Q.

My income and my fiancee’s income will combine to an average of about $500,000 per year.  We are looking at homes for around 1.25 million (My city is expensive, you’d be surprised how little that actually gets you), and based on the rule of thumb we have read about on your site (specifically do not take out a mortgage > 2x annual gross income), we are therefore looking at a $250,000 down payment. I think we can save this in 2-4 years, depending on how aggressive we are (I am doing an extra four shifts a month starting in January to try and make this happen).

So how do we keep this money safe and allow it to still bear interest? Based on advice from my tax attorney, we’re thinking of running it through a shell LLC that we’ve set up for other purposes to protect it from lawsuits. If I did that, I could open up a Vanguard account in the name of the LLC and put it in Money Market funds or Treasuries until it’s needed.  Any other creative ideas?

A.

Sorry to hear housing is so expensive in your town.  You two should probably have a really long chat over drinks some time about whether it’s worth it to you or not.  If you moved a few hours out of town you could probably retire a few years earlier.


I think $250K is a great down payment on a $1.25 Million house, but I wouldn’t be too rigid about the rules, especially given our ultra-low interest rate environment right now.  A “physician loan” at 4% right now MIGHT be better than a conventional loan at 4.5% in 4 years if interest rates go up, especially if there is a strong housing market recovery making you pay more for the house overall.  4 years can be a long time to wait for someone with a $500K income.  But then again, the Fed just announced that it expects to keep rates exceptionally low through 2015, so perhaps you still have years to get a low rate on your mortgage.  It’s impossible to know without a crystal ball, and only you guys can make that decision.  But I would at least look into the relative costs of renting versus buying, perhaps using a resource such as the New York Times Calculator.

The rule of thumb is just that.  Obviously you don’t want to buy a $2-3 Million house, and when you’re looking to minimize mortgage interest you want to avoid jumbo loans, PMI, and higher than market rates whenever possible.  But sometimes people who live in high-cost areas have to bend the “rules” a bit (and make up for it in other areas of their financial lives- driving lower cost vehicles, vacationing less, working longer etc.)

As far as keeping this money safe, there are two big risks you need to look out for.  The first is investment risk.  If you invest in risky stuff (like stocks) you might lose a big chunk of the money right when you need it.  You keep the money safe from this risk by investing in safer investments- savings accounts, CDs, short term bond funds etc.  It’ll earn interest, but probably less than inflation (thanks to the Fed), but with this money the return OF your principal is more important than return ON your principal.  Other thoughts on short term savings options were discussed in a previous column.

The second risk is from lawsuits.  I don’t know the laws in your state, but almost surely money in a typical old taxable brokerage account or bank account is completely exposed to your creditors in the event of a work-related or non-work-related lawsuit.  The best protection against these is adequate liability insurance- malpractice and umbrella.  I’m not sure I’d go to the trouble of complicated asset protection techniques (such as those you need an attorney for) for an amount as small as a couple of hundred thousand dollars.  I’d probably just run the very low risk of a lawsuit for more than your insurance limits.  You may feel differently, but keep in mind it’ll likely cost a four figure amount of money (perhaps more) to set-up LLCs/corporations etc to protect this.  You say they’re already set up, so perhaps the cost is minimal for you.  If it wasn’t, I’d meet with an asset protection attorney in your state to discuss just how much asset protection this would provide (as well as ensure its legality).

Remember also that when you put the money into the LLC, it’s not exposed to your creditors, but it is exposed to the creditors of your LLC.  If your LLC also holds a toxic asset like rental real estate, that may not be a good idea.

What do you think readers?  What advice would you give to this young physician who wants to protect his large down payment fund from loss?

Image Credit: Bart Everson, via Wikimedia, CC-BY-SA