How to Pay for a House – Podcast #102

Intro: This is the White Coat Investor Podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011. Here's your host, Dr. Jim Dahle.

Dr. Jim Dahle: Welcome to White Coat Investor Podcast 102, 30 year mortgages to all cash, how to pay for a house. The US is nine years into the second longest economic expansion in US history and many people are asking how long can this go on? Further, the US is in an affordable housing crisis and when looked at together, these problems create a compelling opportunity. Seasoned real estate investors and sons of physicians, Mark Curry and Ryan Andrews launch, the recession-resistant fund. The fund invests in value add mobile home parks, self-storage facilities, and workforce apartment communities, and provides investors with passive income and immediate diversification. The fund currently holds an ownership stake in 27 properties across nine states. Learn more at www.recessionresistantfund.com. Thanks for what you do. Your daily work is difficult and challenging. You're training for. It was long and hard and a lot of people don't understand just how much difficulty there is in what you do.
Dr. Jim Dahle: And unfortunately few of your patients even probably tell you thank you on a daily basis. So I want to make sure that somebody is telling you that. So thank you from me for what you're doing. I hope you're excited for the upcoming White Coat Investor conference in March 2020 in Las Vegas at the Paris hotel. The registration for that will open in July. There'll be plenty of notice as to the date and time that registration opens. I'm kind of hoping it doesn't fill up in 20 minutes, but I'm worried it might. So I want to make sure that you know it's coming, hopefully, it'll be a couple of days before it fills up. Last time it took six days to fill up, but I'm sure it's not going to take that long this time. Even though we're having twice as many people come to it, so be aware of that.
Dr. Jim Dahle: It's going to be great. There's going to be 27 hours of good stuff there. And it's gonna be great. Even if you miss a few things because you want to hit the tables or want to go see a show or whatever, you'll be able to catch that on video as well afterwards. Make sure you're also signed up for the monthly newsletter. One benefit of doing that is you get the 12 emails, the financial boot camp emails when you sign up for that, you can do that on the website under WCI plus, there's a newsletter signup page. We'll have a link to that in the show notes as well. Speaking of financial boot camp, the book is doing great selling like hotcakes, The White Coat Investor's Financial Boot Camp, which is a 12 step high yield guide to bring your finances up to speed is available on Amazon. They're usually selling it for around 25 bucks. That paperback is out by the time you hear this will probably be getting close to getting the audible version out.
Dr. Jim Dahle: And if I can ever get Kindle to quit giving me the run around, I should have a Kindle version up anytime. Thanks for those of you are leaving us great reviews about it. Those reviews do help us to spread the word on Amazon. All right, let's take some speakpipe questions. The first one is from Kyle.
Kyle: This is Kyle from Georgia and I am a radiology resident doing a surgery intern year. I have two questions for you. The first question is what does a typical day or week like in the life of the White Coat Investor? I feel like this would be pretty interesting to hear about as a long-term listener. The second question is a bit more technical is the classic Roth during residency, 100% true with the new repay/PSLF pathway shouldn't contributing to my tax deferred accounts, lower my student loan payments and in turn have more forgiven? Thank you for everything that you do. I'm very grateful for the impact you've had on my life.
Dr. Jim Dahle: Okay. Kyle's asking what's a typical day or week in the life of the White Coat Investor? Well, I don't know, there is a typical, there's a lot of variation for sure. Let's just talk about this week. All right. So we'll start on, let's start on Monday. Monday I did a bunch of White Coat Investor work, kind of for the first six hours, got up at seven or eight o'clock in the morning and have breakfast with my daughter, answer a bunch of emails, respond to some comments on the blog, check the Twitter and Facebook feeds. Take care of some contract issues with some of the businesses we work with. And I think I wrote a blog post that morning before I went to my shift. I worked at two to 10 evening shift at the hospital and that's what I did on that day. I think I was in bed by 11 o'clock that night. It was great. I got right out the end of my shift.
Dr. Jim Dahle: Tuesday I had, I basically spent the whole day working on White Coat Investor stuff. I know I wrote one blog post, I did my taxes. That was a big part of it, a chunk of my 2018 taxes as well as the quarterly payroll for the White Coat Investor that is ridiculously complicated. It turns out I do form 941 that I do each month or each quarter, so that took up a fair chunk of time. And that was pretty much it for the day. That evening I had a Webinar ASAP sponsored that and so we did a Q&A right from my basement, answered questions for about an hour for I think there was 170, 180 people on that Webinar and that's available on ASAPs website if you're a member, if you missed it, it's like a whole nother podcast episode or to, check it out.
Dr. Jim Dahle: Then Wednesday woke up, got ready to do these podcasts went over to the school, watch my daughter, she was in a talent show and rushed back. And now I'm obviously recording podcasts or recording two podcasts today, we're doing the one that was number 100 that ran a couple of weeks ago as well as this one. And then we've got the White Coat Investor team meeting that's probably going to go about three hours. Got to take my son to a doctor's appointment this afternoon and I'm sure what I'm gonna do this evening. Tomorrow we are going to go on vacation, we're going to go down to southern Utah and we're going to spend the weekend riding mountain bikes and doing some Canyoneering and doing some rock climbing and just hanging out with some friends. So that should be the rest of the week for this particular week. Now we don't go on vacation every week, but a typical work week for me, it probably involves two to three shifts in the emergency department and I probably work on White Coat Investor stuff, three to four other days quite honestly.
Dr. Jim Dahle: Most days I do at least something on the website, even if it's just checking email and answering a few emails or looking at the comments on the blog and moderating those a bit. But that's kind of a typical week in the life of the White Coat Investor. The nice thing about it is I don't have to stay up all night anymore because I don't work any night shifts. And that's made a dramatic difference in my quality of life. And so I think I can keep practicing emergency medicine at the level I'm doing it until I'm 70. I mean, it's really, I've eliminated almost all the bad parts of the job. Okay. Second question from Kyle is this issue about Roth in residency? Now, my general recommendation, the general rule, the rule of thumb is that when you're in low earnings years like residency or fellowship or a sabbatical or early retirement, then you use a Roth account.
Dr. Jim Dahle: And the other years you use your peak earnings years, you use a tax deferred account. That's the general rule. Are there exceptions to both of those? Absolutely. In residency, one of the biggest exceptions now is if you are trying to get public service loan forgiveness, if you think there's a pretty decent chance you're going to go for that, it can make sense to do a tax deferred account. And the reason why is because it lowers your taxable income and it lowers your pay or repay payments. And thus because you're paying less in residency, there's more leftover after 10 years to be forgiven. Now, do I think everybody ought to be doing that? I don't because I don't think most people are gonna end up going for public service loan forgiveness. I mean, not only is there some legislative risk there and some people just get sick of dealing with the run around from Fed loans.
Dr. Jim Dahle: But a lot of people just end up in private practice, they just don't want to spend that much time in academia or working for a 501(c)(3) or they didn't enroll during residency or whatever. For whatever reason they don't end up going for public service loan forgiveness. And it's not like it's a terrible idea to do Roth IRAs then, but it probably does decrease the amount of money you'll have forgiven. I would probably still convert it all to a Roth IRA the year I leave residency though. My portfolio used to be 100% Roth for a long time and then it gradually became less and less and less and less and now it's about 10% Roth and so don't miss out on that chance to get a bunch of money into tax free accounts early in your career. You will want that later, I can assure you. All right. The next question comes from Brian.
Brian: Hi Dr. Dahle. Thanks for what you do. I Have a question about trying to balance aggressively repaying student loans with the consideration of possibly buying a new home in the next couple of years. As a bit of a backstory, I'm a fairly new attending in my second year of practice, but we are currently paying down our loans at a rate that would have us all paid off within five years of graduating. We're putting about 40% of our pretax income towards wealth creation in the form of retirement accounts and paying down student loan debt and considering the 30% effective tax rate that we have, I think that we are doing fairly well in this respect. That being said, I commute a long way to work several times a week and we have a growing family, so one consideration that we've had is starting with a 30 year loan. If we were to go ahead and get a new house that is starting with the 30 year loan and while repaying our student loans and not changing that plan.
Brian: Then paying down the 30 year loan like a 15 year loan once the loans are all paid off. The second scenario would be the same thing starting out with a 30 year but then refinancing into a 15 year as soon as the loans are paid off. Third scenario that I've considered is aggressively paying down all of the student loans so that they're completely gone and then getting a physician mortgage with absolutely are very little money down which would resent but then result in a high monthly payment. Thanks for any help or advice you can provide. Appreciate it. Thank you.
Dr. Jim Dahle: All right. Brian's a new attending. He's got a good plan in place to pay off the student loans within five years. I like that he's putting 40% of his income toward wealth building. I like that. And he's basically asking a question that doesn't matter all that much. Is it okay to do a 30 year loan? Yeah, it's okay to do a 30 year loan. Is it even better to refinance into a 15 year loan at some point? Sure. If it makes sense, do that. Who knows, maybe rates went up and it doesn't make sense to go into any different loan at that point and you just keep the 30 year, even if you're paying it like a 15. It's also not an unreasonable option to do a doctor loan, remember a physician mortgage and you can get a whole list of the companies that offer physician mortgages on the White Coat Investor website under the recommendations tab for physician mortgages.
Dr. Jim Dahle: You can use those as well, especially if you have a better use for your money, like paying off student loans. There's not just three options here in this scenario though, there's a fourth one. One is we pay off all the student loans as fast as we can. Then we save up a down payment and get a conventional loan. That's also reasonable. Nobody says you have to buy a house in your first year out of residency. I wouldn't feel like you can't buy one though. I usually recommend you wait six to 12 months or so. Make sure the job likes you and you like the job. Make sure your family situation, your personal situation is stable and your job situation is stable and then I think it's okay to buy. If you don't have a down payment because you've been putting all your money toward retirement accounts and toward paying down student loans, I think that's okay to use a doctor mortgage and put 0% or 5% or 10% down. I think that's okay.
Dr. Jim Dahle: The real key is what percentage your income is going toward wealth. If you're putting 20, 30, 40, 50% of your income toward building wealth, you're going to be okay. The rest is just details. Maybe you save a few bucks here or there by picking the right mortgage, but it's really a pretty minor issue in the grand scheme of things. All right. Our next question on the speak pipe comes from Doctor D.
Dr. D.: Hello, Dr. D, this is also Dr. D. I am three months into my crash course on the WCI. I've read almost every blog and listened to over 80 podcasts and read countless Facebook posts, loving it. I have two questions for you both relate to backdoor Roth IRAs. Of course, I'm in my mid-40s, owner of a solo practice with two employees who want a 401(k) but so one year ago I opened a SEP IRA and now has 8000 in it. Now after creating our retirement plan, I know I tend to save 25% of our income, retirement accounts all of them except for the HSA and Fidelity, what should I consider it with this SEP since I prefer to honestly do an annual backdoor Roth. I do have a traditional IRA with about 33,000 and all which have been a nondeductible contributions over the past years. What options do I have? It seems maybe the backdoor Roth is not in the cards for me. Backdoor Roths question number two.
Dr. D.: My wife is an MD doing research. We started work as an independent contractor. As the kids get older, I created an LLC for her and planned to open a solo 401(k) for her as well. She has a roll over traditional IRA with 29,000 in it, which is almost all non-tax deductible contributions over the past eight years, the first 5,000 were the rollover from her previous jobs 401(k) in 2011 so that was pre tax contributions. Can I, and should I roll over all of that money into the solo 401(k) or perhaps into the Roth IRA at Vanguard knowing that we'd have to pay taxes on the gains or is there a better way or idea prior to converting the annual contributions to the back door for 2019? Thank you very much.
Dr. Jim Dahle: Okay. Dr. D has a $30,000 SEP IRA as well as a $33,000 traditional IRA that is mostly nondeductible contributions. And he's asking what should I do with the SEP IRA? Well, SEP IRAs generally are not the right investing account to use for a doctor. This is a type of self-employed retirement account that is available to independent contractors. It's easy to use. It does have the benefit that you can open it after the calendar year has actually ended. But in general, it's an inferior account to an individual 401(k) or a solo 401(k). So if you find yourself in a SEP IRA, which you probably want to do, is roll that SEP IRA into a 401(k) to allow you to start doing backdoor Roth IRA contributions. The other benefit of using an individual 401(k) instead of a SEP IRA is that you can max it out on less income. It actually takes more income to max out a SEP IRA than it does to max out an individual 401(k).
Dr. Jim Dahle: So if you don't make enough, you simply can't put as much into the account. Also, if you're an S corp and you want to lower the amount you're paying in salary so that you can have more of your income coming to you as a distribution on which you don't have to pay Medicare taxes. That's another good reason to use an individual 401(k). So in his situation, what should he do? Well, just roll that SEP IRA into the individual 401(k) when you open it up. Just remember vanguard doesn't allow IRA rollovers into their 401(k), so you probably have to go someplace like E-Trade or Fidelity as far as that traditional IRA just converted. Yes, somebody in there is going to be tax deferred money. So there will be a small tax bill on that $33,000 but most of it's going to go across tax free. And then you got an extra $33,000 in a Roth account. That's a good thing.
Dr. Jim Dahle: He notes that his wife also has a traditional IRA with mostly nondeductible money and wonders whether he should put it into the solo 401(k) or what. Well, if it's mostly nondeductible money just convert it to a Roth Ira, if you only have to pay a couple thousand bucks in taxes and you get all kinds of money now in a Roth Ira, that's a good deal. So that's what I'd do with that. Our next question comes from Carmen.
Carmen: Hi, Dr. Dahle. Can you talk about any texts strategies for those who won't qualify for the 20% pass through deduction? My husband is a W2 employee and I have a small medical practice structured as S corp. Due to our combined income this year, my business won't qualify for that 20% deduction, is there any strategies I can use to help with the next year's tax return for the business? Thank you so much.
Dr. Jim Dahle: Carmen is asking for some tax strategies for those who don't qualify for the 199A deduction. Her husband's an employee and she's S corp. Well, here's the deal. A lot of doctors can't get the 199A deduction. None of the employee docs can. And any doc making more than the limits, the income limits on that deduction can't take that deduction because they are in a specified service business. Those who practice medicine or law or financial advisors, those sorts of people can't get this deduction if they make too much. So the only real strategy there, unless you're going to go into something else, open a side gig or something, is to get your income, your taxable income below those limits. And those limits are a phase out range that goes from 315,000 to 415,000 married. It's half that for single people. So what can you do to get your taxable income down?
Dr. Jim Dahle: Well, probably the biggest tax deduction is retirement accounts. So max out all your tax deferred retirement accounts for both spouses and you might consider adding on a personal defined benefit cash balance plan. A lot of times you can put a lot of money into those 50 or $100,000 or even $200,000 and that will help you lower your taxable income and maybe get it into the range where you get that deduction. And so that's a great thing because not only do you have more money saved for retirement, but now you get this awesome new tax break in addition. So take a careful look at that and consider doing that. All right, next question is anonymous.
Anonymous: My question is in regards to funding the TSP while any tax exempt location. My husband is preparing for six months deployment to a tax exempt location. I am a 1099 contractor and plan to maximize my solo 401(k) contributions this year. We have already funded our backdoor Roth IRAs and likely will have fully funded his traditional TSP prior to his deployment. As you know when in the tax exempt location the allowable contributions are significantly higher. I am not sure if we can switch to the Roth TSP while he is deployed because he has fully funded his traditional TSP prior to the deployment. We are likely in our highest tax bracket now as he plans to fully retire next year and I'm hoping to cut back on my hours as well. We do not currently have a primary mortgage and no other debt except for rental property which we hope to sell next year.
Anonymous: Do you suggest maximizing the contributions to his TSP during his deployment in lieu of the money going towards our brokerage account? Also, do you know if you can fund a Roth TSP while deployed, if you have already fully funded a traditional TSP while any taxable location, any other information you have regarding this talk topic is welcomed. Thanks again.
Dr. Jim Dahle: Okay, so basically they're asking here about what to do when you get deployed with your TSP. Well, here's the deal. When you're in the military, I know you might be in your peak earnings years, but that's probably still not all that high. Your military income, a lot of it isn't taxed. Your BAH and your BAS, that isn't taxed at all, you're usually not paid all that much. And when you get deployed, that's all tax exempt income. And so when you're in the military, most of the time it makes sense to do Roth TSP contributions. It makes even more sense to do that when you're going for a pension because all that pension is going to be totally taxable in retirement. So that should make you lean more toward doing Roth TSP contributions. I think it's actually a pretty rare person that should be doing tax deferred TSP contributions in the military anymore these days.
Dr. Jim Dahle: So at any rate, that's not the question. They've already maxed out the tax deferred TSP contribution this year, although I might talk to finance and see if you can change that and maybe you can recharacterize that to Roth. But that's not the question. The question is what you do when you're deployed and when you're deployed, you can put additional money into the TSP. This is after tax money. It's tax exempt money. It's money you didn't pay taxes on and you don't have to pay taxes on because you earned it in a war zone and then you can put it in the TSP. The downside is all the earnings on that money are taxable and the TSP doesn't let you do an in-service Roth conversion. So you can't really do a true mega backdoor Roth IRA strategy in the TSP. And so you gotta be a little bit careful there.
Dr. Jim Dahle: And what you're really trying to do is eventually get that tax exempt money into a Roth IRA. Now what I did after I separated from the military is I rolled almost all the money out of the TSP. I left a couple of hundred bucks in there and then I rolled a bunch of money back into the TSP. The TSP only accepted tax deferred rollovers. So that left behind all of my tax exempt money. It was all basis left behind in an IRA. And then I just converted that tax free to a Roth IRA. So maybe you can do something like that when you separate from the military as well and make that a smart move. But that's kind of the general strategy with what you do when you're deployed.
Dr. Jim Dahle: Also be sure to use the savings deposit program. It's only $10,000 you can put in that, but they pay you 10% on it. So while you're deployed and for three months before you come home, you make 10% guaranteed on your money. So put your 10 grand in there and at least make that on it. But otherwise, the main benefit is just that tax exempt income. It lowers your income for the year and allows you to do lots of other things like contribute to a Roth TSP instead of a regular one or perhaps even do some Roth conversions at year. All right. Next question comes from Dan.
Dan: Hey Jim, this is Dan from Indianapolis. I want to ask a quick question about fixed income. My current adviser has me in about 35% of fixed income. It seems way off the mark as I'm relatively young, 40 with many years of investing left ahead of me. Am I way off in thinking that this is incredibly conservative at my age and that we should move this into things like stocks as this is currently, while it's giving me some stability, it doesn't appear to be giving you the most bang for the buck. Thanks in advance.
Dr. Jim Dahle: Dan's basically saying hos advisor has him on 35% fixed income and he's 40 years old and feels like he should be more aggressive, should he be more aggressive? I don't know. I don't know Dan's risk tolerance, but if you're wondering if you should be more aggressive, there's a good chance maybe you should be, but 35% bonds is not crazy at 40. I mean if you use Jack Vogel's rule of agent bond, he would have you at 60, 40 at 40 years old. Some people use a more aggressive rule, age minus 10 or age minus 20, which would put a 40 year old at 20 to 30% in bonds, a little bit less aggressive than Dan is being, this isn't like a crazy recommendation from the financial advisor. What I would do is I would talk to them and say, “Hey, I think I can tolerate more risk. Do you think I can, can you help me make sure I don't bail in a down market?” I think that's a worthwhile conversation to have with the financial advisor for sure.
Dr. Jim Dahle: Just bear in mind that you don't want to be careful that you're not performance chasing. Just because stocks went up in the last couple of months. It doesn't mean you should jump on the bandwagon and invest all your money in stocks. How'd you feel back in December when stocks tank 20% did that bother you? Did that make it hard for you to keep putting money in there? Did you wish you had fewer bonds then? Those are kind of the scenarios that allow you to test your risk tolerance. The general rule for risk tolerance is it's kind of like the price is right. You want to get as close as possible to your risk tolerance without going over because when you go over and stock market risk shows up and you end up selling low, that's a financial catastrophe.
Dr. Jim Dahle: You would have been much better off just having a less aggressive asset allocation the whole time than selling low just once during your career. Our next question comes in from Twitter where they're asking, will people abandon passive investing in the next downturn? I've been seeing this a lot in the media lately that for some reason people think no one's going to index when the stocks tank. Well, guess what? People were using index funds before 2008. I've been investing in index funds of my entire career including several years before 2008 and kept doing it after 2008. Stocks go up, stocks go down, but that's no reason to pay extra to active mutual fund managers who are actually subtracting value from your portfolio. If they can't beat the market, there's no point in paying an active manager and the data is pretty clear that the vast majority cannot beat the market over the long run, especially when you consider the cost of doing so and the tax bills that come from trying to do it.
Dr. Jim Dahle: All right. This one comes in from email. I would like to see a transparent explanation of how refinancing student loans really works. The new company buys your loan at a higher rate and gives you a lower rate. Where do they make their money? Is the term of the loan extended? All right. Here's the truth about student loans. Government is loaning you money at a very high rate, six, seven, 8%. There is money available in the markets at a much lower rate. These student loan refinancing companies are often borrowing money at one or 2% and that allows them to lend you money at three or four or 5% and make a profit. That's how they make their money. Seriously. That's how they do it. They will borrow at one rate, they'll lend at a higher rate and that's all there is to it. So as long as interest rates are moving around and they can just adjust the rate they can borrow at that, they can stay in business with that model.
Dr. Jim Dahle: As long as the federal government is really overcharging for these crazy rates they're given to doctors for student loans, sometimes they make some fees. If you make late payments, sometimes you've got to pay fees and that sort of stuff. But they really often don't extend the term of the loan. A lot of times people are paying for 20 or 25 years on their government loans and they can refinance those to a five year term. So often they're paying for a shorter term and that's why they can get a much better interest rate. But there's really no secret here to the business. Even if they pay you a little bit of cash like if you go through the deals on the White Coat Investor website on our recommended student loan refinancing companies page, they'll pay you a few hundred dollars and they'll pay me some money too for recommending them.
Dr. Jim Dahle: And despite that payment, there's still plenty of money there from that difference in interest rates for them to make a solid profit. Okay. This one comes in by email. This is actually an exchange of a few that I thought was worth sharing on the podcast. It kind of goes in with our theme for this podcast, which is all about mortgages. Remember we had that question early on about what to do with a mortgage and now we're going to talk a little bit more about a couple other issues with mortgages. This email comes from a pulmonologist in Chicago, says, “I'm a pulmonologist and practiced almost 10 years now. We bought a house three years back. Worth more than a million. I know that wasn't very frugal. It was a 15 year loan, 3% rate of interest.”
Dr. Jim Dahle: That sounds pretty good. “And we put some equity into the house with the down payment and payments on principle, due to the growing family, we wanted more room with a live in nanny. Recently we got a more expensive house, $2 million. I know I've always been frugal except these two times.” Well, they're pretty big times. “And sold their old house. After buying the new one, I put 20% down in the new house with cash in the bank and selling our taxable brokerage account. I had no cash left after this except my 401(k) and 403B for me and a SEP IRA for my wife. It was scary for a few weeks. Now I sold my old house for some loss but got some decent equity out a $300,000 or so. Considering the monthly payment will be high for the new house and then I have cash on hand. Would you advise putting more money down at this time towards principle or investing in a stock market taxable account in index funds? I have a 30 year loan on the new house with a 10 year arm with a 3.8% loan.”
Dr. Jim Dahle: Well, I told you it wasn't really enough info here to give advice, but that $2 million house seemed pretty expensive for a typical doc. I know what pulmonologists make and I don't think they get paid dramatically more in Chicago and $2 million is a heck of a house. So my general rule is to keep your mortgage to a 15 year fixed mortgage and keeping that to less than 2X your gross income. So if you're making $500,000 a year, you had to keep your mortgage to less than a million dollars. I suspect that this particular doc was well beyond that, but it was a little bit hard to say without more details.
Dr. Jim Dahle: I asked if the doc was planning on paying off the mortgage in less than 10 years and if not, why do you get a 10 year arm? Because who knows where interest rates are going to be in 10 years? What are you going to do if interest rates are 9% at that point, are you still gonna be able to even afford to live in that house? And I also wasn't sure how the doc had lost money on a house in recent markets, but I guess if you're only there for three years, it's possible that you could and maybe probable when you consider the transaction costs. As far as that $300,000 there's not really a right answer on what to do with it. But if the goal of sending it to the mortgage company isn't to lower your payment, right, it's to save interest and pay the loan off faster.
Dr. Jim Dahle: If you can't afford to meet your financial goals and make the current payment on the house, especially a 30 year payment, you just bought more house than you can afford. Buying a house should not feel scary. If you buy too much, a house becomes a curse instead of a blessing in your life. And if the house doesn't make sense, just sell it and buy something smarter and less expensive. If it does make sense, the only way to know whether it's better to pay it down or to invest is to use a functioning crystal ball, which I don't have and neither is anybody else. So I told the doctor, do whatever he likes or split the difference. And I also told him that it doesn't matter if you're frugal generally, if you're not frugal when you buy the biggest purchases of your life, you can buy a lot of lattes with what it costs to buy a one or $2 million house.
Dr. Jim Dahle: Doc got back to me, noted the income was around 550 between him and his wife and that the house three years ago is 1.2 million with 20% down and they needed more room. And so they sold it for 1.14 million plus the transaction costs, but took around $300,000 out, bought a new place for 2.2 million with 20% down. And he was just nervous because he had to put in all his cash into it. Yeah, I'd be nervous too with a $2 million loan. That's a pretty darn big loan for somebody who's only making $550,000, he says the bank wouldn't even qualify him for 15 year fixed mortgage. So I'm not surprised because it really is a huge loan. So I told the doc if you put that you got $400,000 down now as a down payment, if you put the other $300,000 in that 700,000, that leaves you with the 1.5 million mortgage, which is almost 3X his gross income, which is well out of my recommended 2X range.
Dr. Jim Dahle: So I told him he was on the house poor end of the spectrum with $700,000 in the house and only $300,000 in investments. I mean, there's lots of people in the bay area in Manhattan with similar issues and those people are simply going to work longer. They're going to spend less in retirement, they're going to travel less, they're going to drive crummier cars, but the difference has to be made up somewhere. Something has to give. You don't get a pass on math just because you buy an expensive house or just because you live in the bay area or Manhattan. And remember of course that just because a bank will loan you the money doesn't mean you should take it. So I told the doctor without that $300,000 going towards the mortgage, he's got a $550,000 income in a 1.8 million mortgage, so that'd be a 3.3x rather than a 2.7x ratio.
Dr. Jim Dahle: So I thought the right answer was probably to put it toward the mortgage if he was set on buying a house that expensive. I think it's going to take a long time to chew through that mortgage though. And I think he really probably ought to take a careful look at reducing his housing expenses and maybe even leaving Chicago at some point, not only is the cost of living go way down, but so do your taxes and so does your asset protection risk. Cook County can be brutal for a malpractice risk. By the way, if you need a realtor this spring, checkout Curbside Real Estate, this is Peter Kim's company, the passive income MD guy, they'll connect you with a realtor experienced in working with doctors. So if you let him know that I sent you or go through the links on the website in the show notes, you'll get an extra $100 back at closing.
Dr. Jim Dahle: So that's a little incentive to go through these links. Our next question also comes in via email. I just had a quick question. “I'm a dentist and I just finished paying off my student loans after the whole experience of paying them off I personally never want to take out another loan for anything ever again.” I can relate to that. I kind of feel the same way about debt at this point. “I just wanted to get your thoughts on delaying retirement savings for four years in order to save up for a house with cash. I am currently 32 years old. Just let me know your thoughts. Thanks so much.” Well, I'm no fan of debt. I think people know that, but I think that approach of paying cash for a house is probably a little too extreme.
Dr. Jim Dahle: There's three issues working against this approach. First interest rates could go up. I guess it doesn't matter much as long as you definitely don't have to borrow, but I think that's pretty rare doc that doesn't have to borrow for their home. The second issue is that the house could appreciate significantly while you're saving up. Meanwhile, none of your housing payment is going towards principal and so I think the house is kind of constantly moving away from you if you wait until you have all the money before you buy it. You could also be making more on your investments while borrowing at relatively low interest rate. So I think that all argues for using a mortgage to buy a house sooner rather than waiting until you can pay all cash, four years isn't forever. I guess if you could save it up in just a few years, maybe it's not that big of a deal. But I think it's reasonable to take a mortgage and I don't think we have to tell people that they can't even use a mortgage to buy a house.
Dr. Jim Dahle: I feel the kind of the same way about paying for medical or dental school, as long as you only take out enough debt that it's one x your future gross income. I think that's a good investment, I think is a reasonable way to pay for medical school. But I don't think you should borrow Forex, what you're going to make when you get out of school. I think that's a huge mistake and it's kinda the same way with the house. As long as it's a reasonable mortgage, I think it's okay to use a reasonable amount of debt to pay for it. But I'd recommend that this dentist do this instead. First, buy a house you can definitely afford. That means less than two times your gross income in the mortgage put down at least 20% buy on a mortgage that is no longer than 15 years, maybe a 15 year fixed, maybe even a five one arm and then pay it off quickly.
Dr. Jim Dahle: If you direct every dollar, you can at and above and beyond what you can put in retirement accounts, I'll bet you can pay it off in less than 10 years. That's the approach we took with ours. We paid ours off in seven years without ever missing a retirement contribution. That, of course, requires some frugal living, hard work, but we were able to do it. Remember that once you miss out on those retirement contributions, that tax protected and asset protected space is gone forever and those are the dollars that we have the longest to compound.
Dr. Jim Dahle: Well, I think we probably ought to wrap it up at this point. We talked about a lot of cases about housing. I think there's a lot of people thinking about buying houses this time a year. That's pretty common. Be sure to check you out our recommended realtor, resources and our recommended mortgage resources available on the website and of course, be careful. Don't buy too much, probably don't buy as a resident. That's usually the wrong move. Consider at least renting then until you're in a stable family and professional situation and just be smart about housing. It's a big expense and it can really keep you in the poor house if you're not careful. Many economic indicators are pointing to an upcoming slowdown down and possible recession. It is an important time for investors to reduce risk in their portfolios by diverting buying capital across stabilized cash flowing and value add real estate.
Dr. Jim Dahle: The recession resistant fund allows passive investors to own a portfolio of unique asset classes which are counter cyclical or relatively uncorrelated to the market and designed to continue generating positive returns through the next market correction. Learn more at www.recessionresistantfund.com.
Dr. Jim Dahle: Be sure to sign up for the free monthly newsletter and thank you for subscribing to this podcast and for giving us a great rating on iTunes or if you're listening on YouTube, and thanks for subscribing there as well. Head up, shoulders back. You've got this. We can help. We'll see you next time on the White Coat Investor podcast.
Disclaimer: My Dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He's not a licensed accountant, attorney or financial advisor. So this podcast is for your entertainment and information only and should not be considered official, personalized financial advice.