Life Situation:
Single, early 30s, no dependents, major US city. Currently in my final year of psychiatry residency (finishing July 2020), at which time my income will increase dramatically as I begin solo private practice. Trying to decide whether to continue renting or buy a house that is large enough and central enough to have a home office.
Gross Salary/Wages:
Current residency salary 65k/yr with benefits but see below.
Other Ordinary Income:
Moonlighting nights and weekends, average for the last 6 months is ~75k/yr which will continue until July 2020.
Adjusted Gross Income:
~140k/yr. However, I plan to begin a solo private practice upon finishing residency in July 2020 with estimated revenue ~300-500k/yr.
Taxes:
No state income tax, currently at 24% federal bracket and hopefully will touch 35% federal bracket for 2020.
Current expenses:
Rent/utilities: ~2050/mo, ~24.6k/yr (could probably find a 20% cheaper apartment but this is a very expensive city and it's not worth it to me at this time)
Food/dining: 600/mo, 7.2k/yr (mostly cooking, dine out occasionally and find this necessary given my social circumstance)
Additional professional training: 500/mo, 6k/yr (non-negotiable given how I'd like to practice)
Shopping: 250/mo, 3k/yr
Car expenses: 150/mo, 1.8k/yr
Gym: 69/mo, 828/yr
Total: ~44k/yr
Anticipated business expenses:
Malpractice, licensing, maintaining office furniture, etc.: 30-50k/yr (very difficult to anticipate and will likely change year-to-year)
Anticipated profit beginning July 2020:
250-450k/yr
Current assets pre-tax deductions:
403(b): 20k (100% VIVLX, maxed to match)
Roth IRA: 45k (100% VTSAX, maxed annually)
Taxable brokerage: 37k (100% VTSAX)
Total: 102k
Cash: 15k
Car: 2k
Parents: Could contribute a 200k down payment to a house
Liabilities:
Remaining med school debt: 20k (0% interest until graduation June 2020, at which time it will begin at 5% - I paid down the worse loans earlier)
Net Worth:
~100k (parents not included)
Specific Questions:
In my particular niche, a home office would be appropriate. This would have numerous financial benefits including: eliminating ~2000/mo office lease; eliminating friction and dead time associated with traveling to an office and having to sit there when I have gaps in my schedule; and allowing me to see more patients at random hours. Ideally, I would need a detached additional dwelling unit ("DADU") with a private entrance, waiting room, bathroom, and good soundproofing, though it may also be possible to do this in a basement ADU. I found a house that is absolutely perfect for this with both a DADU and a basement ADU, currently on the market for 985k, no HOA fees, 4k/yr insurance, taxes 10k/yr, unknown utilities. The basement unit could be rented separately for ~1.5k/mo. The rest of the space is more than enough for me being a single person. The obvious problem is the huge investment out of proportion to my wealth, which would heavily concentrate my assets toward debt and a single unit of real estate. I would likely be able to convince my parents to supply the 20% down payment if I was certain this was a good idea. This would be a significant investment for them. Using the rent vs. buy calculator from Khan Academy (attached), it is a bit of a tossup until you consider the office-lease-saving potential of a DADU (can simply plug in the rent as 4k/mo) and the income potential of the basement ADU, at which point there is a present value benefit of owning the home for 10yrs between 300-550k depending on speculative variables. Furthermore, I would likely be able to deduct some portion of my mortgage as a business expense (though this would apply to a regular office as well). In the likely event that I am not able to decide quickly enough to get this particular house, please help me create some price range and expected ADU rental parameters to more quickly make this decision in the future. If you feel renting is the better option, please provide some expected length of time or amount of capital saved until this is no longer the case.
*Note: I have no interest in getting opinions on the clinical/personal implications of seeing patients at a home office, or the interpersonal ramifications of getting a down payment from my parents. I am purely interested in the financial sensibility of this decision. If I were to buy this house, I am also interested in opinions on 30 vs. 15yr fixed mortgages in my situation.
Thank you for helping.