The Road To FISE: Are You a Resident? Buying Your First Home? Crunch the Numbers.
February 26, 2021
I admit it. My family has been involved in the real estate business since the 1970s. But then so have many people in our region. There are a lot of “real estate” families like ours. Just like anyone who has worked and thought about things through many times, real estate is a skill set. And like anything, when you first look at it – it appears daunting, then easy, then really difficult and then in the end simple again.
A really smart HMO resident called me yesterday to ask me real estate advice about buying their first home. They have a small downpayment and are approved for a 30 year fixed at 3.1%. But there is some uncertainty about their lives in terms of where they will be in a year, and where in San Diego they could eventually settle if the graduate gets a job here. No children yet. Smart young doctor that is usually good with money.
I always tell people to ask their own financial advisors and professionals. But I always love to talk real estate, and give my thoughts. And my conclusion to this young friend is that she is generally smart with money, but the purchase was not a fantastic purchase. It was an OK move, but one I would not advise. I would sit it out a year. Finish her additional year of training, figure out job and build up her war chest. Again, for anyone in the readership – consult a REAL financial professional. I’m just doing this for fun, like your mother-in-law who tells you to drink 7-up for your indigestion.
But in all seriousness there were some flaws in said young doctor’s thinking. Here are some points I wanted to get across to this young physician during our conversation. And in the end they will make their own decision after consulting with multiple people, and go about their happy dual income professional lives and be better off than 99% of the world.
5 TAKE HOME POINTS IF YOU ARE THINKING ABOUT YOUR FIRST HOME
- Don’t Try to Time the Market, Time Your Life. Everyone tries to “time the market.” No one can predict the market. Our family has been in real estate for the better half of 50 years and we can’t predict the market. The reason why is that the market reflects so many forces including human beings, wars, nature, migration, the economy, and the small percentage of the population that believes in conspiracy theories. If anyone says they can time the market, I’m pretty sure I own more properties than they do and my networth is higher and I have better cashflow and equity appreciation. So there. But in all seriousness, what you can time is your life. Buy a first home if it is financially feasible when you are sure you will stay there for at least 5 years. There are many cost involved in buying a home that you won’t necessarily be able to recoup including the down payment in case the market actually drops, closing cost, and the soft money that you start pouring out when you are in the euphoria of the first home. Decorating. House-warming party. Knick-knacks. On and on.
- At least a 20% DownPayment. Being a home-owner is expensive. I’m still of the old school where you should save at least a 20% downpayment or get family help to put down that much.
- How Do You Amass A Big Down Payment? I know this is super hard. That is why I’m not a big fan of people paying down their relatively low-interest student loans early. You need to build your warchest. For a standard home in our area that a phyisician would likely live in, would be about 700K. That is about $140,000. How do you save $140,000? We did. Our savings rate at some points in our life and probably now (I need to update our spreadsheets this weekend) was 50-60%. We saved money and worked a lot. Both Mr. Plastic Picker and I worked a lot of overtime shifts in fellowship, and Mr. Plastic Picker picked up shifts during the first few years we were attendings. And we were super frugal. We continued to live like trainees. We didn’t even dare buy disneyland passes they seemed so extravagant when we were not yet in our forever home, and we were a dual physician income couple.
- Don’t Assume You Can “Turn It Into A Rental.” Rental property is rental property. Your first home is your first home. You might be able to rent it out later, but it should cashflow now or at least you need to make equity. This means that your monthly cost should equal about the market rate renters are paying. For this particular young doctor her monthly cost was going to be $1000 over the rental rate. In the event that they had to move and “turn it into a rental” and couldn’t sell the property, she would essentially be paying the bank $1000 to have someone live in their home. Then there are vacancies. You can’t assume that you will always have renters. Trust me. I’ve had a property sit empty for several months for repairs and various reasons. One was flooded due to a rare storm event and a dry creek bed in the back no one knew existed. We’ve always had big financial cushions to weather those times. But in the case that happens, a young couple could be in deep financial doo doo really quickly. The financial stress can lead to divorce. And remember Dr. Plastic Picker’s number one real for financial independence: divorce is expensive, marry once and well and for true love to someone who is hopefully frugal.
- Look at the Fundamentals of A Property: Don’t ever feel pressured to buy. It’s no different when you are at the car dealership and they are trying the hardsell. The salesman is going to make their comisssion and more if you are suckered into a higher price. Look at the funamentals of the property: quality of land and opportunity to be able to improve the property with sweat equtiy, and also school district. As someone who sends their kids to private school, private school is expensive. But that is an entirely differnent post that was oddly insanely popular.
And that is it. Those are the simple points that Dr. Plastic Picker your local litter-picking and real-estate investing pediatrician wanted to impart to you. There is a method to my maddness. My immediate neighborhood is super clean because I clean it. This keeps the real estate price good! And then there is a cascading effect that others keep it clean as well. Mind-blowing – I know! I’m not stupid.