Author Topic: DRs finally makes crap ton of $ - rent or buy house despite student loans?  (Read 6068 times)

wearfannypacks

  • Stubble
  • **
  • Posts: 224
    • My Journal
Brand new to high income bracket and our lease is up end of June. Decision time.

Here's a brief snapshot:
~Married with 2 kids
~4k monthly living expenses ($1500 rent 2 bed apartment)
~400k in student loans between the 2 of us.
~Yearly income first full year after residency will be north of 400k

Should we buy a modest house to reduce tax burden? (under 200k)
Move to rent a house? ($1400-1800 mo)
Stay in our 2 bedroom apartment? (1500 mo)

I'm not ready to buy the settle down into our forever house. Frankly the idea of furnishing anything much larger than our 2 bed apartment makes my head explode. Love to get your input. Happy to edit with more info.

Financial goals are to
-max out tax advantage retirement accounts (Sep IRAs)
-throw the rest at paying down student loans
-eventually work in spurts in between extended travel with the fam (we get fulfillment from our jobs and don't see quitting forever.)
^see ourselves airbnb-ing or houseswapping when we get to this phase.

Over the last 6 months, our monthly spend is 3-5k a month. (last few months have been unusual, we've had a baby, met our high healthcare deductible, car break down, paying for professional licensing, family travel for funerals)

If nothing crazy happens we are at 3-3.5k a month.

We earned ~100k last year. Upcoming salary projections are
2016- $250-300k
2017- $350-450k+

What would you do? Words of Wisdom from others who have been in this situation?

ZiziPB

  • Magnum Stache
  • ******
  • Posts: 3271
  • Location: The Other Side
The only tax burden reduction you will see is the mortgage interest deduction which will be minimal given your desired purchase price and a low interest rate rate on your mortgage.  And depending on your actual income, you may start seeing that phased out as well, if not in 2017 then soon after if your income keeps going up.  So my advice would be to stay put until you are ready to buy a long-term house, unless you are in desperate need of more space, in which case rent something larger.

Travis

  • Handlebar Stache
  • *****
  • Posts: 2436
  • Location: Arizona
Quote
Frankly the idea of furnishing anything much larger than our 2 bed apartment makes my head explode.

Sounds like a great reason to pump the brakes on buying a home.  Switching to renting a house will get you some experience on how to maintain one before you take the plunge.  I'm not well versed on the mortgage tax deduction, but adding $200k in debt to save a couple thousand on taxes doesn't sound like the math works out.  Spend a little time with your new income and figure out what you can really afford between maxing investment accounts and paying down your student loans.  Between higher income and lower loan debt you'll have a better time negotiating a mortgage too.

Thinkum

  • Pencil Stache
  • ****
  • Posts: 725
  • Location: SoCal
  • Life is Good
First off BIG congratulations! $3-3.5K including rent, is not a bad monthly spend.

As to rent or buy, in your case, I would just continue renting. Owning a home is nice and all, but it has it's own set of problems, and some that are quite costly. I would recommend paying down debt, maximizing tax free contributions, and building your stash. If you find down the line you'd like a place of your own, you'll have the coin to buy. Allow some time to get used to the schedules and demands of being both new Dr's and new parents.

Sibley

  • Magnum Stache
  • ******
  • Posts: 3461
  • Location: Chicago, IL
Only buy a house if you want to. That's not just furnishing, it's also maintenance and repairs.

Definitely kill those student loans though, ASAP.

jengod

  • Handlebar Stache
  • *****
  • Posts: 1180
  • Location: Near LAX
Kill the student loans first.

Give yourself some time to just sit with the new income without a lifestyle upheaval.

Get completely debt-free, save a 10-20 percent down payment, and then start looking.

Just go slow.

Congrats!

nereo

  • Senior Mustachian
  • ********
  • Posts: 10344
  • Location: la belle province
    • Here's how you can support science today:
There's a lot more to home ownership than simple economics, but let's start with the economics.

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

According to that calculator, which makes more economic sense for your circumstances?  Buying or renting?

Given that interest rates are ~4% right now and you are talking about a home in the $200k range, your maximum interest deduction might be ~ $8,000. At your expected income levels that might save you ~$2640 in taxes in the first year, and then that will decline each year. I'm not a CFP, so please do run your own numbers (I could be wrong).

pbkmaine

  • Walrus Stache
  • *******
  • Posts: 8296
  • Age: 62
  • Location: The Villages, Florida
Stay where you are, kill the debt. You may never want to buy if you plan to travel extensively.  The "benefits" of ownership are greatly exaggerated, IMHO, because they do not take costs of maintenance and upkeep into consideration. You also have realtor fees when you sell a house, much less flexibility if you want to relocate, and the possibility of losing money if you buy in a strong market and sell in a weak one.

wearfannypacks

  • Stubble
  • **
  • Posts: 224
    • My Journal
Yeah, I realize the numbers may not be exact, but that's an interesting way to frame it.

Is the aggravation of a new home purchase worth a yearly saving of about 3k in taxes? We also don't own a fridge/washer/dryer/lawn mower. There are also closing costs and home maintenance to figure in too. More money.

Yeah, I don't think so.

I was doing a bit more research on home rentals, there are some reasonable homes in a similar location. I also like the point of adjusting to living in a house rather than an apartment, and going from there.

Also point well taken on getting used to a new income level. It'd be excellent to really knock a bunch of student loans down over the next 2 years. Frees up cash flow when we are done, and also gives us a reason not to lifestyle inflate....maybe I should start a journal to keep myself honest :)

There's a lot more to home ownership than simple economics, but let's start with the economics.

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

According to that calculator, which makes more economic sense for your circumstances?  Buying or renting?

Given that interest rates are ~4% right now and you are talking about a home in the $200k range, your maximum interest deduction might be ~ $8,000. At your expected income levels that might save you ~$2640 in taxes in the first year, and then that will decline each year. I'm not a CFP, so please do run your own numbers (I could be wrong).

wearfannypacks

  • Stubble
  • **
  • Posts: 224
    • My Journal
There are these mortgages called physician mortgages, were they don't have PMI and don't take into consideration student loand debt, and you can have a $0 downpayment.

In doing more research it sounds like thier fees and interest rates are higher too. Another example of just because you can, doesn't mean you should.

HipGnosis

  • Handlebar Stache
  • *****
  • Posts: 1593
I'm told that http://whitecoatinvestor.com/ has good advice for you.

What's the interest on that student debt?  Can you refinance to a lower rate?

Do you have an emergency fund??

If you can rent a nice house for $1800, go for it!!

Do you both know specifically where you will be working after residency?!?  You probably need to settle into your careers before you buy a house.

Axecleaver

  • Magnum Stache
  • ******
  • Posts: 3366
  • Location: New York
Congratulations on making it through your residencies! With 750k in income MFJ, stashing 106k in two SEP-IRA's, you're in the top tax bracket and will hit the PEP and Pease phase outs, plus AMT. So you won't get any tax advantages from owning a home, or any other deductions, including the personal deduction. Look into a larger rental where you can enjoy a bit more space. There's often rentals available under market, where someone owns a home but hasn't figured out what to do with it.

Rest of your plan is solid. Max out the SEP-IRA's, save a 40k downpayment (which you can do in one month at your income level) in case you change your mind, then throw the rest at your student loans. You can have those paid off in two years.

Plus, who knows how your first year or two will go in your new jobs? It would be awful to have bought a house and then find a better job on the other coast.

thingamabobs

  • Stubble
  • **
  • Posts: 145
Are you in an area that you know you will stay? i.e. where both your families are, friends, etc. Most new grads change jobs in 1-2 years (I did), so I would not recommend buying.

PhysicianOnFIRE

  • Bristles
  • ***
  • Posts: 452
  • Location: Up North
    • Physician On FIRE
Congratulations on being so close to finishing residency!  I see more and more docs on here, which is great.

 I was in your position 10 years ago.  I did locums for a couple years before settling down into a permanent position.  At that point, I built the dream home.  Turned out to be a big mistake as the hospital went bankrupt about 4 years later.  As others have pointed out, > 50% of physicians aren't in their first "permanent" position after 2 years, so buyer beware.

Your low spending (for a 2-doc family) is impressive and you're on a great path to attaining FI in short order.  It took me about 9 years, but I didn't discover MMM, WCI or any of the personal finance blogs until 8+ years after residency.  I mostly had a similar mindset though, so other than the 4000 square foot house, I made a lot of choices that helped me get to where I am today (FI and looking to RE in 5 to 9 years in my mid-to-late forties).

To answer your question, renting a house might be a nice upgrade from a 2-bedroom apt for a family of 4.  It's nice to have a guest room and a yard for the kids to run around. But do what works for you!

Cheers,
-PoF




dess1313

  • Bristles
  • ***
  • Posts: 442
  • Location: Manitoba Canada
Congrats on getting through a rough and grueling education!!!

I would sit and rent for another year or two.  If you've just had another child, plus all the changes in your life that are about to come, why stress yourself out any more than you have to?  Maybe renting a house might be nice, then you can slowly adjust to different living, and find out more about what you like and don't like in the features of a home.  Think of it as a test drive to see how you like it.  when i bought my place, i was not expecting all the little costs that add up.  i had a lot to furnish, plus little things to buy all the time, as well as reno projects to do.  It was an expensive time for me, and the process of house buying was stressful as well.

Take this time to make a future plan.  What is important to you and your partner going down the road?  Maybe you want to work in other areas/different locations which again would make buying a house a poor choice.  What are some big goals or things that you would like to do over the next 5-10 years?

I would focus on getting your financial house in order.  It sounds like in about 18 months you could knock out most, if not all of your student loans. 
Also if you want to travel, why would you want to worry about what happens at your house?  make your land lord worry about that for now.
Then i would focus on a down payment.  shouldn't take too long at your incomes, but i don't know what sort of house values there are in your area to choose from

alsoknownasDean

  • Handlebar Stache
  • *****
  • Posts: 1975
  • Age: 35
  • Location: Melbourne, Australia
Congratulations!

I'll echo the others in asking what the interest rates of your student loans are. If they're high, knock them on the head now.

If you're comfortable continuing to rent for the time being, by all means do it. Hopefully you'll have those student loans gone in a few years and then you can look around to buy a house if you feel like it.

For now, what's best for your current situation re: house/apartment?

11ducks

  • Pencil Stache
  • ****
  • Posts: 559
  • Location: Duckville, Australia
Congratulations!! What an amazing thing to accomplish.

I'd lean towards staying put, for at least a year to settle into your jobs. I'm not sure how old your kids are, but particularly if they are young, making big changes like moving house, poss moving schools, as well as parents possibly taking on very different workloads /schedules, could be a lot of change for your family all at once. Even if they are older, finding, buying and moving into a new place takes quite a bit of time. Just something to consider.

wearfannypacks

  • Stubble
  • **
  • Posts: 224
    • My Journal
Thanks for the congratulations everyone. We've been been pushing so hard, for so many years I forget it's ok to celebrate.

Answers to a few questions
-Our loans are at 6.25%
- We do plan to refinance. I started practice this last year and don't have a long enough income history (2 years is standard). Once DH's official contract is signed we can start refinancing with sofi, earnest, or one of those other companies. A signed contract is enough proof of income.
-Emergency Fund, yes! We have 17k (4 months of living expenses)
-We have a 3 yo and 3 month old. A yard would be lovely. An extra room for visitors would be grand! Having our car parked close to our living quaters would make grocery shopping way easier.
-We are staying in the same city as DH's residency. We feel pretty connected to the community, family is a healthy drive away ;)
-Turnover in his position is pretty low. I anticipate things working out until we reach FI. However, there are also plenty of other jobs in our city in his field.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10344
  • Location: la belle province
    • Here's how you can support science today:
Thanks for the congratulations everyone. We've been been pushing so hard, for so many years I forget it's ok to celebrate.

Answers to a few questions
-Our loans are at 6.25%
- We do plan to refinance.
I started practice this last year and don't have a long enough income history (2 years is standard). Once DH's official contract is signed we can start refinancing with sofi, earnest, or one of those other companies. A signed contract is enough proof of income.


One point of advice.  If you are like many people, you probably have a variety of student loans ranging from 2.x% to >8%.  You may find that you get much better refinancing terms if you shed a few of the very high student loans.  Those are the ones that the loan company are making the most money on.
With $17k in an Efund + your spouse's impressive salary you have the option of nixing some of the loans right off the bat. 
When refinancing ask what the difference would be if you included your most expensive loans or excluded them.  If the final rate is different exclude them and pay off the most expensive notes.  If it makes little difference lump them in together.



wearfannypacks

  • Stubble
  • **
  • Posts: 224
    • My Journal
Thanks for the congratulations everyone. We've been been pushing so hard, for so many years I forget it's ok to celebrate.

Answers to a few questions
-Our loans are at 6.25%
- We do plan to refinance.
I started practice this last year and don't have a long enough income history (2 years is standard). Once DH's official contract is signed we can start refinancing with sofi, earnest, or one of those other companies. A signed contract is enough proof of income.



One point of advice.  If you are like many people, you probably have a variety of student loans ranging from 2.x% to >8%.  You may find that you get much better refinancing terms if you shed a few of the very high student loans.  Those are the ones that the loan company are making the most money on.
With $17k in an Efund + your spouse's impressive salary you have the option of nixing some of the loans right off the bat. 
When refinancing ask what the difference would be if you included your most expensive loans or excluded them.  If the final rate is different exclude them and pay off the most expensive notes.  If it makes little difference lump them in together.

Ah, we think similarly. Both of us have already done a federal refinance with the interest rates averaged out. So in total we each have a mambajamba loan of ~200k each. We did exclude out 8.5% loans and paid those of during residency. Now it's a matter of trying to get a lower rate through one of the private companies out there. If we can get around 4% that would save significantly in interest.

cchrissyy

  • Pencil Stache
  • ****
  • Posts: 734
  • Location: SF Bay Area
with a house at that price point, and low mortgage rates, your interest deduction and property taxes will be low,  *probably lower than your standard deduction*, and if you take the standard deduction and don't itemize there is no tax benefit whatsoever to having deductible mortgage interest and taxes.