you have kids, and the public school is crap because no parent who cares much about their kids lets them go there and no one is making schools better, well, welcome to Alabama I mean well, then you’ll decide private school is worth it.
I think private school is not for us… that is why we opted to live in a nicer neighborhood with good public schools.
I think that rather than have a gigantic house, a lot of us with younger children look for places that allow our kids to be outside in the neighborhood, close to community centers, close to work/less commute.
I am paying for a million dollar house so that my commute is < 20 min, kids can walk to their public school and be around other children in the same manner in which I grew up. I happen to have a pool but that is not why I got this house. For me it was the location.
I am wondering what drives others to buy expensives houses? it cannot all be just for luxury?
Why not? I bought an expensive house because I wanted the following luxuries:
Close to recreational areas
Good school district
Lots of rooms for guests to stay
Awesome view
Great neighborhood
Bigger kitchen
More area to entertain
Nicer bathrooms etc
Those are all luxuries. Our last place had none of them. We’re actually getting ready to renovate for similar reasons. I mean, how can a fire pole be anything but a luxury?
Honestly I need one of those coming to think of it
This is all so spot on. Keep preaching in your no-nonsense style because even though I’ve been a reader of yours for years, I appreciate these reminders.
My husband (a pediatrician almost 5 years out of residency) is still driving the ‘97 Civic he owned when we met in undergrad. It’s got 250K miles and he wants to drive it into the ground. It’s become a point of pride for him to park it next to all the Ford F-150s in his parking lot (a fancy truck is the “doctor car” for his partners, apparently!)
Dani are y’all in Texas? I owned an F-150 there- bottom line vinyl floor barely had AC long bed etc etc for hauling manure etc. for my garden. I recall driving down to San Antonio and being next to a souped up F-150 with carpeted floor and special edition etc etc and seeing that fella look enviously at the mud spatters on my truck. Between high end Broncos and pick-ups there- those are the Texas limousines or Mercedes. Me I could never understand why you’d want a pick up truck where the floor couldn’t be hosed out if you had manure on your boots when you drove.
Not a doctor but work in technology. Spouse and I make a combined of $1mil/year. We bought a house thats 0.95X our annual income and still surprised by the amount of maintenance costs it takes to keep the house in “good” condition. We drive Honda cars and dont splurge on many things except for travel for our parents (international business class) and vacations thrice a year at 10K each. We are still able to save good chunk of money.