Tag: house

How much net worth should be put into your house?

net worth homeGiven the easy access to credit that we have in the United States, it is easy to purchase a house that commands several times your salary. Physicians are prime customers for lenders, as we are low-risk clients who have high earning potential and stable jobs. Easy access to credit is also a curse for us, since it is incredibly easy to overextend our earning potential to buy a McMansion.


Consider your home as a stable asset.

Those who encourage us to maximize the amount of our net worth into our primary home (not just real estate) really seem to argue that our home is a stable asset. A house is unlikely to lose its value overnight. Even if it burns down or gets wiped out by a hurricane (assuming you have hurricane insurance), you can recover a large portion of the loss through insurance. We need a place to live anyway, so keeping part of your assets under your roof is a logical approach, right? If you need to withdraw cash out of your property, you can obtain a home equity line of credit (HELOC). Your home provides you with an additional “bucket” to store your wealth.


[showads ad=responsive]


How liquid is a home asset?

While you can withdraw your assets in your home from HELOCs and reverse mortgages, it may only be practical for one-time uncommon large-ticket purchases. It’s not like you can cash out your home to pay for hospital bills and a new car to move into an RV without having to sell your home outright. You can withdraw equity in the home relatively quickly, but you can’t unload it completely without selling it. And as we all know, you can’t force your home to be sold. What if you ended up getting a new job in a new city? Many doctors change jobs after purchasing a new home and end up having to pay a mortgage for a house that they can’t even enjoy.

The liquidity of homes are highly variable, even within the same market. Homes in the Bay Area move like hotcakes—I have a friend who sold his house in Burlingame, CA within a week after listing. Other homes in San Francisco can be sold before hitting the market. In contrast, higher priced homes (>$500,000) in second and third tier markets can sit for years before being sold. One of my friends in Iowa has had his $550,000 home in a Grade A school district sit on the market for over a year without any buyer interest, but another friend whose $600,000 updated home in a Grade B- school district in the same city sell within a few weeks.

What I’ve concluded so far is that you can’t rely on your home to be much of any asset. You have to get lucky and sell it quickly (preferably cash deal) in order to withdraw all of your equity in it.


How do I approach home ownership in terms of net worth?

Because of relatively instability in where we live and how our primary jobs turn out, I don’t consider a primary home an investment, only a luxury. While I am building equity while paying down my mortgage, I have not seen much of a tax benefit yet from tax deductions yet. Additionally, the cost of owning a home for me has been significantly higher than renting. I have to deal with broken fixtures, lawn work, and regular upkeep costs that I would not have had to worry about in a rental.

Ultimately once I own my property outright, I can breathe easier about the rest of the expenses. I do not reside in a highly competitive real estate market, so I do not expect my property value to rise significantly if I decide to sell and move out.

Do you intend to keep any part of your net worth in your primary residence?


(Photo courtesy of Flickr)

Do you want to get the latest Smart Money MD posts in you inbox?
Get the FREE Smart Money MD Financial Cheatsheet for signing up!

Do not own more house than you need

This is the second article in a following series on saving money. 

Housing costs in America are cheap. If you look at the cost of rent of an average city in Western Europe, you will see that it is several times higher than most of the larger cities in the U.S. How about Tokyo or Hong Kong? Equivalent housing in New York is similar in pricing yet the GDP of Hong Kong is much lower than that of the U.S. If you are looking strictly in doctor income, you will come out ahead significantly in the U.S. If you compare the overall financial health of a doctor in an average midwestern city like Omaha to one in Hong Kong, the Omaha doctor wins by a landslide. A $3000/month mortgage in Omaha will get you a giant 4500 sq ft house with 4+ bathrooms while you get a 800 sq ft apartment in Hong Kong with questionable bathroom plumbing!

You can definitely make the payments as a doctor. But it doesn’t mean that you should splurge on your housing. Standard recommendation for housing is that you shouldn’t spend more than a third of your monthly income on housing. A doctor who still has student loan debt or is in her first five years of practice should not be spending nearly that amount. If you spend $1000 less a month on rent or mortgage, you’d save $12,000 in one year! A smaller home will also require less energy to heat and cool, less space to furnish, and less maintenance.

The perk of being a doctor in America is that you have a higher potential income and cheaper cost of living. Use that to your advantage. The amount saved can be used to fund your Roth IRAs or taxable investment accounts. Even with tax drag, a 4% annual growth on $12,000 will result in $21,611.32 after 15 years. Contribute this amount every year and you will have a hefty sum.

Ask yourself where you priorities are, and what activities, hobbies, or goods make you happy? Is it a new pair of Loubs every year? Is it an extended vacation? Or a fancy house?

[showads ad=responsive]


Do you choose to put your money in your house? What do you do to control costs in your home? Sound out below!

How much house can I buy on my salary?

As a high-income earning physician, you deserve a McMansion, right? How much house can you buy on your income?

Suppose that you are the average physician that we discussed in an earlier post. You are making $200,000 annually. According to this example, you have approximately $131,000 for living expenses and miscellaneous expenses.

Unless you will be paying for a house entirely with cash, you will likely take out a mortgage. In standard home loan mortgages, a down payment of 20% will usually afford you the lowest interest rate. For a $200,000 home, you will need to scrounge up $40,000 for a down payment, plus a few extra thousand dollars for miscellaneous home expenses such as moving expenses, furniture, and additional taxes.

In our example, if our new physician rents an apartment for the first year and lives a moderately lavish lifestyle, she will have $51,000 left for savings. That leaves plenty to put towards the down payment for If that entire amount is directed towards the down payment on a home, you can purchase a $255,000 home. If our doctor wishes to have a larger home (loan of greater than $417,000), she could take out a jumbo loan.

Now, I know plenty of doctors who live in homes <$250,000, but I would venture a guess that the majority of doctors buy much larger and more expensive homes. How can this be manageable? The truth is that everyone is in a different scenario. Perhaps those with the larger home have a higher income. Perhaps they already have savings from prior jobs, the spouse, family…etc. Perhaps they’ve overextended their income. After all, a large percentage of physicians do not have much savings!

Questions or comments? Sound out below!

[showads ad=responsive]