Advice: Get modest house or more expensive house?

[goldsummer]

Which option would you advise to take?

Option A)
I have the opportunity to buy a modest 3 bedroom house that needs some work (but still very livable) from family for ~100-130k. I could live in it for a few years, make repairs and updates, then rent it out or sell it. Or stay in it.

Option B)
Get a better house that I really want for 250-350k and just stay in that.


I'll be a new attending making 200-220k.
I also have about 80k in savings.


Also, is it true a more expensive house helps more come tax season, especially on a physician's salary??? I was told I might actually bring home less overall if I chose a more frugal home?

Thanks.

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[RangerBob]

Personally I’d just live where I wanted to be long term, assuming it fits within your budget and you can meet all your financial goals. I hate moving. And as someone who lives in CA, both homes are a bargain to me.

The more expensive home may not actually help with taxes, now that the standard deduction has been increased.

 

[thumbz]

I fell into the trap of thinking buying a more expensive house would help come tax time. Here's your situation.

You buy the $130k house, you pay 5% mortgage interest - you write off $6500 of interest which at a marginal tax rate of 30% gives you $1950 extra on your tax return. You paid $4550 out of pocket in interest.
You buy the $350k house at 5% interest - you write off $17,500 of interest which at a marginal tax rate of 30% gives you $5250 back on your tax return. So hooray bigger tax return! But! You spent $12,250 out of pocket on interest so you're actually $7700 worse off as you paid that much extra to a bank.

Then people talk about SALT (state and local tax write off) - so higher property taxes give you a bigger writeoff on federal taxes. But not actually - it's capped at $10k and as a doc you'll hit that in state taxes alone unless you live in a no income tax state.

tl;dr - don't buy the more expensive house to help you at tax time. It's a logical fallacy. I fell for it.

Buy the fixer upper, fix it up and flip it. Learn to do as much work yourself as you can. I just installed a toilet yesterday - it's super easy and I'm youtube taught entirely. Sinks, faucets, etc are all in the same boat. We sold our first house (fixer upper) at a 50% profit and used it to kill our student loans which allowed us to buy a more expensive second home comfortably.

 

[FutureInternist]

I thought that the tax write off for mortgage (and student loan) interest phased out after a certain income?

So even if the write off was worth it, most do s wouldn’t qualify anyway?

 

[thumbz]

I thought that the tax write off for mortgage (and student loan) interest phased out after a certain income?

So even if the write off was worth it, most do s wouldn’t qualify anyway?

Student loans yes, you phase out at a docs income. Mortgage interest isn't capped based on income but is capped to $750k worth of house (anything over that is not deductible).

 

[dpmd]

Even with my fancier house, my mortgage interest is low enough that the standard deduction works out better for me (very low interest rate, yay) so I wouldn't do it for supposed tax benefits. Almost all those tricks people talk about for saving money on taxes end up costing you enough elsewhere that they really aren't helpful. So ignore that aspect. What I would consider more is whether the neighborhood is one you would like to stay in and whether the layout is something that you could make your forever house. The difference in prices makeshift almost like having a 120k renovation budget. There is a lot of stuff you can do with that much money but only if the lot size is what you need it to be. Even structural stuff can be changed with that much money but you can run into the issue where you put so much money into the house that you can never get it back in the neighborhood. Not a huge issue if you plan to stay there but it factored in to why I got a bigger fancier place. I did do some renovations that I wanted while I lived there though and was generally happy with it plus I ended up closer to financial.independence than I would have if I had bought the fancy place earlier. And it makes a nice rental property now. Moving sucks but is easier if it is in town and you can afford to hire moving help. Plus if you end up hating your job and moving it will be easier to move if you haven't put as much of your savings into a house and the mortgage is smaller.

 

[FutureInternist]

Student loans yes, you phase out at a docs income. Mortgage interest isn't capped based on income but is capped to $750k worth of house (anything over that is not deductible).

Oh dang... gotta refile past 3 years of taxes 🤔

 

[cpants]

The tax deduction is not beneficial. As others pointed out paying more interest to get 30% of it back on your tax return makes no sense.

Honestly either one of your options is pretty modest on a 200k salary. I'd opt for spending a bit more on something you can stay in for a longer time. Moving is very expensive as is selling a home. Flipping houses as a physician is not viable for most people. Even if you know how to do the work yourself, you are not going to have a lot of time. If you do have a lot of time, you'd do better working more as a doctor rather than working a construction job...

 

[dpmd]

The tax deduction is not beneficial. As others pointed out paying more interest to get 30% of it back on your tax return makes no sense.

Honestly either one of your options is pretty modest on a 200k salary. I'd opt for spending a bit more on something you can stay in for a longer time. Moving is very expensive as is selling a home. Flipping houses as a physician is not viable for most people. Even if you know how to do the work yourself, you are not going to have a lot of time. If you do have a lot of time, you'd do better working more as a doctor rather than working a construction job...

I agree with not picking the cheaper place if the location or footprint of the house makes it incompatible with staying more than a few years, but if it is in a good place and a custom kitchen and bathroom remodel could make it a long term home then it is a feasible option with a plan to have a contractor do the work. People are sometimes so stuck on a ready to love in home that they don't realize how nice it is to pick your flooring, your cabinet layout, and other details that take a house from meh to wow.

 

[cpants]

I agree with not picking the cheaper place if the location or footprint of the house makes it incompatible with staying more than a few years, but if it is in a good place and a custom kitchen and bathroom remodel could make it a long term home then it is a feasible option with a plan to have a contractor do the work. People are sometimes so stuck on a ready to love in home that they don't realize how nice it is to pick your flooring, your cabinet layout, and other details that take a house from meh to wow.

Yea I agree. Just don't think buying places that need tons of work and "flipping" them as suggested by another poster is a good plan.

 

[RangerBob]

Yea I agree. Just don't think buying places that need tons of work and "flipping" them as suggested by another poster is a good plan.

But it could be a fun hobby! I enjoy working on the home, but it can be done quicker, better, and cheaper if someone else does it (assuming I work more shifts with all the time I save).

I just enjoy learning new stuff, and I like tools. Great hobby. Terrible investment.

 

[dpmd]

Yea I agree. Just don't think buying places that need tons of work and "flipping" them as suggested by another poster is a good plan.

Definitely not. I don't agree with shoddy workmanship which all too often comes with flipping anyway.

 

[NITRAS]

Buying things for a "tax write off" is trading dollars for quarters. Add in the standard deduction for married filing jointly is $24k.

You should buy the house that fits your expected life plans for the next 4-5 years. Shorter than that and it often makes more sense to rent.

As a homeowner, you get to do lots of projects, even in houses that aren't fixer uppers. I'm moderately handy, but my list of stuff to do, is always a long list, and my house was new. The thought of a fixer upper is hard for me to imagine.

If this is your first job, it might make sense to rent one more year to make sure you are going to want to stay in your job. You will have a lot better idea of what house, and you will be more comfortable in hour salary to figure out what you want to pay. When I first started, my salary was pretty close to that and the take how pay of like $4500 every 2 weeks wasn't that awe inspiring.

 

[Perrotfish]

Which option would you advise to take?

Option A)
I have the opportunity to buy a modest 3 bedroom house that needs some work (but still very livable) from family for ~100-130k. I could live in it for a few years, make repairs and updates, then rent it out or sell it. Or stay in it.

Option B)
Get a better house that I really want for 250-350k and just stay in that.


I'll be a new attending making 200-220k.
I also have about 80k in savings.


Also, is it true a more expensive house helps more come tax season, especially on a physician's salary??? I was told I might actually bring home less overall if I chose a more frugal home?

Thanks.

I would plan for your first year as an attending to involve pretty long hours. You'll be gaining efficiency and hopefully also studying quite a bit. My days got a lot shorter going into my second and then third year out with the exact same clinic volumes and call frequency.

YMMV but I wouldn't recommend taking on any large projects right out of the gate. Renting is fine. Buying a low maintenance home is the second best option, though be aware that many attendings do not stay in their first job. Buying a fixer upper, though, should probably wait at least a year or two.

 

[The PA Investor]

Personally I would go for the cheaper home. That 100-130k mortgage could be worthwhile for you to rent it out and cashflow. By repairing/updating that house you cause forced appreciated in a short amount of time in addition to regular appreciation. Moving is a pain but having rental real estate in your portfolio that provides positive cash flow is huge. You can use that rental property for some tax savings as well. Your future self will thank you for moving into that fixer upper.

 

[Trogghunter]

Think about the house that you would want to be quarantined in. Buy that house.

 

[clubdeac]

just rent.. buying is a pain in the ass. Why pay a mortgage broker 6-9k and then a real estate agent 3% and then hassle with all the paperwork. In the end the amount you spend on taxes, mortgage interest, closing costs, home insurance, and PMI (if you don't put 20% down) will come close to a year's worth of rent. I've run the numbers every which way and I'm becoming more and more convinced that home ownership is just another scam

 

[cpants]

just rent.. buying is a pain in the ass. Why pay a mortgage broker 6-9k and then a real estate agent 3% and then hassle with all the paperwork. In the end the amount you spend on taxes, mortgage interest, closing costs, home insurance, and PMI (if you don't put 20% down) will come close to a year's worth of rent. I've run the numbers every which way and I'm becoming more and more convinced that home ownership is just another scam

It's not a scam, and it makes a lot of sense financially in the long term. You're right though that the numbers don't make any sense at all on a 1-3 year time frame.

 

[redfish955]

Homes double in price every twenty years. You will need a place to live for a solid 60 plus years. The key to home ownership is purchasing something you can pay off in 15 years while saving 25% of your earnings.

 

[TraderDoc]

Homes double in price every twenty years. You will need a place to live for a solid 60 plus years. The key to home ownership is purchasing something you can pay off in 15 years while saving 25% of your earnings.

I respectfully disagree with this. I'm confident that hyperinflation is coming given this unprecedented stimulus during COVID-19. Thus, today's dollar is significantly more valuable than the dollar in 10-15 years. but more importantly, instead of using the extra $$$ to pay off a 15 year home mortgage vs 30 years, I think using that money to intelligently invest is of far better use.

For example, on a $200K mortgage. Difference in payment per month is roughly $500 for a 15 vs 30 year mortgage. Thus with a $500 monthly investment into a portfolio with roughly 15% yearly returns (which is easily doable if one takes time to learn to invest in the market), with compound interest, over 30 years that is roughly $2.6 million. You'd end up paying $90K more in interest for the 30 year mortgage vs the 15 year, but that extra $500 a month with sound investing makes that look like peanuts.

 

[redfish955]

I respectfully disagree with this. I'm confident that hyperinflation is coming given this unprecedented stimulus during COVID-19. Thus, today's dollar is significantly more valuable than the dollar in 10-15 years. but more importantly, instead of using the extra $$$ to pay off a 15 year home mortgage vs 30 years, I think using that money to intelligently invest is of far better use.

For example, on a $200K mortgage. Difference in payment per month is roughly $500 for a 15 vs 30 year mortgage. Thus with a $500 monthly investment into a portfolio with roughly 15% yearly returns (which is easily doable if one takes time to learn to invest in the market), with compound interest, over 30 years that is roughly $2.6 million. You'd end up paying $90K more in interest for the 30 year mortgage vs the 15 year, but that extra $500 a month with sound investing makes that look like peanuts.

You get a better interest rate. Your payment on a 200k house will be like $200 a month difference.

 

[clubdeac]

I respectfully disagree with this. I'm confident that hyperinflation is coming given this unprecedented stimulus during COVID-19. Thus, today's dollar is significantly more valuable than the dollar in 10-15 years. but more importantly, instead of using the extra $$$ to pay off a 15 year home mortgage vs 30 years, I think using that money to intelligently invest is of far better use.

For example, on a $200K mortgage. Difference in payment per month is roughly $500 for a 15 vs 30 year mortgage. Thus with a $500 monthly investment into a portfolio with roughly 15% yearly returns (which is easily doable if one takes time to learn to invest in the market), with compound interest, over 30 years that is roughly $2.6 million. You'd end up paying $90K more in interest for the 30 year mortgage vs the 15 year, but that extra $500 a month with sound investing makes that look like peanuts.

Interesting... so you'd recommend a 30 yr mortgage over a 15 year at this point in time/history?

 

[NITRAS]

I respectfully disagree with this. I'm confident that hyperinflation is coming given this unprecedented stimulus during COVID-19. Thus, today's dollar is significantly more valuable than the dollar in 10-15 years. but more importantly, instead of using the extra $$$ to pay off a 15 year home mortgage vs 30 years, I think using that money to intelligently invest is of far better use.

For example, on a $200K mortgage. Difference in payment per month is roughly $500 for a 15 vs 30 year mortgage. Thus with a $500 monthly investment into a portfolio with roughly 15% yearly returns (which is easily doable if one takes time to learn to invest in the market), with compound interest, over 30 years that is roughly $2.6 million. You'd end up paying $90K more in interest for the 30 year mortgage vs the 15 year, but that extra $500 a month with sound investing makes that look like peanuts.

Your premise is that people invest the difference, which is an unlikely to happen in real life. The reality is that most people buy a bigger house. The point of a 15 year mortgage is that you get it paid off. With no payments, you can invest, and have a stronger position to capitalize on downturns.

15% rate of return?! LOL

 

[TraderDoc]

I Learned to swing trade/day trade and long term invest since residency. Started with $200/month contribution to portfolio. I have done about 40-50% every year since 2016. Year to date up 150%. So 15% returns in a year to me is an incredibly bad year. Up market/down market. Stocks up or stocks down. Always a way to invest.

 

[dpmd]

Are you sure your contributions are being counted in your gains?

 

[TraderDoc]

That’s a good question. I don’t think it does. But I’m not sure how Fidelity counts contributions in calculating return %.

 

[dpmd]

From their website. This calculation is based on a number of factors, including changes in the value of the assets you own, dividends and interest you earned, fees that you may have paid, and the size and timing of your additions and/or withdrawals

 

[thesauce]

Another thing not being discussed here is what your specialty is...some have to “schmooze” to build their practice and having a bigger house where you can entertain will help with that

 

[The PA Investor]

just rent.. buying is a pain in the ass. Why pay a mortgage broker 6-9k and then a real estate agent 3% and then hassle with all the paperwork. In the end the amount you spend on taxes, mortgage interest, closing costs, home insurance, and PMI (if you don't put 20% down) will come close to a year's worth of rent. I've run the numbers every which way and I'm becoming more and more convinced that home ownership is just another scam

I would typically agree with you. I live in the Bay Area and people are house crazy. They're typically older houses that need to be upgraded/ remodeled and the people who buy them are totally over leveraged and become house poor. Obviously not everyone is like the Bay, but people in general buy too much house.

 

[Investing Resident]

just rent.. buying is a pain in the ass. Why pay a mortgage broker 6-9k and then a real estate agent 3% and then hassle with all the paperwork. In the end the amount you spend on taxes, mortgage interest, closing costs, home insurance, and PMI (if you don't put 20% down) will come close to a year's worth of rent. I've run the numbers every which way and I'm becoming more and more convinced that home ownership is just another scam

Depending on where the OP lives, I would also agree with this sentiment. I want to also bring up the fact that there is an opportunity cost associated with using your available capital to buy your primary residence. The amount of money that you spend on the acquisition of the house could be used to invest elsewhere and provide much better returns. Not to mention the ongoing cost of maintaining a house turns your house into a liability rather than an asset.

That said if you purchase the cheaper house with the intention of renting it out in the future, this may be a sound decision. Just make sure to run the numbers and do your due diligence to make sure that the property will cash flow once you move out and get it rented.

 

[Splenda88]

I would definitely go with option A. Pay it off in 3 yrs and buy another place where you really want to live and uses the paid off place as cash flow.

 

[<L>]

I would typically agree with you. I live in the Bay Area and people are house crazy. They're typically older houses that need to be upgraded/ remodeled and the people who buy them are totally over leveraged and become house poor. Obviously not everyone is like the Bay, but people in general buy too much house.

I'm certainly not in the Bay Area, but I'm in a place where I saw how low the prices the OP was taking about and laughed. We just dropped 650k on a bungalow in the city this summer. Uprooting and moving to a place like Cinci or Kansas City started looking appealing when I was doing the budget.