You may or may not have noticed, but I recently posted about my family’s success in using The 10% Rule in improving our net worth by $254,000 in just one year. This was only possible because we lived on less than 20% of our income. Living on that percentage of our income was only possible, because we didn’t buy a house. In fact, the more that I think about it, the more I realize that the decision to buy a house (or not) after residency is likely the number one determining factor of how quickly a physician gets to financial independence, or if they reach it at all. It’s tough answering the question “when is the right time to buy the next house?”
Today’s post will walk you through our thought process in buying our next home. We will discuss selling our current house, taxes and fees to be paid, and when/why our timeline for finding a home will start.
When is the Right Time to Buy the Next House After Residency & Fellowship?
Previously, I had a pretty hard and fast rule about when we would buy our next house: when our student loan debt is gone. Originally, this was going to take two years.
However, it dawned on us at some point that we couldn’t just wake up one day and say, “Today is the day that we will buy a house!” In addition to that, we have also discussed how we must move before my little girl starts the next grade at her current school. So, we needed to give ourselves time to look.
With a bit of whiplash, we very quickly learned the opposite lesson, too. Don’t start looking for a house until you are ready!
In our family, I manage the big picture of the finances, the investing, and the debt repayment plan. My wife pays the bills and takes care of a lot of the particular concrete tasks. We’ve always been good at filling each other’s gaps.
Given my big picture responsibility, I recently gave my wife the “go-ahead” to start looking at homes. I thought it would take some time to find some good ones.
Two weeks in, we had already gone to see five different homes. My wife was texting and emailing me daily with new homes to consider. Pandora’s box was officially open.
The Cost of a Home
After opening Pandora’s box, I spent some time determining if this was actually a smart financial decision for us. Too often, people ask “can we afford it?” I think the better question is, “How much will this decision impact our financial goals?”
We wanted to stay within 1.5 to 2 times my annual base salary (~$300,000). So, this puts us in the ballpark of a $400,000-$600,000 house. We currently live in a very low cost of living area, and so it’ll likely be in the lower end of that range.
After figuring out the ballpark we were looking in terms of the total price, I reached out to a few home lenders and received several different monthly payment and interest rate quotes for various term conditions. After these initial offers, our monthly mortgage payment looked like it would run around $2500 per month on a $400,000 house.
However, I’ve never wanted to take 30 years to pay a mortgage off. So, we would likely plan to put more money into it, say $3,000 a month. With our current mortgage payment of $650, we would have to come up with $2,350 somewhere else.
Looking at our budget, there was just no way to accomplish our goal of becoming financially independent in our mid 40s, pay off our debt in two years, buy the house, and stay married. With my wife recently starting a full time job, buying a house was simply going to put too much stress on our finances, family, and our marriage.
The only real option was to slow down our student loan payments in order to make up the difference, and with the success we have had this year, we just weren’t willing to do that.
Pumping the Breaks
This led to an obvious decision. We needed to stop looking at houses. In order to achieve our financial goals, we need to be saving approximately 30% of our gross income, which would not be possible if we bought a house.
When is the right time to buy the next house? Not right now. It just isn’t the right time. We did make a compromise, though. We have now decided that we shouldn’t look now, but we also cannot wait until the day we need to buy a house to start looking either.
So, our time-line will start when we are down to $50,000 in student loans because at this point we will have enough money between the equity from our current house and our savings to pay off that debt immediately if it was necessary.
Selling Our Current Home
Our current home, an 1100 square foot house with a one-car garage currently has 7 inhabitants (five humans, and two dogs). We purchased it for $120,000 in the summer of 2009, and it has a current value somewhere between $125,000 and $130,000. We currently owe about $98,000 on the mortgage.
With the above numbers, let’s say that we sold our home for $128,000 and owed $98,000 = $30,000 in profit. Sounds good, right? Well, we haven’t taken into account the taxes or the commission paid to the realtors, brokers, and lenders yet.
Fortunately, home sales are a tax-free event as long as you are not making a massive profit (more than $250,000 if single; $500,000 married) and have lived in that house for 2 of the last 5 years. We are making peanuts on our current home – $30,000 if we are lucky – in comparison to those kind of numbers.
Even though we won’t be taxed on the profit that we make, we will still have to pay the people and the fees involved in selling the home. Roughly, this usually costs about 10% including the buying and selling realtor both getting 3% (total of 6%).
So, from our $30,000 profit from our $128,000, we can expect to see $20,000 of that. In addition to the $30,000 emergency fund that we have, this accounts for how we came up with the $50,000 time point on our student loans before we can start looking.
The Next Step
With the picture painted above, you might guess that we are in a race to get to $50,000 in student loans remaining. We currently have $72,800. With our monthly payment now at $5500 per month, this will take us 4 months to get to without including any bonus pay that I might receive.
When we sell the home above, we would put the money from selling the house towards our debt and then have $30,000 remaining with $30,000 in our emergency fund. That would be a very tempting time to simply pay off the remaining balance. However, that would leave us with no emergency fund.
That is a future problem that I currently don’t have to deal with right now.
When is the right time to buy the next house? Well, until we get to $50,000 we will stick to the plan, keep building our wealth in a crazy fast fashion, and enjoy being happy in our little home.
How soon after finishing training did you buy a home? What criteria did you have? What advice would you have to someone following along the path behind you? Leave a comment below.