Just had our offer accepted on a $1.4 Million House

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Topic Author
wholeinone04
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Location: California

Just had our offer accepted on a $1.4 Million House

Post by wholeinone04 » Sat Feb 24, 2018 7:01 am

My wife and I live in a HCOL area and just went into escrow on a freshly renovated 3 bed/2 bath 'starter house' and now we're trying to decide on a couple loan options. We'll have about a 24-36 month EF after the purchase and plan to live there for at least 3 years while my wife is in residency (OBGYN). After that, we will likely stay in the same area but open to moving if she gets an amazing offer somewhere else. I'm self-employed and can work from anywhere on the globe but business is best where we are now.

Our loan officer (B of A, highly recommend btw if you're in the LA area - PM me) gave us a couple options that we need to decide on by tmw:

Conventional Loan: 4.125% on a 30 year fixed loan, no points. 20% down.
Doctor Loan: 4.3% on a 30 year fixed loan, no points. 10% down. and no MI.

The plan is to live in this new house for at least 3-5 years depending on my wife's job situation and then upgrade to our 'dream house' that we'll live in forever. If RE market prices stay flat, we'll be able to put 20% down on our 'dream house' in 3-5 years no problem and we'd keep the starter home and rent it out most likely. I have 2 other investment properties (one in another state that is managed and another 2 hours away that I manage) so renting is not a problem, this one probably wouldn't cash flow but it would be close to break even.

If the RE market goes up, then it would be tougher (but not impossible) to buy our 'dream house' so we'd probably sell our starter house in order to help with the downpayment for our dream house.

If the RE market goes down, then we'll hold onto the starter house and rent it out when we're ready to buy our 'dream house'. This is sort of my ideal situation as we will have about the same amount of cash on hand regardless of whether the housing market goes up or down.

So which loan option should we go with?

We have the cash to do 20% down (or more) so I'm leaning towards the conventional loan and just lock in a great rate. But it is tempting to only have to put 10% down and keep $140,000 in my pocket.
Last edited by wholeinone04 on Sat Feb 24, 2018 7:28 am, edited 1 time in total.

tyrnup13
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Re: Just had our offer accepted on a $1.4 Million House

Post by tyrnup13 » Sat Feb 24, 2018 7:17 am

Keeping that additional $140,000 is initially going to cost you 4.125% per year, or $5,775. If you already have a substantial investment portfolio, then I would definitely take the first option and put 20% down. That also gives you some room, in case the market declines and you are forced to sell.

Bacchus01
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Re: Just had our offer accepted on a $1.4 Million House

Post by Bacchus01 » Sat Feb 24, 2018 7:34 am

Which option?

The RENT option

Archimedes
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Re: Just had our offer accepted on a $1.4 Million House

Post by Archimedes » Sat Feb 24, 2018 7:39 am

Since you are committed to your current location for only 3 years, and since real estate prices can fluctuate both up and down in the short term, and since your current planned purchase for 1.3 million will likely cash flow negative as a rental, and since long distance landlording can be quite challenging if you end up moving far away in 3years, and since real estate transaction costs are quite high, have you considered any alternative housing arrangements for the next 3 years?

Maybe renting?

If you get lucky, this could work out fine. However you are assuming a rosy scenario for a whole bunch of variables over which you may have little control.

Maybe start by running the numbers on the home you plan to purchase as a rental property. Will it cash flow positive if you have to pay someone to manage it while living far away?

riverguy
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Re: Just had our offer accepted on a $1.4 Million House

Post by riverguy » Sat Feb 24, 2018 8:36 am

$1.4MM for a 3 bed 2 bath starter house is insane. That being said with your situation I think you should rent.

staythecourse
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Re: Just had our offer accepted on a $1.4 Million House

Post by staythecourse » Sat Feb 24, 2018 8:47 am

I must be missing something here. You must be making quite a bit of money yourself? You have a family? I KNOW you are not asking, but why in the heck do you need to buy a house? What if the market is down when you want to move and you can't when she is finished? What she can't find a job in the area? What if she hates OB (trust me it happens A LOT) and wants to transfer? What if you lose your job?

I am a doctor, married to one, both our parents are ones, both are sisters, many of our cousins, and nearly ALL of our friends and I can not remember ONE time I have EVER heard of a resident, buying such an expensive house for residency. EVEN the one's whose spouses area already working and well established in their own careers. Well the only exception may be the multi olympic gold medalist we had as a resident, but she is likely the outlier.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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climber2020
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Re: Just had our offer accepted on a $1.4 Million House

Post by climber2020 » Sat Feb 24, 2018 8:54 am

wholeinone04 wrote:
Sat Feb 24, 2018 7:01 am

The plan is to live in this new house for at least 3-5 years depending on my wife's job situation and then upgrade to our 'dream house' that we'll live in forever.
I agree with the others. You should rent. Odds are you may not be living in that city once residency is done, and odds are also that the first job, wherever that is, won't work out either. The first job that most doctors get out of training doesn't work out and they end up moving due to restrictive covenants.

arsenalfan
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Re: Just had our offer accepted on a $1.4 Million House

Post by arsenalfan » Sat Feb 24, 2018 8:56 am

Sell in 3-5 years @ 1.4 MM = $84k in realtor costs to sell + other miscellaneous fees. Pretty good chance you'd lose money. You're speculating price will rise and you will break even/a profit?

Rent in 3-5 years: 20% down @ 4.125% over 30 years = $1.12 MM mortgage = $5500 per month rent to cover P/I (not including taxes or insurance). Could you rent for $6k+/month, or are you ok being cashflow negative for a decade or more?

ny_rn
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Re: Just had our offer accepted on a $1.4 Million House

Post by ny_rn » Sat Feb 24, 2018 9:17 am

wholeinone04 wrote:
Sat Feb 24, 2018 7:01 am
So which loan option should we go with?
Neither. Rent for the next three years, save a lot and then buy your "dream house." Simple.

NYC_Guy
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Re: Just had our offer accepted on a $1.4 Million House

Post by NYC_Guy » Sat Feb 24, 2018 9:25 am

He wasn’t asking whether to buy or rent. He’s already under contract. On the question asked, I’d go wih the 10% down option. I would, however, also check out long-dated ARMs (7/1 or 10/1). I think the likelihood you own the house in 7 or 10 years is very low (given the facts you provided).

aristotelian
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Re: Just had our offer accepted on a $1.4 Million House

Post by aristotelian » Sat Feb 24, 2018 9:38 am

NYC_Guy wrote:
Sat Feb 24, 2018 9:25 am
He wasn’t asking whether to buy or rent. He’s already under contract. On the question asked, I’d go wih the 10% down option. I would, however, also check out long-dated ARMs (7/1 or 10/1). I think the likelihood you own the house in 7 or 10 years is very low (given the facts you provided).
They haven't closed, so it is possible they could still get out of it, although they would lose any earnest money they have put into it.

That said, it appears they are high income and could absorb a loss, or stay in the property if the market drops. He says the plan would be to move "if she gets an amazing offer", so I assume any move would be worth it. This probably won't be a disastrous decision, although I admit it doesn't make much sense on the face of it.

jibantik
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Re: Just had our offer accepted on a $1.4 Million House

Post by jibantik » Sat Feb 24, 2018 9:45 am

3 bed/2 bath, 1.4 million.... oh my golly gumdrops :o

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Sandtrap
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Re: Just had our offer accepted on a $1.4 Million House

Post by Sandtrap » Sat Feb 24, 2018 9:51 am

Simplify.
Rent for the short term and focus on careers.
Complexity, added debt, and risk, is not a good thing at this time.
If there should be personal or financial "black swans" during this period, they would be better survived by renting (flexibility) and keeping your cash in hand.
The time will go by quickly. Then shop for the "dream home".

That said, I'd go with the 10% down option and hang onto cash reserves to weather any storm that might come up.

Good luck.
j :D
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Bmac
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Re: Just had our offer accepted on a $1.4 Million House

Post by Bmac » Sat Feb 24, 2018 9:59 am

Presumably the OP has high income as even at current resident salaries (compared to mine 20+years ago) it is hard to imagine qualifying for a $1,000,000 loan regardless of mortgage terms. I would suggest at least going to the Whitecoat Investor website and checking out some of Jim Dahle’s post regarding buying homes during residency.

chessknt
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Re: Just had our offer accepted on a $1.4 Million House

Post by chessknt » Sat Feb 24, 2018 10:08 am

Sandtrap wrote:
Sat Feb 24, 2018 9:51 am
Simplify.
Rent for the short term and focus on careers.
Complexity, added debt, and risk, is not a good thing at this time.
If there should be personal or financial "black swans" during this period, they would be better survived by renting (flexibility) and keeping your cash in hand.
The time will go by quickly. Then shop for the "dream home".

That said, I'd go with the 10% down option and hang onto cash reserves to weather any storm that might come up.

Good luck.
j :D
I second this unless you will have a nice big cushion in monthly income after this big mortgage.

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Sandtrap
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Re: Just had our offer accepted on a $1.4 Million House

Post by Sandtrap » Sat Feb 24, 2018 10:13 am

Bmac wrote:
Sat Feb 24, 2018 9:59 am
Presumably the OP has high income as even at current resident salaries (compared to mine 20+years ago) it is hard to imagine qualifying for a $1,000,000 loan regardless of mortgage terms. I would suggest at least going to the Whitecoat Investor website and checking out some of Jim Dahle’s post regarding buying homes during residency.
Good point.
OP can PM the Doc here:

WhiteCoat Investor
memberlist.php?mode=viewprofile&u=735

j :D
Wiki Bogleheads Wiki: Everything You Need to Know

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Watty
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Re: Just had our offer accepted on a $1.4 Million House

Post by Watty » Sat Feb 24, 2018 10:21 am

wholeinone04 wrote:
Sat Feb 24, 2018 7:01 am
We'll have about a 24-36 month EF after the purchase
......
Conventional Loan: 4.125% on a 30 year fixed loan, no points. 20% down.
Doctor Loan: 4.3% on a 30 year fixed loan, no points. 10% down. and no MI.
With either of these options your loan will be well above the $750,000 loan amount that you can deduct the interest on. You will be paying over 4% in after tax dollars on the interest on the loan above that amount. For a risk free after tax return of 4%+ I would take a hard look reducing your emergency fund to 12 months and making a much larger down payment than even 20%. That would make the conventional loan a better choice if the other closing costs are the same.
wholeinone04 wrote:
Sat Feb 24, 2018 7:01 am
I have 2 other investment properties (one in another state that is managed and another 2 hours away that I manage)......
Are there mortgages on these properties that are at a higher after tax interest rate? If so then going with the lower down payment loan might make sense so you could use the extra cash to pay off higher interest rate mortgages.
wholeinone04 wrote:
Sat Feb 24, 2018 7:01 am
....plan to live there for at least 3 years while my wife is in residency (OBGYN).
I am not a doctor but no program has a 100% completion rate.

In addition to performance issues something like a health issue can get people side tracked and not be able to keep up.

I would be cautious about depending on her high income.
wholeinone04 wrote:
Sat Feb 24, 2018 7:01 am
If the RE market goes up, then it would be tougher (but not impossible) to buy our 'dream house' so we'd probably sell our starter house in order to help with the downpayment for our dream house.
If prices go up then you will likely qualify for the homeowners capital gains exclusion which you would lose if you rent it for more than a few years. This would likely make keeping it as a rental a poor choice.

letsgobobby
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Re: Just had our offer accepted on a $1.4 Million House

Post by letsgobobby » Sat Feb 24, 2018 10:25 am

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Last edited by letsgobobby on Sat Jun 01, 2019 3:28 pm, edited 1 time in total.

HEDGEFUNDIE
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Re: Just had our offer accepted on a $1.4 Million House

Post by HEDGEFUNDIE » Sat Feb 24, 2018 10:41 am

Ignore everyone here telling you to rent. They don’t know your (presumably) high income, and I’m guessing those who have posted don’t live in VHCOL areas where sitting on the sidelines could mean missing out on the chance to *ever* buy the house you want.

Fixed rate mortgages are a form of interest rate insurance. Why buy 30 years of insurance (at the higher rate) when you may only need 5 years of insurance? I am about to go under contract on a similar sized $1.8M house in the Bay Area, and I am pre-approved for a 5/1 ARM at 3.15%.

Check out First Republic, they love HNW couples and can offer rates well below the big banks. Service is not bad either, they can close within 21 days.

RRAAYY3
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Re: Just had our offer accepted on a $1.4 Million House

Post by RRAAYY3 » Sat Feb 24, 2018 10:56 am

i Wouldn’t buy anything I knew I planned on leaving within 3 - 5 years

Doesn’t seem worth the hassle

Carter3
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Re: Just had our offer accepted on a $1.4 Million House

Post by Carter3 » Sat Feb 24, 2018 11:00 am

I think go with the convention loan and put down 20%. You'll be ahead of the game that way. I had a doctor's loan when the housing market crashed and was sorry I hadn't put more into it early on in order to refinance.

veindoc
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Re: Just had our offer accepted on a $1.4 Million House

Post by veindoc » Sat Feb 24, 2018 11:20 am

NYC_Guy wrote:
Sat Feb 24, 2018 9:25 am
He wasn’t asking whether to buy or rent. He’s already under contract. On the question asked, I’d go wih the 10% down option. I would, however, also check out long-dated ARMs (7/1 or 10/1). I think the likelihood you own the house in 7 or 10 years is very low (given the facts you provided).
I think an ARM is a great idea if you don’t plan to rent it out. You stated that if you were to rent it out it would break even or be cash flow negative. Would it cash flow positive if you put 20% down? So what’s the point? I wouldn’t voluntary tie my money in an investment unless it was making money from the get-go. Otherwise it’s just speculating. Get the ARM, put 10% down (doc loan), sell this house when ready, and buy the dream home and a cash flow positive rental.

bayview
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Re: Just had our offer accepted on a $1.4 Million House

Post by bayview » Sat Feb 24, 2018 11:22 am

OP, no comment on your question, but you might want to edit your thread title to something like:

"Just had our offer accepted on a $1.4 Million House - doctor loan?"

You might get more views by those who have used this option themselves.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

uberdoc
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Re: Just had our offer accepted on a $1.4 Million House

Post by uberdoc » Sat Feb 24, 2018 11:51 am

OP, are you sure you intended to post this on boggleheads forum?
I am 3 years into practice with good income and still renting. You want to be really sure about your long term plan before getting into this buying-selling business.

oxy10
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Re: Just had our offer accepted on a $1.4 Million House

Post by oxy10 » Sat Feb 24, 2018 12:08 pm

OP, I would rent, but the answer to your question can be calculated in a straight forward manner. Your costs are an extra 17.5 bp, post tax, on the WHOLE loan to get an extra 10% leverage.

Break Even Point = (17.5 bp x 9 + 4.125%)/ LT Capital Gains Tax

Assuming 25% LT capital gains tax (15% Fed + 10% local) you have to ask yourself would you take 30 year fixed leverage at 6.37% to invest in the market right now? If the answer is a resounding yes do the doctor loan. If it’s no or unsure take the risk free return with the 20% down loan.

DrGoogle2017
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Re: Just had our offer accepted on a $1.4 Million House

Post by DrGoogle2017 » Sat Feb 24, 2018 12:34 pm

I vote for the doctor loan, 10% down, higher interest rate, but not by much. Interest rate is going go up. Why chance it with ARM?

Topic Author
wholeinone04
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Re: Just had our offer accepted on a $1.4 Million House

Post by wholeinone04 » Sat Feb 24, 2018 1:05 pm

Thanks for all the feedback, I was trying to avoid the rent vs buy discussion but always good to hear dissenting opinions. Just for background, our current net worth is 40% cash, 45% investments (stocks/bonds/etc in retirement accounts and taxable) and 16% real estate so I feel that they're we're heavily underweighted in RE. And while I'm a big Boglehead believer, I also know that the 10-15 richest people I've met in my life all were heavily involved in real estate. Pretty simple analysis but I feel strongly that having significant RE holdings in your portfolio (especially in VHCOL area) is the best way to build wealth. I actually think it's ironic that so many Bogleheads ignore their own advice and hold way more stocks/cash than RE (and sorry REITS don't count) but that's another discussion...back to the topic at hand.

Even though my wife is in residency, we are probably not the typical resident family with this house being only 1.5x our annual income, we max out retirement accounts every year (401ks, BD Roth, Mega Roth) and have no debt (other than mortgage on rental properties). And to be honest, we got pretty lucky to find this house, the LA housing market is insanely competitive right now. Hard to understand unless you live here and are making offers. This house is actually a good deal.

We need to be close to Beverly Hills for my wife's residency (don't want her driving more than 10-15 min after 18 hour shifts) so you can imagine it isn't cheap, especially for a house. We currently rent the top unit of a nicely remodeled duplex for $4,000/mo (2 bed/2 bath) and it's in a great location for us but we value having our own space and with a newborn, this is even more true. I don't like having to constantly worry about how my newborn's crying is affecting the neighbors and hearing them make noise/etc. Houses for rent are even more expensive and very low availability/competitive.
climber2020 wrote:
Sat Feb 24, 2018 8:54 am

I agree with the others. You should rent. Odds are you may not be living in that city once residency is done, and odds are also that the first job, wherever that is, won't work out either. The first job that most doctors get out of training doesn't work out and they end up moving due to restrictive covenants.
I would actually say the odds are in our favor that we'll be living in the same city once residency is done since this is where we both grew up, lots of friends and family in town, and she'll likely get a strong offer from the hospital she's at or a private practice nearby due to all the connections she's making.
arsenalfan wrote:
Sat Feb 24, 2018 8:56 am
Sell in 3-5 years @ 1.4 MM = $84k in realtor costs to sell + other miscellaneous fees. Pretty good chance you'd lose money. You're speculating price will rise and you will break even/a profit?

Rent in 3-5 years: 20% down @ 4.125% over 30 years = $1.12 MM mortgage = $5500 per month rent to cover P/I (not including taxes or insurance). Could you rent for $6k+/month, or are you ok being cashflow negative for a decade or more?
I know my original post was a bit wordy but as mentioned, I would not sell in 3-5 years unless the property goes up 10-20% to offset those very costs and then some. I'm in a cyclical real estate market so 10-20% appreciation is very reasonable assumption if the market continues to go up.

If the RE market stays flat or goes down, I would keep the property and rent it out as I'm an experienced landlord and we will also have the cash and then some for a 20% downpayment on our dream house (probably $2-3 million) if the market stays flat or goes down.

Right now, the starter house property would rent for around $5k/mo and assuming rent would be closer to $5,500 a month in 3-5 years, yes I am ok with cash flow negative for 10 years as in that case, I'd manage it myself (I've visited our 2 hour away rental property once in just 5 years, everything can be done over the phone/internet these days guys :) ) and even use my dad as a handyman :)
ny_rn wrote:
Sat Feb 24, 2018 9:17 am
wholeinone04 wrote:
Sat Feb 24, 2018 7:01 am
So which loan option should we go with?
Neither. Rent for the next three years, save a lot and then buy your "dream house." Simple.
Our dream house is around $2-3 million right now (4/5 beds, updated, in good neighborhood for public schools, etc) but if current appreciation holds, it could easily be more in the future and would be tough for us to afford. I don't want a $20k/mo mortgage lol...we're not that rich yet.
NYC_Guy wrote:
Sat Feb 24, 2018 9:25 am
He wasn’t asking whether to buy or rent. He’s already under contract. On the question asked, I’d go wih the 10% down option. I would, however, also check out long-dated ARMs (7/1 or 10/1). I think the likelihood you own the house in 7 or 10 years is very low (given the facts you provided).
Haha thanks. I'm tempted by the 10% option but honestly 4% guaranteed returns (if we do 20% down) isn't bad in this environment. Any reason why you prefer that? I actually feel like the plan is to still own it in 7-10 years and forever going forward. I am thinking that the 'starter house' purchase right now is a good hedge against inflation/RE market going way up. And even if it does and I have the cash (I may) in 3-5 years for a DP without selling the starter house, we'd like to keep both. I am a bit scared of having a $20k/mo mortgage though because in that scenario, even with $1 million/year in income we could easily afford it but life would be a lot less flexible (ie we have plans to live in diff country every summer when kids are grown/wife take medical missions/etc)

I did my first condo (280k purchase price and now a cash flow + rental property) on a 7/1 ARM and it has worked out great, if rates are up in 2019 though, I can also just pay off the balance. I wouldn't be able to pay off the balance of the $1.4 million house in 10 years nor would I want to. So ARMS kinda scare me at this price point. Even though we may only live here for 3-5 years, the back up plan would be to rent it out.
jibantik wrote:
Sat Feb 24, 2018 9:45 am
3 bed/2 bath, 1.4 million.... oh my golly gumdrops :o
Haha yea can't do much about it though. We both grew up here and have tons of family/friends/etc. And 70-80 and sunny 90% of the year isn't too bad either :) We're gonna head to the beach for a walk later and a picnic overlooking the ocean - I might have to bring a vest though as it's been dipping into the 60's lately lol..
Sandtrap wrote:
Sat Feb 24, 2018 9:51 am
Simplify.
Rent for the short term and focus on careers.
Complexity, added debt, and risk, is not a good thing at this time.
If there should be personal or financial "black swans" during this period, they would be better survived by renting (flexibility) and keeping your cash in hand.
The time will go by quickly. Then shop for the "dream home".

That said, I'd go with the 10% down option and hang onto cash reserves to weather any storm that might come up.

Good luck.
j :D
See updated net worth %'s above. We have lots of cash and right now I'm just DCA'ing into the stock market but feel that it's favoring stock market way too much. Again, this money is going into RE one way or the other. If I don't buy this house, I'll find an investment property out of state or potentially a partnership - both of which are tough to find/vet/etc. I think buying a house myself is the perfect mitigation for spending that money on an investment property. Right now, I'm looking at turnkey SFRs in midwest, mobile park equity investments - really hard to vet these companies.
Bmac wrote:
Sat Feb 24, 2018 9:59 am
Presumably the OP has high income as even at current resident salaries (compared to mine 20+years ago) it is hard to imagine qualifying for a $1,000,000 loan regardless of mortgage terms. I would suggest at least going to the Whitecoat Investor website and checking out some of Jim Dahle’s post regarding buying homes during residency.


Yea we qualify for the loan with my income alone. I've read many of his posts and agree for the typical resident, it's a bad idea. We're not typical though.
chessknt wrote:
Sat Feb 24, 2018 10:08 am
Sandtrap wrote:
Sat Feb 24, 2018 9:51 am
Simplify.
Rent for the short term and focus on careers.
Complexity, added debt, and risk, is not a good thing at this time.
If there should be personal or financial "black swans" during this period, they would be better survived by renting (flexibility) and keeping your cash in hand.
The time will go by quickly. Then shop for the "dream home".

That said, I'd go with the 10% down option and hang onto cash reserves to weather any storm that might come up.

Good luck.
j :D
I second this unless you will have a nice big cushion in monthly income after this big mortgage.
We will. Income isn't an issue here.
Sandtrap wrote:
Sat Feb 24, 2018 10:13 am
Bmac wrote:
Sat Feb 24, 2018 9:59 am
Presumably the OP has high income as even at current resident salaries (compared to mine 20+years ago) it is hard to imagine qualifying for a $1,000,000 loan regardless of mortgage terms. I would suggest at least going to the Whitecoat Investor website and checking out some of Jim Dahle’s post regarding buying homes during residency.
Good point.
OP can PM the Doc here:

WhiteCoat Investor
memberlist.php?mode=viewprofile&u=735

j :D
I've chatted with him before, we're in similar industries.
Watty wrote:
Sat Feb 24, 2018 10:21 am

With either of these options your loan will be well above the $750,000 loan amount that you can deduct the interest on. You will be paying over 4% in after tax dollars on the interest on the loan above that amount. For a risk free after tax return of 4%+ I would take a hard look reducing your emergency fund to 12 months and making a much larger down payment than even 20%. That would make the conventional loan a better choice if the other closing costs are the same.
Yea I know, I was really bummed to see the $750k limit and I think this is why I'm leaning towards 20% DP. I've thought about putting even more down to get to that $750k number but feel like 20% is a good middle-ground. Will still have around $400k cash on hand. If I make good money this year/next though, will seriously consider it/probably do it.
Watty wrote:
Sat Feb 24, 2018 10:21 am

Are there mortgages on these properties that are at a higher after tax interest rate? If so then going with the lower down payment loan might make sense so you could use the extra cash to pay off higher interest rate mortgages.
Ah so that's a good point, and this is the type of insight/analysis I came looking for - just had to sift through the other 20 posts first :) So I'm at a 3.125% rate with $190k to go (resetting though in 2019 to 2.25 + currrent libor [2.41 as of the other day] = 4.66%). My second property is only $136,800 loan amount (30 years) but at 5.125% since it's investment property.

If I paid off some or all of the second mortgage at 5.125% though and arbitraged to 4.3%, the interest isn't deductible on my primary home though still? So for ex. if I did $100k, I'd save let's say 1% or $1,000/year but now I have to pay taxes at my marginal rate (50%) on the earnings from the second investment property which is cash-flowing. Although I think my first property shows a loss on taxes bc of depreciation so it would offset the income - ok now I'm confused and need to think about this some more...
Watty wrote:
Sat Feb 24, 2018 10:21 am

I am not a doctor but no program has a 100% completion rate.

In addition to performance issues something like a health issue can get people side tracked and not be able to keep up.

I would be cautious about depending on her high income.
Agree 100% and we're not depending on her income now or in the future on this starter home purchase. We will be though on the 'dream house' purchase in 3-5 years.
Watty wrote:
Sat Feb 24, 2018 10:21 am

If prices go up then you will likely qualify for the homeowners capital gains exclusion which you would lose if you rent it for more than a few years. This would likely make keeping it as a rental a poor choice.
Very good point, esp with new rules. So if the market goes way up, we may want to sell it and lock in all the gains tax free. Esp on this property where only a 20% increase, would mean $280k in tax free earnings. This is the type of wealth that makes RE so appealing to me...
letsgobobby wrote:
Sat Feb 24, 2018 10:25 am
Sounds like OP has his own high income.

I still would rent since residency can go all kinds of ways.

Of the options I'd take the physician loan.
What way could it go that would affect us? And any reason why you'd take the phsyician loan? The extra cash doesn't do much for us right now that I can think of but open to suggestions..
HEDGEFUNDIE wrote:
Sat Feb 24, 2018 10:41 am
Ignore everyone here telling you to rent. They don’t know your (presumably) high income, and I’m guessing those who have posted don’t live in VHCOL areas where sitting on the sidelines could mean missing out on the chance to *ever* buy the house you want.

Fixed rate mortgages are a form of interest rate insurance. Why buy 30 years of insurance (at the higher rate) when you may only need 5 years of insurance? I am about to go under contract on a similar sized $1.8M house in the Bay Area, and I am pre-approved for a 5/1 ARM at 3.15%.

Check out First Republic, they love HNW couples and can offer rates well below the big banks. Service is not bad either, they can close within 21 days.
Haha thanks and yea I should probably re-phrase that this is a VHCOL area and that's exactly the point - if we sit on the sidelines for 3-5 years and the market continues at this pace, we may just miss out on buying the house we want. This $1.4m house is updated and nice but no one's going to mistake us for being ultra-rich lol.

I agree that way too many people go with fixed rate mortgages, esp when you consider the avg length of ownership is 7 years and obviously the break even point (vs 30 year fixed and assuming max rate increase) may be closer to 7 years on a 5 year ARM and 9-10 years on a 7 year ARM. But I guess what's your plan if/when you want to move to a bigger/better house if interest rates have gone up? I think the downside case is really the only thing I'm worried about with an ARM and this high of a mortgage. I may have $1m in cash in 5-7 years but I won't want to use it to pay off this property, sort of defeats the point of investing with leverage in RE right? :)

Btw, First Republic sounds great, my guy at B of A can do a 5/1 ARM at 3.25% no pts so seems comparable. I got two other quotes from 'brokers' and they were .5% higher!
RRAAYY3 wrote:
Sat Feb 24, 2018 10:56 am
i Wouldn’t buy anything I knew I planned on leaving within 3 - 5 years

Doesn’t seem worth the hassle
Can the mod delete the posts where clearly they haven't read my post?
Carter3 wrote:
Sat Feb 24, 2018 11:00 am
I think go with the convention loan and put down 20%. You'll be ahead of the game that way. I had a doctor's loan when the housing market crashed and was sorry I hadn't put more into it early on in order to refinance.
Hmm can you explain further? I am leaning toward the conventional loan but if the market crashed, then wouldn't my equity be wiped out? Ie if I put 20% down and the house drops from $1.4 million to $1 million value, I still owe more than the mortgage so why would 10 or 20% matter?

I actually think that 0% might be the best option since then if market tanks, I could shortsale and get out of it or even get foreclosed on but I'd save so much cash from no DP plus the money I make over the next few years, I may be able to buy our 'dream house' which remember the price of has now also crashed, in CASH. Some people may have ethical qualms with doing this to a bank but not me lol.
bayview wrote:
Sat Feb 24, 2018 11:22 am
OP, no comment on your question, but you might want to edit your thread title to something like:

"Just had our offer accepted on a $1.4 Million House - doctor loan?"

You might get more views by those who have used this option themselves.
Good idea will do thx!
uberdoc wrote:
Sat Feb 24, 2018 11:51 am
OP, are you sure you intended to post this on boggleheads forum?
I am 3 years into practice with good income and still renting. You want to be really sure about your long term plan before getting into this buying-selling business.
Haha trust me I know, but this is a big purchase/decision and while I'm confident, I wanted people who would tear it down. So far, haven't seen any reliable quantitative arguments or examples so still feeling good. BH forum was great when I was first getting started with investing but the strategies/investments I'm making now seem to fall outside the normal range for the forum and it's been hard to get good advice - lmk if there's a better place/forum for these types of questions :)
oxy10 wrote:
Sat Feb 24, 2018 12:08 pm
OP, I would rent, but the answer to your question can be calculated in a straight forward manner. Your costs are an extra 17.5 bp, post tax, on the WHOLE loan to get an extra 10% leverage.

Break Even Point = (17.5 bp x 9 + 4.125%)/ LT Capital Gains Tax

Assuming 25% LT capital gains tax (15% Fed + 10% local) you have to ask yourself would you take 30 year fixed leverage at 6.37% to invest in the market right now? If the answer is a resounding yes do the doctor loan. If it’s no or unsure take the risk free return with the 20% down loan.
Thanks for this calculation - very helpful. Not sure I quite understand it though. Where does the 9 come from?

You're saying I would get 6.37% return on the 10% ($140,000) by doing the 20% loan right?
DrGoogle2017 wrote:
Sat Feb 24, 2018 12:34 pm
I vote for the doctor loan, 10% down, higher interest rate, but not by much. Interest rate is going go up. Why chance it with ARM?
Not planning on doing an ARM. It's more the doctor loan at 10% down vs conventional at 20% down.

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Re: Just had our offer accepted on a $1.4 Million House

Post by Sandtrap » Sat Feb 24, 2018 1:28 pm

Haha trust me I know, but this is a big purchase/decision and while I'm confident, I wanted people who would tear it down. So far, haven't seen any reliable quantitative arguments or examples so still feeling good. BH forum was great when I was first getting started with investing but the strategies/investments I'm making now seem to fall outside the normal range for the forum and it's been hard to get good advice - lmk if there's a better place/forum for these types of questions :)
Here you go:
Bigger Pockets R/E forum.
https://www.biggerpockets.com/forums

j :D
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Re: Just had our offer accepted on a $1.4 Million House

Post by letsgobobby » Sat Feb 24, 2018 1:29 pm

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Re: Just had our offer accepted on a $1.4 Million House

Post by staythecourse » Sat Feb 24, 2018 1:53 pm

Reread the thread.

This may be the rare situation I would agree with the OP in buying in this situation with his OWN income enough to cover the mortgage and a strong desire to stay in the area (even it means taking a discount in terms of pay for staying in a competitive market).

If it was me I would take the 20% down option as it seems likely an area like that is only to appreciate. Then if plans go as planned (pun intended) then roll over the equity into the next house as you spend time finding the right "dream house".

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: Just had our offer accepted on a $1.4 Million House

Post by itstoomuch » Sat Feb 24, 2018 2:03 pm

First House, buys the Second House.
I'd do the 20% DP.
:sharebeer
YMMV
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Re: Just had our offer accepted on a $1.4 Million House

Post by ny_knicks » Sat Feb 24, 2018 2:04 pm

Skimmed the thread...you're making $700k now w/ your wife in a residency. Post residency you're looking at $1M+ in annual income it sounds like. Considering you're moving in 3-5 years and $ isn't a problem the difference between these 2 loans in negligible to you.

You're talking a couple thousand per year up or down on someone making $1M. Likely not even worth your time punching the numbers in the calculator...

Since you asked my advice is 20% down. Gives you a bigger cushion if you go to sell in 3-5 and the value of the house has gone down.

Enjoy the home!

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Re: Just had our offer accepted on a $1.4 Million House

Post by Watty » Sat Feb 24, 2018 3:46 pm

I might have missed it but I would assume that you are relatively young. It would be good not get too excited about home price appreciation. Even in a normal area that is not arguably in a bubble price appreciation may not be so great over the very LONG term.

The problem is that a plausible argument can be made that the long term price appreciation on a typical single family home is something like negative 100% the way they are built nowadays. This is because the house will age and by the time it is 100 year old it will likely be long past its prime if it even makes it that long. If some of the rentals you already own are older then try to picture what they they will look like when you are 75 years old.

There will be exceptions of course and a 200 year home can still exist and be a gem, but those will be a small percentage of the houses that actually existed 200 years ago.

Another problem is that even if your house is well maintained if it is in a subdivision of similar houses the subdivision may decline if all the other houses are not also well maintained. In some areas there are subdivisions that were built in the post WWII building boom of the 1950's that are not aging well.

It is anecdotal but I have been researching my family tree and I have run across several of the street addresses of where some of my ancestors lived in the early 1900's and few of the houses still exist, and the ones that do look pretty marginal now. If possible see if you can find out the street address of where your parents or grandparents lived when they were kids to see what their old homes look like now.

This is not something new either. When I was dating my future wife she was renting part of a house in a residential area of downtown Portland Oregon. I was at the historical society there and they had a pictorial map of that area in the 1800's and you could see that different house was on that lot then. I did a bit of informal research and I am pretty sure that the house she lived in was the third house on that lot, and it is now likely a candidate for being a teardown to build the fourth house on that lot.

This is not to say that real estate is a bad investment, it is just that you should plan on the majority of the return you get from it to be from the rental income, not price appreciation. In my planning I would consider any price appreciation as being a bonus.

You have and your wife also have, or will have, high incomes. One of the "problems" with that is that between your day jobs and kids your free time will be very valuable so even with a property management company the time that you spend overseeing real estate may not be a good use of your time.

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Re: Just had our offer accepted on a $1.4 Million House

Post by JBTX » Sat Feb 24, 2018 4:39 pm

1.4 M x .9 x .043 = 54180
1.4 M x .8 x .04125 = 46200

Difference = 7980

7980/140000 = 5.7% interest rate on additional 10%

I’d take the cheaper loan if I could afford it.

Like others I cannot grasp paying $1.4M for a home, and then potentially selling it in a few years. Even if you get your money back there are realtor fees and other money you will sink into your house that you likely won’t fully recover (furniture, landscaping, redecorating, remodeling)

As to real estate investing being the best way to get rich, perhaps, perhaps not, but this isn’t real estate investing. It is your personal home. For your personal residence it is really a rent vs buy decision. If you want to become a landlord that is a whole different discussion, and BH is probably not the best place to have that discussion. Personally if I were pulling in that much income I’d focus on my career and not get distracted dealing with landlord issues. Once you are fully established then if you still want to be a landlord have at it.

Good luck.

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Re: Just had our offer accepted on a $1.4 Million House

Post by A-Commoner » Sat Feb 24, 2018 4:40 pm

We got a doctor loan from BoA for a 30 yr fixed 5 months ago. The house, which we got for $1 million, is in a Los Angeles suburb as well. We put 20% down. The rate was 3.6% with no points. Looking back, I feel vindicated for getting the mortgage at such an attractive rate instead of paying outright in cash, which we could have done. The house per Zillow is now valued at 10% higher than when we bought it 5 months ago. Meanwhile our stock market investments are also higher (even accounting for the recent dip).

If you intend to stay in LA long term, I agree that you should buy the house instead of rent. We intend to retire in LA ourselves.

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Re: Just had our offer accepted on a $1.4 Million House

Post by HEDGEFUNDIE » Sat Feb 24, 2018 4:52 pm

JBTX wrote:
Sat Feb 24, 2018 4:39 pm

Like others I cannot grasp paying $1.4M for a home, and then potentially selling it in a few years. Even if you get your money back there are realtor fees and other money you will sink into your house that you likely won’t fully recover (furniture, landscaping, redecorating, remodeling)
https://www.redfin.com/CA/San-Mateo/416 ... e/79015174

So here is a 2,000 sqft townhouse that sold for $1.3M three years ago. DW & I bid $1.8M on it and wasn’t even close to the winning bid (close to $2M all cash).

Would love the BHs to opine what would have been the best play here if I were the buyer of that townhouse three years ago. Buy or rent? Fixed rate or ARM?

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Re: Just had our offer accepted on a $1.4 Million House

Post by letsgobobby » Sat Feb 24, 2018 4:57 pm

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Re: Just had our offer accepted on a $1.4 Million House

Post by JBTX » Sat Feb 24, 2018 4:58 pm

HEDGEFUNDIE wrote:
Sat Feb 24, 2018 4:52 pm
JBTX wrote:
Sat Feb 24, 2018 4:39 pm

Like others I cannot grasp paying $1.4M for a home, and then potentially selling it in a few years. Even if you get your money back there are realtor fees and other money you will sink into your house that you likely won’t fully recover (furniture, landscaping, redecorating, remodeling)
https://www.redfin.com/CA/San-Mateo/416 ... e/79015174

So here is a 2,000 sqft townhouse that sold for $1.3M three years ago. DW & I bid $1.8M on it and wasn’t even close to the winning bid (close to $2M all cash).

Would love the BHs to opine what would have been the best play here if I were the buyer of that townhouse three years ago. Buy or rent? Fixed rate or ARM?
Well of course real estate prices will always go up year after year and never go down. Glad it worked out for you.

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Re: Just had our offer accepted on a $1.4 Million House

Post by HEDGEFUNDIE » Sat Feb 24, 2018 4:59 pm

letsgobobby wrote:
Sat Feb 24, 2018 4:57 pm
Do you think it's possible for prices to increase 50% every three years forever?
Racking my brain for reasons why the economic fundamentals and outlook for the Bay Area (or any other VHCOL area) are worse now than they were three years ago, and can’t come up with any. If anything the outlook now is significantly better.

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Re: Just had our offer accepted on a $1.4 Million House

Post by InvestNewbie » Sat Feb 24, 2018 5:14 pm

Given your horizon of potentially selling the house in a few years I would consider primarily what fraction of your available cash the down payment represent. If you've got another $1 million in liquid assets that you can tap at an ATM/bank counter then perhaps it makes more sense to take the lower interest rate. After all why pay more in interest than you have to. Also if it's not too late I would consider some of the 5/1 or 5/5 ARM products if the rates make sense.

If you're wiping out half or a third of your liquid assets with this down payment that might create some issues for the next house. Or other life circumstances may arise such as kids, illness, etc. that rapidly spend down what looks like a health savings account. How fast are you going to be able to reaccumulate the difference in the down payment? By the time you're looking for your next house will have enough in your war chest to handle a continued hot real estate market where you may be competing with true cash buyers?

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Re: Just had our offer accepted on a $1.4 Million House

Post by unclescrooge » Sat Feb 24, 2018 5:19 pm

ny_knicks wrote:
Sat Feb 24, 2018 2:04 pm
Skimmed the thread...you're making $700k now w/ your wife in a residency. Post residency you're looking at $1M+ in annual income it sounds like. Considering you're moving in 3-5 years and $ isn't a problem the difference between these 2 loans in negligible to you.

You're talking a couple thousand per year up or down on someone making $1M. Likely not even worth your time punching the numbers in the calculator...

Since you asked my advice is 20% down. Gives you a bigger cushion if you go to sell in 3-5 and the value of the house has gone down.

Enjoy the home!
+1

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Re: Just had our offer accepted on a $1.4 Million House

Post by letsgobobby » Sat Feb 24, 2018 5:39 pm

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Re: Just had our offer accepted on a $1.4 Million House

Post by mega317 » Sat Feb 24, 2018 5:39 pm

HEDGEFUNDIE wrote:
Sat Feb 24, 2018 4:59 pm
letsgobobby wrote:
Sat Feb 24, 2018 4:57 pm
Do you think it's possible for prices to increase 50% every three years forever?
Racking my brain for reasons why the economic fundamentals and outlook for the Bay Area (or any other VHCOL area) are worse now than they were three years ago, and can’t come up with any. If anything the outlook now is significantly better.
If bay area housing or anything else in the world was certain to grow at even half of that rate I and everyone else in the world would put every dollar they could into it. I assume you have stopped contributing to retirement accounts and all leisure to do this.

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Re: Just had our offer accepted on a $1.4 Million House

Post by A-Commoner » Sat Feb 24, 2018 5:54 pm

Anecdote: my parents house in Los Angeles has appreciated about 5% annualized over a 24 year period. This is a sample size of 1. Since there was a mortgage on that house, the returns have been higher.

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Re: Just had our offer accepted on a $1.4 Million House

Post by HEDGEFUNDIE » Sat Feb 24, 2018 5:57 pm

letsgobobby wrote:
Sat Feb 24, 2018 5:39 pm
HEDGEFUNDIE wrote:
Sat Feb 24, 2018 4:59 pm
letsgobobby wrote:
Sat Feb 24, 2018 4:57 pm
Do you think it's possible for prices to increase 50% every three years forever?
Racking my brain for reasons why the economic fundamentals and outlook for the Bay Area (or any other VHCOL area) are worse now than they were three years ago, and can’t come up with any. If anything the outlook now is significantly better.
I guess we’ll just ignore the history of the world, which shows that real estate largely appreciates around the rate of inflation +/- 1%. A few areas including the BA have been exceptions and maybe, who knows - will always be an exception. Probably a 2/2 townhome in San Mateo will be worth $100,000,000 in thirty years, since that’s what a 14% annualized rate of return looks like.
The combination of leverage, compounding and the law of large numbers are a beautiful thing.

Let’s say the market cools down to a mere 5% CAGR. A cooling market *even though* the technology sector has become the predominant industry in the US equity markets and all the major tech firms have huge expansion plans for the area (just Google “Google Diridon”). But for the sake of argument let’s say the market cools to 5%.

After 5 years this $2M townhouse will be worth $2.5M. That’s $500k gain on a down payment of $200k + $200k principal payments. Let’s just call the non-recoverable carrying costs the imputed rent I would have paid if I didn’t buy, and my consumption choice of living here.

Over 100% gain on principal over five years, in an arguably conservative scenario. OP probably has something similar in mind.

mega317
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Re: Just had our offer accepted on a $1.4 Million House

Post by mega317 » Sat Feb 24, 2018 6:02 pm

Like what happened 10 years ago?

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Re: Just had our offer accepted on a $1.4 Million House

Post by ThatGuy » Sat Feb 24, 2018 6:03 pm

Work is the curse of the drinking class - Oscar Wilde

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Re: Just had our offer accepted on a $1.4 Million House

Post by TomatoTomahto » Sat Feb 24, 2018 6:07 pm

HEDGEFUNDIE wrote:
Sat Feb 24, 2018 10:41 am
Ignore everyone here telling you to rent. They don’t know your (presumably) high income, and I’m guessing those who have posted don’t live in VHCOL areas where sitting on the sidelines could mean missing out on the chance to *ever* buy the house you want.
OP can ignore my suggestion to RENT, but not on the basis of our not being in a HCOL area or not having income like OP’s. We are closing on a house next week, but only because it would not be available to us as renters, and we don’t have to use a sharp pencil to figure out affordability. That said, I’d NEVER buy with a 3 year plan. We can debate how much a round-trip RE transaction costs, but it is probably mid single digit percent.
Okay, I get it; I won't be political or controversial. The Earth is flat.

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Re: Just had our offer accepted on a $1.4 Million House

Post by itstoomuch » Sat Feb 24, 2018 6:37 pm

San Mateo: My nephew and spouse bought 2017 in a estate sale, needs work. He cried when he had to sell his 1998 basis APPL stock for DP (new Physician and lawyer)

Seattle: Our rental condo is +40% after 2.5 yrs. Son's TH is +70% after 3.5 yrs. (figures are conservative. 2018 pricing is just getting started).
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Re: Just had our offer accepted on a $1.4 Million House

Post by Bacchus01 » Sat Feb 24, 2018 6:42 pm

HEDGEFUNDIE wrote:
Sat Feb 24, 2018 5:57 pm
letsgobobby wrote:
Sat Feb 24, 2018 5:39 pm
HEDGEFUNDIE wrote:
Sat Feb 24, 2018 4:59 pm
letsgobobby wrote:
Sat Feb 24, 2018 4:57 pm
Do you think it's possible for prices to increase 50% every three years forever?
Racking my brain for reasons why the economic fundamentals and outlook for the Bay Area (or any other VHCOL area) are worse now than they were three years ago, and can’t come up with any. If anything the outlook now is significantly better.
I guess we’ll just ignore the history of the world, which shows that real estate largely appreciates around the rate of inflation +/- 1%. A few areas including the BA have been exceptions and maybe, who knows - will always be an exception. Probably a 2/2 townhome in San Mateo will be worth $100,000,000 in thirty years, since that’s what a 14% annualized rate of return looks like.
The combination of leverage, compounding and the law of large numbers are a beautiful thing.

Let’s say the market cools down to a mere 5% CAGR. A cooling market *even though* the technology sector has become the predominant industry in the US equity markets and all the major tech firms have huge expansion plans for the area (just Google “Google Diridon”). But for the sake of argument let’s say the market cools to 5%.

After 5 years this $2M townhouse will be worth $2.5M. That’s $500k gain on a down payment of $200k + $200k principal payments. Let’s just call the non-recoverable carrying costs the imputed rent I would have paid if I didn’t buy, and my consumption choice of living here.

Over 100% gain on principal over five years, in an arguably conservative scenario. OP probably has something similar in mind.
Transaction costs are now free? Didn’t know that.

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