Via a recent email:

Thanks for all the great content! My wife is a recently graduated dermatologist. We are debt-free, have a $400k mortgage and a net worth of $1.3m. I have been working hard while she was in residency. Long time follower of your work.

Anyway we just purchased a new home in a nice neighborhood for $500k. What has shocked me is all the other expenses such as $215/month for homeowner’s insurance and the cost of new furniture for a 3000 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. Yet despite all of that, this couple is feeling a bit pinched as they upgrade their lifestyle. Now imagine a more typical recent residency graduate that owes $300K in student loans, has a net worth of -$300K, and now has a $500K mortgage on a $500K 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- $2300 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
  • Drapes
  • Furniture
  • Carpet
  • Paint
  • Landscaping
  • Cleaning costs
  • Lawn and landscaping maintenance
  • Snow removal
  • Maintenance costs

Upgrades and Renovations Are Pricey

A typical estimate for maintenance costs of a home are 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 that is a high-end general contractor who bought a house in the neighborhood a couple of years ago. 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 a 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 have been looking at our house and property and thinking 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. I’m sure I’ll blog more about what we end up doing, but 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 think they’re immune to the spending habits of their neighbors, especially those who are financially savvy, 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 for just a few years, much less your entire life. 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.

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

high cost of livingThe biggest reason doctors don’t build wealth is they skip the “Live Like a Resident” period. “Oh, that doesn’t apply to me, I’m a dermatologist.” 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 not only 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, but it 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 Jones a bit when you’ve rid yourself of 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, didn’t start their career in their mid-30s owing $300K 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 dot-com millionaires or just hospital CEOs, but don’t make the mistake that a doctor can live in any neighborhood she wants. In fact, if you tone it down just a little bit, you can be the Joneses everyone else in the neighborhood compares themselves to. Buy a house that is 1X your income instead of 2X, much less the amount the bank will approve you for.

# 3 Don’t Furnish Immediately

A lot of people are surprised to learn that we had several empty rooms for YEARS after buying our doctor house and that it is still primarily furnished with hand-me-downs. There is no rule that you must buy all new furniture when you buy a new house, in fact, there is no rule that you 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 to start with.

# 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 probably don’t have a goal to be the richest person in the graveyard. It’s okay to spend money on stuff you want. It’s not okay to spend all of your money. Make conscious decisions and live as best you can with the consequences.

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!