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Can I Afford this vs Should I Buy it

Home Mortgages and Home Buying Can I Afford this vs Should I Buy it

  • White.Beard.Doc White.Beard.Doc 
    Participant
    Status: Physician
    Posts: 952
    Joined: 02/06/2016

    Let me share a few personal thoughts on the subject of large, expensive homes.

    I am the owner of a too large, very expensive, albeit beautiful home, on a prime piece of property mere minutes outside the city limits of one of the most desirable and expensive cities in the country.  We bought it as a foreclosure in the depths of the real estate depression.  My wife loved it… I thought it was way too big for us but the location was perfect for both of us.  My wife had a 3 minute commute until retiring this year, and my commute is roughly 4 to 7 minutes depending which of 2 locations I am heading to on any given day.  I was somewhat reluctant to buy it as the size, maintenance, utilities and taxes were expected to be significant.  But the price was so low due to the foreclosure situation.  I figured the land, the enjoyment and the likely ability to sell for a significant profit in better times would make up for much of those other negatives.  The truth is one never knows how any given investment or major purchase is going to work out, but there are times in life when we simply decide to make that leap of faith.

    Here we are years later.  How do I feel?  My wife loves the house, and I love many things about the house, particularly the location.  It is great going to work and being able to dash home for lunch in 5 minutes if I feel the desire.  The grounds and gardens are a great source of joy to my wife and I do enjoy them as well.  The biggest negative is the property taxes, and they are substantial.  I had psychologically justified the excessive property taxes in the past with the income tax deduction making the taxes a bit more palatable.  However, with the new tax law, we lost that deduction.  Although we can easily afford to pay the property taxes, thinking forward to retirement, once I am no longer working and earning a high income, I don’t think I will want to be paying such high property taxes from my retirement assets.

    We are at a later stage of life in comparison with you, so the house value, while high, is a small percentage of our net worth on the cusp of retirement.  If I had to do it over again, would I buy this big, expensive house?  I would probably say yes as the joy has been significant and our income has been stable and high enough to make it easily affordable without compromising any other financial needs.

    So my thoughts for your situation… If you love the house and the high income is stable and will allow you to pay it off in only a few years, and the long commute is not an issue for your spouse, then go ahead.  The 1 hour commute would be a total deal breaker for me, but everyone has different trigger points.

    Best of luck to you in your decision.

    Click to expand…

    Buying a house on acreage can be a very good investment long term with rezoning potential. Particularly if bought during a recession. What is the land:building ratio on your property though Whitebeard and do you think it would have gone up much if it had been 20% ? I tend to think a ratio less than 50% is like gravity over time. You could do well buying at a good time but the odds over time are not favourable. It could be in a sought after area and appreciate, but the appreciation on the 20% land has to outweigh the depreciation on the 80% building and that is a lot of work to do.

    Click to expand…

    The land value was roughly 900k and we bought the foreclosure with an almost completed new home with “good bones” for 1.3MM directly from the bank.   It was too much house for us but the price and the location made it too good to pass up.  The market at that time was in free fall because of the terrible economy so many people couldn’t get a loan.

    Physicians get left behind when the tech sector and financial sectors are booming and giving out huge bonuses.  The opposite is true when the economy tanks.  The docs always have great jobs with stable, secure income no matter the state of the economy.  We took advantage of the situation and bought low.  We hope to sell high some day.  However, the current market in our area is sizzling hot for the small starter homes under 1MM, but softer at the high end as the tax law change effectively made the property tax costs almost double for high earners.

    #155449 Reply
    Drop it into MD Drop it into MD 
    Participant
    Status: Physician
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    Joined: 09/20/2018

    the current market in our area is sizzling for the starter homes under 1MM,

    Click to expand…

    It just blows my mind that homes can cost so much.

    #155450 Reply
    Liked by artemis
    Avatar Dont_know_mind 
    Participant
    Status: Physician
    Posts: 979
    Joined: 11/21/2017

    Let me share a few personal thoughts on the subject of large, expensive homes.

    I am the owner of a too large, very expensive, albeit beautiful home, on a prime piece of property mere minutes outside the city limits of one of the most desirable and expensive cities in the country.  We bought it as a foreclosure in the depths of the real estate depression.  My wife loved it… I thought it was way too big for us but the location was perfect for both of us.  My wife had a 3 minute commute until retiring this year, and my commute is roughly 4 to 7 minutes depending which of 2 locations I am heading to on any given day.  I was somewhat reluctant to buy it as the size, maintenance, utilities and taxes were expected to be significant.  But the price was so low due to the foreclosure situation.  I figured the land, the enjoyment and the likely ability to sell for a significant profit in better times would make up for much of those other negatives.  The truth is one never knows how any given investment or major purchase is going to work out, but there are times in life when we simply decide to make that leap of faith.

    Here we are years later.  How do I feel?  My wife loves the house, and I love many things about the house, particularly the location.  It is great going to work and being able to dash home for lunch in 5 minutes if I feel the desire.  The grounds and gardens are a great source of joy to my wife and I do enjoy them as well.  The biggest negative is the property taxes, and they are substantial.  I had psychologically justified the excessive property taxes in the past with the income tax deduction making the taxes a bit more palatable.  However, with the new tax law, we lost that deduction.  Although we can easily afford to pay the property taxes, thinking forward to retirement, once I am no longer working and earning a high income, I don’t think I will want to be paying such high property taxes from my retirement assets.

    We are at a later stage of life in comparison with you, so the house value, while high, is a small percentage of our net worth on the cusp of retirement.  If I had to do it over again, would I buy this big, expensive house?  I would probably say yes as the joy has been significant and our income has been stable and high enough to make it easily affordable without compromising any other financial needs.

    So my thoughts for your situation… If you love the house and the high income is stable and will allow you to pay it off in only a few years, and the long commute is not an issue for your spouse, then go ahead.  The 1 hour commute would be a total deal breaker for me, but everyone has different trigger points.

    Best of luck to you in your decision.

    Click to expand…

    Buying a house on acreage can be a very good investment long term with rezoning potential. Particularly if bought during a recession. What is the land:building ratio on your property though Whitebeard and do you think it would have gone up much if it had been 20% ? I tend to think a ratio less than 50% is like gravity over time. You could do well buying at a good time but the odds over time are not favourable. It could be in a sought after area and appreciate, but the appreciation on the 20% land has to outweigh the depreciation on the 80% building and that is a lot of work to do.

    Click to expand…

    The land value was roughly 900k and we bought the foreclosure with an almost completed new home with “good bones” for 1.3MM directly from the bank.   It was too much house for us but the price and the location made it too good to pass up.  The market at that time was in free fall because of the terrible economy so many people couldn’t get a loan.

    Physicians get left behind when the tech sector and financial sectors are booming and giving out huge bonuses.  The opposite is true when the economy tanks.  The docs always have great jobs with stable, secure income no matter the state of the economy.  We took advantage of the situation and bought low.  We hope to sell high some day.  However, the current market in our area is sizzling hot for the small starter homes under 1MM, but softer at the high end as the tax law change effectively made the property tax costs almost double for high earners.

    Click to expand…

    Unfortunately, I wasn’t in a position to buy anything in the last recession. I was already somewhat overleveraged going into it and lucky to be able to hold what I had.

    Thanks for sharing the story Whitebeard. It sounds like you took advantage of the opportunity very well. It’s interesting to find out how other people played it out in the situation. If they did better than I did, hopefully it helps me to understand how to do better in the future.

    I am just wondering whether you had any debt going into 2008 and if so how much roughly ? In retrospect, I could have and should have taken on more debt during the recession, but it seemed too much at the time. I had around 1.6M in debt on 500k income at the time and 3.2M in assets. Which was not an aggressive total LVR (50%) but was unfortunately too uncomfortable in the situation.

    #155514 Reply
    White.Beard.Doc White.Beard.Doc 
    Participant
    Status: Physician
    Posts: 952
    Joined: 02/06/2016
    Earnest refinancing bonus

    I am just wondering whether you had any debt going into 2008 and if so how much roughly ? In retrospect, I could have and should have taken on more debt during the recession, but it seemed too much at the time. I had around 1.6M in debt on 500k income at the time and 3.2M in assets. Which was not an aggressive total LVR (50%) but was unfortunately too uncomfortable in the situation.

    Click to expand…

    We had 3 mortgages at the time of the economic crisis, overall a significant amount of debt.  However, we had also been investing in income producing real estate for many years by that time. We kind of laddered up over time, when one property started making too much cash, we added another property to bring new depreciation deductions into the picture to counteract the tax effects of the profits.  And while the amount of our debt was substantial, the loan to value was not.  Despite the severe recession, multiple properties that we had owned for a longer period of time were continuing to produce excess income on top of continuing to pay down the loans.  The key for us during the recession was we had cautiously bought investment properties at lower prices long before the big run up in prices, so even with lower rents we maintained significant positive cash flows.

    We are no longer accumulating new real estate investments.  In preparation for nearing retirement we have paid off all of our remaining mortgage debts with the exception of our primary home mortgage.  The rate on our primary home loan is only 2.6% tax deductible, so an effective rate of 1.4%.  I am earning a bit more than that on my triple tax free municipal money market account, but I think I may pay off the remaining mortgage balance over the next 6 months just to simplify my life.

    #155549 Reply
    Liked by q-school, hatton1
    Avatar Tim 
    Participant
    Status: Accountant
    Posts: 3294
    Joined: 09/18/2018

    “Have you considered how much good you could do by maximizing your wealth? Think Bill Gates, Andrew Carnegie, John D. Rockefeller…If you’re a believer, there is scriptural basis for this philosophy. Luck may not have as much to do with where you find yourself as you think.”

    One of your hobbies is “slicing and dicing “ tax planning and investing. You are still working which is good.
    I assume your credit score is still an 850. With financial assets accumulated that you may go parttime, I think you have some really big adjustments to make.

    Just suppose the scorecard you have used to measure success ceases to give you satisfaction. You practice isn’t worth the time to go in. You lose interest in the “smart” tax efficient aspects of investing. Why carry a mortgage that’s now so small it’s not worth your time?

    My question is what are you going to do for the next 30 years to keep score and keep yourself occupied? High achievers need challenges. Seems like your scorecard was career and money balanced with family.

    White.Beard.Doc scholars breakout session at an annual professional meeting. You “partner” with funding 10 annual awards. $20k at $2k each. Now if 9 others chip in, that’s 10 grants of $20k per year. Residents, high school, college or whatever. The $20k is deductible.
    My point is your human capital in using you time can be valuable. Maybe is $20k for loan repayment, or new education. Reading 2000 applications is a job.
    Maybe organizing a charitable medical services floats your boat. You can always fill your time, how you fill your time for Act II is the challenge.
    Financially, two buckets dump it into the predetermined balanced portfolio or into the charity bucket. My suggestion is focus your human capital on the charitable side. Get some goals and scorecards setup for ActII.

    Time can’t be mastered by anyone. What is Act II?

    #155601 Reply
    q-school q-school 
    Participant
    Status: Physician
    Posts: 2640
    Joined: 05/07/2017

    Let me share a few personal thoughts on the subject of large, expensive homes.

    I am the owner of a too large, very expensive, albeit beautiful home, on a prime piece of property mere minutes outside the city limits of one of the most desirable and expensive cities in the country.  We bought it as a foreclosure in the depths of the real estate depression.  My wife loved it… I thought it was way too big for us but the location was perfect for both of us.  My wife had a 3 minute commute until retiring this year, and my commute is roughly 4 to 7 minutes depending which of 2 locations I am heading to on any given day.  I was somewhat reluctant to buy it as the size, maintenance, utilities and taxes were expected to be significant.  But the price was so low due to the foreclosure situation.  I figured the land, the enjoyment and the likely ability to sell for a significant profit in better times would make up for much of those other negatives.  The truth is one never knows how any given investment or major purchase is going to work out, but there are times in life when we simply decide to make that leap of faith.

    Here we are years later.  How do I feel?  My wife loves the house, and I love many things about the house, particularly the location.  It is great going to work and being able to dash home for lunch in 5 minutes if I feel the desire.  The grounds and gardens are a great source of joy to my wife and I do enjoy them as well.  The biggest negative is the property taxes, and they are substantial.  I had psychologically justified the excessive property taxes in the past with the income tax deduction making the taxes a bit more palatable.  However, with the new tax law, we lost that deduction.  Although we can easily afford to pay the property taxes, thinking forward to retirement, once I am no longer working and earning a high income, I don’t think I will want to be paying such high property taxes from my retirement assets.

    We are at a later stage of life in comparison with you, so the house value, while high, is a small percentage of our net worth on the cusp of retirement.  If I had to do it over again, would I buy this big, expensive house?  I would probably say yes as the joy has been significant and our income has been stable and high enough to make it easily affordable without compromising any other financial needs.

    So my thoughts for your situation… If you love the house and the high income is stable and will allow you to pay it off in only a few years, and the long commute is not an issue for your spouse, then go ahead.  The 1 hour commute would be a total deal breaker for me, but everyone has different trigger points.

    Best of luck to you in your decision.

    Click to expand…

    whitebeard, you are saying even it wasn’t in foreclosure, you would buy it at market price if you had to do it again because your quality of life improved so much?  or you would only do it if you got the same value opportunity?

    thanks!

     

    #155613 Reply
    White.Beard.Doc White.Beard.Doc 
    Participant
    Status: Physician
    Posts: 952
    Joined: 02/06/2016

    I would never have bought the large, expensive home at the market price.  My spouse had admired the house as it was being built, but we decided it was too expensive at the original price.

    My better half tracked the status of the house as the real estate crash hit because she would pass it leaving her work.  When the foreclosure happened we low balled an offer to the bank that had taken over the house.  After some patience on our part, the bank accepted.

    Half the reason we agreed to buy the house was the extremely attractive price.  We had been in the market for an upgrade in our commute and location, and were originally looking for a house about half the square footage.  We ended up buying twice the house, but right at our original target price.  The negative is the property taxes and utilities are expensive, but not really a burden.  I think what makes us happy is the gardens and the location, so half the house with those same features and we would be just as happy, plus we would have less square footage to heat, cool and maintain.

    #155641 Reply
    Avatar angeladiaz99 
    Participant
    Status: Physician
    Posts: 90
    Joined: 09/30/2018

    Hey all- first post here. I’m a 2nd year private practice attending in a medium-sized non-coastal city with a moderate cost of living. Single, no kids, just paid off my $150k in student loans last year. My income was 330k last year and ought to grow more over the next few years as I take over the practice I joined. I won’t have to take out a loan to buy in – there is a 5 year transition plan that is essentially sweat equity. I’ve been renting my apartment the last 2 years and looking to buy. There’s a new condo bldg in my neighborhood going up and it’s exactly what I want. The problem is I really don’t know what is reasonable to spend. The two units I’m considering are 500k and 573k (just to be clear, I’m only considering buying one, not both). Originally I thought high 400s was my criterion for the mortgage. I should have the 20% saved up soon. Question is – as a first time buyer, am I foolish for considering spending this much? I think I can afford it, but it seems like a ton of money.

    Click to expand…

    I apologize for piggybacking on this thread but I had a similar question with different numbers. It also seems like an old thread so I figured nobody would mind my piggybacking and hopefully would be cleaner than starting a new thread.

    My husband and I are both physicians in our mid 30s. We are in a medium-sized coastal city with a surprisingly high cost of living (if you insist on the type of housing my husband does)

    Married, 2 kids, no student loans, no other debt. Combined income is in the high 6 digits but we are unlikely to grow it any further (and are always concerned about reimbursement cuts lowering this given the fields we are in and the current high income.)

    We already own a house and paid off the mortgage. We haven’t looked into what we could get but in speaking with our neighbors, we paid $400K 5 years ago, we think we might be able to sell it for $500K. I think the house is just fine but my husband wants a bigger and “better” house and cites closer location to school as a big driving force for a desired move.

    The house he is looking at costs $3M. We have the 20% set aside in a taxable account as we speak (and a little more if needed to make sure the mortgage is no more than 2x our gross income). We’ve played with numerous mortgage calculators where even in factoring in utilities, insurance, and much higher property taxes, our monthly expenditure for all housing items should not exceed 20% of gross monthly income either.

    For my husband, he’s claiming this is his dream house and the numbers work so why not plow forward?

    For me, I have the same reservations as the OP. Am I foolish for considering spending this much? I think I can afford it, but it seems like a ton of money. I have reservations about maintaining the same kind of income for the next 15 years to pay this kind of debt obligation. I also question whether spending 6x as much as our current home will bring us 6x the happiness. I would be closer to my work and the kids’ school. My husband would be looking at tacking on another 15-30 mins to his already 45 min commute.

    Would appreciate any insight! Thanks!

    Click to expand…

    So as an update…

    My husband ultimately decided he would throw caution to the wind and made the offer anyway (we did discuss this together, it wasn’t a unilateral decision)

    I’m not sure if this is standard for home buying but there was a clause about when the offer would expire (I believe it was 48 hrs from the time we signed). The seller made multiple excuses about being sick, needing to consult with his accountant to compute the loss he was going to take, etc. etc.

    Long story short, 5 24hr extensions later, the seller had leveraged our offer into another one and wanted us to enter a bidding war.

    We walked away.

    #156921 Reply
    Avatar jhwkr542 
    Participant
    Status: Physician
    Posts: 1330
    Joined: 02/15/2016

    Odd story. Sit for that long and then there are two offers? I’m skeptical…

    #156923 Reply
    Liked by angeladiaz99
    Avatar Kamban 
    Participant
    Status: Physician
    Posts: 2569
    Joined: 08/01/2016
    So as an update… My husband ultimately decided he would throw caution to the wind and made the offer anyway (we did discuss this together, it wasn’t a unilateral decision) I’m not sure if this is standard for home buying but there was a clause about when the offer would expire (I believe it was 48 hrs from the time we signed). The seller made multiple excuses about being sick, needing to consult with his accountant to compute the loss he was going to take, etc. etc. Long story short, 5 24hr extensions later, the seller had leveraged our offer into another one and wanted us to enter a bidding war. We walked away.

    Click to expand…

    Maybe you are lucky to not get into a bidding war. Unless you are in NYC, Bay are or LA paying $3M for a house, even with 2 physician salary will make you house poor.

    #156924 Reply
    Liked by angeladiaz99
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8325
    Joined: 01/09/2016

    Hey all- first post here. I’m a 2nd year private practice attending in a medium-sized non-coastal city with a moderate cost of living. Single, no kids, just paid off my $150k in student loans last year. My income was 330k last year and ought to grow more over the next few years as I take over the practice I joined. I won’t have to take out a loan to buy in – there is a 5 year transition plan that is essentially sweat equity. I’ve been renting my apartment the last 2 years and looking to buy. There’s a new condo bldg in my neighborhood going up and it’s exactly what I want. The problem is I really don’t know what is reasonable to spend. The two units I’m considering are 500k and 573k (just to be clear, I’m only considering buying one, not both). Originally I thought high 400s was my criterion for the mortgage. I should have the 20% saved up soon. Question is – as a first time buyer, am I foolish for considering spending this much? I think I can afford it, but it seems like a ton of money.

    Click to expand…

    I apologize for piggybacking on this thread but I had a similar question with different numbers. It also seems like an old thread so I figured nobody would mind my piggybacking and hopefully would be cleaner than starting a new thread.

    My husband and I are both physicians in our mid 30s. We are in a medium-sized coastal city with a surprisingly high cost of living (if you insist on the type of housing my husband does)

    Married, 2 kids, no student loans, no other debt. Combined income is in the high 6 digits but we are unlikely to grow it any further (and are always concerned about reimbursement cuts lowering this given the fields we are in and the current high income.)

    We already own a house and paid off the mortgage. We haven’t looked into what we could get but in speaking with our neighbors, we paid $400K 5 years ago, we think we might be able to sell it for $500K. I think the house is just fine but my husband wants a bigger and “better” house and cites closer location to school as a big driving force for a desired move.

    The house he is looking at costs $3M. We have the 20% set aside in a taxable account as we speak (and a little more if needed to make sure the mortgage is no more than 2x our gross income). We’ve played with numerous mortgage calculators where even in factoring in utilities, insurance, and much higher property taxes, our monthly expenditure for all housing items should not exceed 20% of gross monthly income either.

    For my husband, he’s claiming this is his dream house and the numbers work so why not plow forward?

    For me, I have the same reservations as the OP. Am I foolish for considering spending this much? I think I can afford it, but it seems like a ton of money. I have reservations about maintaining the same kind of income for the next 15 years to pay this kind of debt obligation. I also question whether spending 6x as much as our current home will bring us 6x the happiness. I would be closer to my work and the kids’ school. My husband would be looking at tacking on another 15-30 mins to his already 45 min commute.

    Would appreciate any insight! Thanks!

    Click to expand…

    So as an update…

    My husband ultimately decided he would throw caution to the wind and made the offer anyway (we did discuss this together, it wasn’t a unilateral decision)

    I’m not sure if this is standard for home buying but there was a clause about when the offer would expire (I believe it was 48 hrs from the time we signed). The seller made multiple excuses about being sick, needing to consult with his accountant to compute the loss he was going to take, etc. etc.

    Long story short, 5 24hr extensions later, the seller had leveraged our offer into another one and wanted us to enter a bidding war.

    We walked away.

    Click to expand…

    Thank you for posting. It is always nice to hear the outcomes of the dilemmas we discuss on this forum. I hope you are both at peace with your decision.

    Johanna Fox Turner, CPA, CFP: I am not your financial advisor; any responses are for general purposes only
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #156932 Reply
    Liked by angeladiaz99
    Avatar Peds 
    Moderator
    Status: Physician
    Posts: 4642
    Joined: 01/08/2016
    We walked away

    Click to expand…

    on to the next one.

    #157002 Reply
    Liked by angeladiaz99
    Avatar CBan01 
    Participant
    Status: Physician
    Posts: 6
    Joined: 03/11/2018

    Update:

    I found a house in the same neighborhood for 415k and bought it.  Much better situation – more space, has a 2 car spot, 120 year old bldg that was completely gutted and redone.  Also no condo fees!  (Originally was considering a condo for ~570k with only one parking space.  I got engaged on NYE and will obviously be needing more space over the next few years).  Moved into the new house in September.  After 12.5% down, mortgage is less than 1 year’s income.  Thanks for all of your help!

    #181557 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8325
    Joined: 01/09/2016

    Thanks for the update, CBan01! And congratulations on your engagement!

    Johanna Fox Turner, CPA, CFP: I am not your financial advisor; any responses are for general purposes only
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #181560 Reply
    Liked by Tim
    Avatar RogueOne 
    Participant
    Status: Physician
    Posts: 5
    Joined: 05/19/2017

    Well said. I’d also second what mpmd notes about condo ownership. Larger building tends to average out common expenses much better, but special assessments are still a pain the behind. Price it out with a 15 year mortgage, the taxes, and association fees, and you should have plenty of equity should diasaster strike, you move, and you become an accidental landlord.
    Condos in a large building can be ideal for single people – easy to get it cleaned by a vetted company, don’t have to worry about package theft, some maintenance is covered, no yard work, etc of a home.
    Just prepare yourself- assessments/association fees tend to go up as the building ages. It’s a fact of life. Some of this is avoided in a newer building without movie theaters and other extravagances. But on the flip side, you get to use those too!

    #181676 Reply

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