Episode 69: Homebuying Wisdom For Docs In Transition

Oct 19, 2020

This Episode

Solo Episode

You Will Learn

– How to assess when is the right time to buy a home, and how much you should pay

– Simple rules to follow when considering how much you can afford to pay based on your salary

– Other key factors to think about when buying a house

Resources & Links

This week, I am coming at you solo to discuss important home buying tips for physicians who are transitioning from training into a practice, fellowship or any other important career transitions. This is something that I have seen many of my clients be impacted by in the previous months, and something that is very important and needs to be thought through correctly.

Justin (30:00):
Welcome to episode 69 of APM success. I’m your host, Justin Harvey, really glad to become to you solo today for an episode to discuss a big financial planning question that a lot of physicians are asking questions about right now, especially if they’ve either recently transitioned employment or if they just matched to residency or fellowship somewhere in there, they have a big move ahead of them to continue on in training. But before we get to that, want to talk for a minute about some of the upcoming content, really excited for some of the guests I have lined up who we’re actually going to be returning to tackle a couple of interesting topics.

Justin (01:02):
The first we’re going to talk about what challenges do physician run anesthesia groups experience when contracting with hospitals, what is the real time real world experience in the anesthesia community in this context, how can they prepare, equip themselves if they have, in some cases, contracting counterparts that don’t always play nicely because the reality is anesthesia billing is complex not only the billing itself, but also how it interacts with, you know I mean, in this case, it’s public health crises and there’s often a subsidy attached to that. Meaning a hospital needs to pay above and beyond what the anesthesia services are bringing in, in some cases, in order to secure the services of the anesthesia company, just because anesthesia is a very poorly reimbursed specialty, but bottom line here is there’s complexity that goes into this, and it can create problems for anesthesia companies who are trying to contract with hospitals.

Justin (02:03):
And I want to unpack that the second thing I’m so excited about this one, talking about private equity buying anesthesia practices and how COVID has impacted this. So it’s no secret that anesthesia specifically has been an area of keen interest for private equity. And I’m going to talk about with an upcoming special guest, what is private equity? What does it mean that they have been historically very interested in acquiring anesthesia practices? What has happened this year as a result of COVID and what can we expect in the future? I somewhat recently talked to dr. Jessica Jamison and interventional pain physician out of Idaho. And we talked about how COVID could be perhaps ushering in the Dawn of a new era for independent pain practice. My personal opinion is that we may be coming up to a similar opportunity in the anesthesia world for physician owned anesthesia groups.

Justin (02:54):
So really excited for that stay tuned. But today what we’re going to be talking about is home buying principles and wisdom for physicians who are in transition. This is something that’s going to impact my own family in the not too distant future. And I’ve had many clients who have been impacted by this in recent months. Medical training by nature bounces you around to different programs, different parts of the country, and you may do residency somewhere and then fellowship somewhere else. And both of those places may be different from either the place you grew up or the place you want to ultimately land post-training. You obviously want to be somewhere where you can probably put roots down, establish some longer term relationships, maybe move closer to family. And there’s a home purchase decision that is embedded in all of these career transitions. So today we’re going to talk about some of the important things to think about in terms of just logistics as well.

Justin (03:49):
It’s the math of, how do you assess when is the right buy a home and how much should you pay? I want to tackle the the cost question. First home purchase is one of these really big things. I’ll, you know, there’s that example of like in your life, you know, you got a jar and you got two or three big rocks and you got to choose the big ones that you can put in. And there’s only room for two or three things personally. Now your financial life is the same way. If you’re going to make big financial decisions and big expenditures, there’s really only a couple big expenditures you can make before you run out of room in your jar. And a home purchase is definitely one of these big rocks. So it’s important to be very thoughtful in thinking about across the landscape of my financial affairs, with all of the decisions I’m making, thinking about how much money I’m going to make, how much taxes I’m going to pay, what my other goals are, what my values are for my family.

Justin (04:40):
How much home can I afford to buy. And so there’s a couple of tests, a couple rules of thumb that I want to mention and unpack a little bit. Now, these are just that rules of thumb. And let me take this opportunity to say that nothing that follows should be construed as personal financial advice. You should talk to a qualified financial planner who knows your situation in your family, intimately, to be able to advise in a customized way to help you assess home affordability. But two rules of thumb to get you started. The first is two times gross income. And the second is 20 to 25% of your net. Take home pay going towards your mortgage. That is principal interest taxes and insurance. And let’s take a look real quick at these rules and how they apply in the life of an anesthesiologist or pain management doc.

Justin (05:30):
So if we have an anesthesiologist, who’s just wrapping up training, they’re moving across the country, they’re getting ready to buy a home. They’ve signed a contract with a guaranteed base of $375,000. If we take these two tests and apply them look at two X gross income. So 375 K times two is $750,000. So seven 50 is essentially a, you know, a mortgage amount that you can reasonably afford. If you’re, we’re looking at a home purchase. I really like this rule because it’s very simple. And I also really like this because it maps on pretty nicely too. If you wanted to do a 0% position loan. Now this is the scope of today’s discussion. And I don’t necessarily recommend this. This point, especially is important to talk to a good financial planner to help you evaluate how much money do I need to put down, what are the risks associated with a small down payment, but if you want it to take on a home purchase of this amount, and you said, you know what?

Justin (06:30):
I think a physician loan could be right for me, I’m going to do 0% down. I’m going to have zero private mortgage insurance, and I’m going to just start making payments on a 15 or 30 year note. This is take the 375 K of anesthesiologist income. It gets you right up to that max of where you can do a 0% down mortgage. Now this obviously varies based on geographic locale, whether or not that’s even going to get you anything. But this is a good starting point to say, 750 that can get me a house where I can put no money down. And it’s roughly two times my gross income. If you’re earning in that three 50 to 400 K range, and this can be just a great starting point. If we look at another example, you know, instead of a one earner household, maybe we have two earners, we’ve got a physician plus another professional collective income of a half, a million that takes our mortgage amount on a purchase up to $1 million.

Justin (07:32):
So again, you’re kind of getting a feel for the range based on these rules of thumb. I’m here in Philadelphia, you know, a million bucks. This is a relatively affordable city compared to many others a million dollars in some places doesn’t go very far. Now, interestingly, we’ve seen significant disruption in real estate markets. Some of the more expensive ones, because a lot of the reason that people have lived there has been to be closer to their company to, to enjoy, you know, a higher paying job. But obviously some of these big expensive cities are seeing a lot of people move out and vacancies are going up and some of the higher end apartments and the home purchase amounts are, are sort of all out of whack right now. We’re sort of waiting to see what stabilization could look like. The bottom line is again, to give you a starting point to say, how much home can I afford based on this two X gross income for your mortgage amount type of threshold.

Justin (08:28):
This is what we’re looking at. You know, I have some clients, you know, a dual physician, couple in the Bay area there they’re scraping to get together. Every penny to get even a, a much higher ratio, maybe a three or four X gross income because they’re in the Bay area. It’s very high taxes. Housing is just stupid, expensive. And so there’s no way that they can make any of these tests. These rules of thumb work in their situation, as long as they want to live in the Bay area. Now that’s obviously, you know, a personal decision that that has tradeoffs and these rules of thumb, the two X gross income for a mortgage amount or the 20 to 25% of net take home, pay going to your mortgage every month. These rules are subject to adjustment based on certain variables specifically, if you’re in the Bay area, if you’re in Manhattan, if you’re in Washington D C or some of these higher cost of living places, Seattle, LA, whatever, then these rules of thumb might yield a number that you can’t.

Justin (09:38):
You literally just can’t find a house for that. So you’re going to need to amend it. If you decide you want to live in one of those places. Also, if you’re in a high tax area, your net income is going to be significantly impacted. And this is an important change to be aware of because when you’re going from residency to fellowship, not only are you paying way, way, way more in taxes in terms of dollars, you’re also paying a much higher amount. So if you’re moving to, you know, a state or a geographic locale, like a city municipality that has its own income tax and if you’re a business owner, your taxes may be even higher. So the point is you might want to take these two rules in tandem, the multiple of gross income, plus the percent of net take home pay in order to understand if I’m in a high tax area, that’s going to have implications on how much home I can afford.

Justin (10:28):
And then the final variable that could impact the, the purchase amount that you settle on is your personal values. If you decide, you know what, I want to have the home of my dreams, and I want this house to be a place where you know, my, my family and extended family can sit around the table at Thanksgiving every year from now until the time I’m 92. And that requires me to have a lot of square feet or, or whatever, there’s trade offs, right? And you can do that and you can buy that house, but it is going to mean that you’re going to be at a higher multiple of your gross income depending on where you live. This may be the case, and there’s going to be trade offs because you’re going to have to work longer. You’re going to have to perhaps sacrifice and other areas where you just can’t afford whatever as nice of a car.

Justin (11:16):
You can’t afford the private school tuition, or, you know, you can’t fully pay for your kid’s college or whatever the trade offs are, they’re going to exist. So make sure that, you know, before you buy this house, before you make this big decision with this big rock in the jar, you want to understand that you’re going to be living out the implications of this for a long, long time. So it’s, it’s good to thoughtfully approach in the context of a couple of rules of thumb to get you started, as well as thinking about your values, thinking about tax impact and all those things I want to briefly now talk about why am I recommending these rules of thumb, this two X gross income or this you know, 20 to 25% of net take home pay. There are a couple reasons that it really does behoove you to keep these things in mind.

Justin (12:05):
The first is that I have found if you’re willing to adhere to these rules of thumb, sometimes you can get a shorter term mortgage. So instead of the conventional 30 year loan pay off mortgage on your house, you might be able to get a 15 year and still be able to comfortably afford it. And what that means is a few things. Number one, you’re gonna get a lower interest rate. If you’re paying a 30 year, you know, three and a half percent, you might get a 15 year, 2.8, seven, five, or something like that. So in terms of total interest, you’re gonna save a lot. A lot of the reason for that savings is because the second, 15 years of the mortgage just disappears. If you do a 15 year versus a 30 year, you’re only making payments for 15 years, and then the interest payments that would have been made for the second half of that mortgage totally disappear.

Justin (12:58):
Now, I don’t want to get too much into numbers because obviously you can’t see them, cause this is just me talking to you, but suffice it to say there’s a significant, real, tangible like money in the bank type of benefit of getting a shorter term mortgage and adhering to these rules of thumb or, or even, you know, using them as a max and buying a house of less costs can really accelerate your journey to financial independence. One additional note here on this point is that a spreadsheet jockeys will tell you if your home is at three and a half percent for 30 years, you’d be an idiot to prepay it to accelerate payment, to pay it off more quickly than you need to, because there is an opportunity to do what we would call an arbitrage where you’re paying off your mortgage slowly in order to max out, investing in the stock market and hopefully earning a higher return mathematically, that may be true based on historical averages, but averages are just that they are averages and any given actual timeframe, that relationship may not hold.

Justin (14:06):
And what I have found for myself personally, in many clients is that this is one area, the mortgage amount on your primary residence. This is one area where math needs to be held in conjunction with the rules of human psychology and behavioral finance. And there’s just some intangible benefit that can’t be fully expressed in mathematical terms. That makes it really, really nice to own your house outright, to not have a mortgage at all. And then every year you’re just paying your property taxes and your insurance, and you don’t have this big fat check going out the door. There’s a psychological benefit to that. That sort of transcends the math. So what I see and what I frequently recommend is that people say, Oh, Justin, like, I’m a little embarrassed, cause I know this doesn’t make sense from a math standpoint, but I think I want to just pay off my mortgage like really fast.

Justin (14:55):
And I love that idea, frankly, I’m going to probably do that with my own family, just because I feel this way about this principle, I’m adhering to these rules of thumb will allow you to optimally enact this approach and you’ll be debt free much sooner. Another reason that I think that adhering to these rules can be really, really benefit is because of this idea of what’s known as hedonic adaptation or the hedonic treadmill. And we talked about this a little bit, way, way back in episode nine, where I talked with dr. Daniel Crosby, who is a behavioral psychologist, turned financial expert, and he takes ideas of human, behavioral economics, and behavioral finance and the science around that. And he applies it to personal finances. And what I discovered when I talked with dr. Crosby, a few things, the first is that studies have shown in terms of income.

Justin (15:56):
This is pretty well known. That dollars that you earn above 75 K don’t reliably make you a happier person. You’re either happy or not happy making more than that, but it doesn’t have to do with your income. Somebody who makes a million dollars a year, isn’t reliably, statistically happier than somebody who makes a hundred K a year. And I have a hypothesis that there is a real estate corollary to this. And this is one of these things that goes into the category of, I can’t prove it with a white paper, but I just really think that this is the way that it works is that no matter how much you spend on the house on a house, there’s a certain threshold above which your house isn’t going to make you happier. Obviously you need a roof over your head. You want it to be a nice place with, you know, a few of the non negotiables that you and perhaps your spouse think about when you think of a domicile that you’re going to exist in for years to come.

Justin (16:49):
But whenever you layer on cost and cost and costs and get more and more exclusive and you get higher property taxes and you get higher maintenance fees and all that, ah, my hypothesis is that because of this idea of hedonic adaptation, you get used to it. You get used to the million dollar or the 2 million or the $3 million house. And you don’t like it better than you would if you lived in a million dollar or a 750 or a $500,000 house over time. Because as dr. Crosby explained at the end of the day, your house is, you know, the place where you’re with people you care about. It’s the place where you do your laundry and lay your head and have dinner. And it’s a lot more than just the economic cost. You’re not as attuned to the economic cost over time. So bottom line on this is that the ideas of hedonic adaptation are important to keep in mind, as you’re thinking about a home purchase.

Justin (17:48):
Now, there are a few pros, a few things that are, would, would behoove you to wait on a purchase, especially if you’re in transition. Like if you’re moving across the country, does it make sense to go ahead and try to buy a house now? Maybe even before, if you accept the job far away and maybe you’re in your last year of training, is this something where you want to try to find the place where you’re going to land and buy it immediately and waiting as is generally it’s, it’s certainly the conventional wisdom. You can rent a place and you can get to know the neighborhoods, get to know the schools, et cetera. You can take your time and find the right deal. You can shop around. You can see more houses and get a bigger sample size and understand like, what do I really want what really is available and how do I make sure I land in the right place?

Justin (18:37):
And you’re going to get a feel for the market pricing, and you’ll be able to identify a good deal when you see one, another reason that it makes sense to wait, if you’re moving across the country, you never know when a job isn’t going to work out. And especially if it’s your first job out of training, maybe you’re moving into a different practice model. If you’ve been in academics, you know, your whole career up to this point, and you’re going into a private practice setting. You think, you know, probably what private practice is and, and hopefully you’re right. And hopefully you love it. And hopefully it’s the last place you’ll ever work, but statistically, it probably isn’t. And so if things don’t work out or, you know, if COVID hits and your practice has to downsize, or there’s an RFP, and you know, you lose a contract, or if the geography is dominated by one company that has a big non-compete footprint and you either lose your job or have to leave, you might need to leave this city altogether.

Justin (19:30):
And it would be better to rent at the outset and really flesh out some of these ideas and make sure that things are as they appear. And in addition to the fact that obviously if you’re going to wait for a year or two, you can save up for down payment, even if you might not need it because of the doctor loan, it still does limit some financial risk to be able to put money down. This is obviously a big and important decision. It’s annoying to have to move twice. So if you’re moving somewhere far away to rent a place for a year, like there’s definitely drawback to that. But you know, you’re, you’re going to have to sort of weigh the pros and cons and see what’s right for you. Keeping all these things in mind, a couple, just things in partying.

Justin (20:13):
This is a really important decision. This home purchase decision, it’s a recurring cost. It’s a, it’s a big number as it relates to, you know, all the purchases that are gonna make the house that you buy. It might be the biggest purchase decision you ever make. And then there’s a lot of associated costs related to it. And this is important to harp on, I think for a minute, there’s this trickle down effect with the home purchase price. If you buy a million dollar house, the property taxes, the maintenance, the landscaping, the, you know, HOA or whatever these costs are all gonna be commensurate with a home at that price point, same as if it’s a 2 million or $3 million house. All these associated costs, not just the mortgage, but everything else are going to be commensurate with that purchase price. Whereas if it’s, you know, seven 50 or 500 or 300,000, all these costs are much less significant.

Justin (21:05):
And I can tell you as somebody who was landscaping for eight or nine years before my career began as a financial planner landscaping is expensive. Get a couple of big trees taken down, or get some hardscaping done, or have a wall put in. Man, if I stayed in landscaping, I’d probably be retired by now. Don’t overlook those costs that are associated with those, those purchase price type of questions. I was joking with a client recently, they had a house probably worth 400,000 ish, and they had somebody to come in and give them a quote for a bathroom renovation. And they got quoted 60 or 70 K on a $400,000 house. It’s very difficult to spend, spend 70,000 on a bathroom. And we were joking about the doctor discount, you know, whenever people, unfortunately when people find out you’re a physician, you can just, you know, two X the price it’s, it’s a joke and kind of funny, but also not funny.

Justin (22:01):
This is a reality you’re going to have to deal with. And if you have a big house in an exclusive neighborhood, just be prepared. And obviously this is if it’s worth it to you, then it’s worth it, but be prepared for that, that doctor discount where you take the normal price and multiply it by one and a half or two in order to get these services, because they’re going to have a significant impact on the amount of money that you can save and the amount of money you can put towards your other goals. And I think as we wrap up, this is just the thing I want to leave you with is a home purchase decision. It’s a really exciting decision. It’s something that should be made thoughtfully over time. And also in the context of your other goals, in the context of your values, you want to step out into this big decision, knowing that the house I’m buying the price range in which I’m looking, the amount of money I’m going to be spending on an ongoing basis.

Justin (22:51):
It fits, it fits myself. My family, it fits our goals, our values, it fits our lifestyle. It fits the way that we envision our future unfolding. It fits the flexibility that we want. It fits the, you know, the, the amount of time I want to work until I’m financially independent, it, it aligns with those other goals. And then when the time comes, you can dive in, you can buy that house, whether it’s right out of training or whether you wait a couple of years, you can step out into that, knowing that you’ve really kicked the tires on this decision. So that’s all I’ve got for this week as always. Thank you for tuning in. You heard this week, head on over to APM success.com, where you can find more content and free resources to help you build a successful career in anesthesia and pain management. If you wanted to leave a review in iTunes, it also really appreciate it. Thanks for using some of your valuable time to join me today on APM success.