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September 14, 2007


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My advice would be to buy a house they are comfortable in, in a neighborhood they like and can possibly grow into if they are planning a family.

Just because they might be able to afford a giant house doesn't mean it's the right thing to do. The maintenance on a bigger house will be more expensive, no doubt. Not to mention pricier homes tend to take longer to sell in the end, since there are less people that can afford them.

Buy a smaller house and invest the difference for retirement, college or start a business on the side.

I didn't think about this the first time, but if they like to travel, it might be worthwhile to buy a 2nd home in a "resort"-type area. That way they can still have some additional real estate and the possibility of renting it out for some extra income.

Definitely buy the smaller, less expensive home. Invest in retirement, pay off all debts (student loans) and save for the home upgrade for the family (if needed).

Then, living below your means - live!

My wife is also a physician and had a large debt when she finished her training 8 years ago. Here's what I wish we had done...Buy a house that will meet your needs for the next 5-10 years, keep it reasonable. Get financing for the home that minimizes your monthly payments (maybe interest-only). Use excess cash flow to fully-fund retirement, emergency fund, and payoff student loan. Once student loan is paid off, fund a tax-managed savings account.

In 5-10 years, you will have a good start on retirement, no debt other than your home (which is the best kind), equity in your home (assuming price appreciation), and a little chunk of money. Now you've got options to solve whatever problems you may have in 5-10 years, such as a bigger house for kids, travelling more, starting a business, college savings, whatever may strike you.

I don't think that there are any problems with buying too little of a house in terms of taxation and investment. The pitfall I would look out for though is trying to get too many square feet for too little money and ending up either with a house in need of serious repairs or in a bad area.

If they like a small house and it fits their needs, then I think they should go with it.

They'll have more money for better, fuller furnishings, for retirement accounts, even for vacations.

I know a lot of people in my line of work that run into this all the time. Well paid, young people could afford multi million dollar houses and very nice cars. Most do not go down that route, preferring the sense of security that comes along with knowing you are not a slave to your job and treasuring the thought that if you wanted (or had) to, you could leave it all behind.

Personally, I am in the process of buying a house that, like Joey says above, will be able to handle anything that comes up in my life in the next few years (marriage, a kid, a small dog), but isn't a castle that would be unwieldy should those not come to pass.

There is a peace of mind that comes with buying stuff that you can easily afford. That in itself is worth a lot of money. Weird how that works...

No problem with buying small, but keep your options open, IMO:

 Small fine, but be very choosey about location.
 Find a small home that has expansion possibilities: a big enough yard or space on each side of the house so should you chose to stay in it, you could expand,. An uncomplicated footprint or unfinished attic are things to look for.
 Be close to work, you will save a bundle
 Make sure the house is a place in which you would enjoy living! Being uncomfortable for 5 to 10 years is just silly.


JJ's ideas are great. Small is fine -- if they're worried about the size for social reasons (i.e., entertaining professional colleagues and needing to appear as well off as they are), be very, very choosy about the neighborhood and the layout. The right layout can work magic in creating an impression of luxury.

My opinion is that throughout your working life, you should have between 20% to 28% of your income always flowing into your house. If you are paying far below 20%, it's time for an upgrade. It simply about diversification. Some of your money should be in stocks, some in cash and other equities, some in real estate. Alternatively you could buy a smaller house, but supplement your real estate portfolio with a rental property or a REIT.

I also like JJ's post. Also, if you're disciplined enough not to accumulate a lot of useless junk, having a house with an unfinished basement gives the mechanicals an out-of-the-way place to be put, and makes it much more convenient to perform any wiring or plumbing upgrades and repairs. (If you're a hoarder, you shouldn't tempt yourself by having a basement.)

They should plan to go with the less expensive house they think they can afford for several reasons:

1) They'll probably end up buying a home 10%-20% more expensive than they planned once they start looking (esp since they know they can afford to).

2) When all the final costs are tallied (including moving expenses, closing costs, new furniture/remodling), they will almost certainly have spent thousands and thousands more than they anticipated.

3) Similiarly, ongoing costs like property taxes and ins are always much higher than you budget for. Better not to be stressed/surprised by these sudden expenses.

4) Plus they probably can't afford what the brokers and calculators say they can anyway. So they may end up stretching their budgets even if they think they're being conservative.

5) Most importantly though, they'll probably want to move again in a few years anyway because a) it sounds like they don't have children yet, and if/when they do they'll want/need to upgrade; b) as they get involved in the community and get to know the city, they'll probably realize where they really want to live (where their peers live, etc.).

So they can get in a smaller place now, save & pay down debt, and build enough equity to seamlessly upgrade down the road when the time comes.

Its only really too small if there isn't enough room for you. Invest any extra money, and if in 5-10 years time you want a bigger home you'll have the money to buy one.

I can't remember where I saw it, but I read somewhere that it's better to buy a smaller house in a better neighborhood than a bigger house that isn't. Determine independently how many bedrooms and/or space you need to accomodate your family size, and then look at houses that size in the best neighborhoods in your area. Even in the worst of real estate markets, houses in the best locations will fare best. This protects the investment you do make.

You should spend what you feel would best suit you both now and in the future. If you are past residency, then you will probably be in the same location building a practice for a long time and you should keep that time frame in mind when buying. If you aren't that familiar with the location, take time to rent and look first. Remember the purpose of money is not hoarding it but to provide for a comfortable life and allow freedom to do what one wants with it. That means both consumption and investment in some balance.

Buy the smaller house, pay it off and use the money you save for other investments. We bought the smallest house in our neighborhood - about 1800 square feet. It is in one of the smaller new developments (total number of people in our community is around 2500), close to the children's school (15 mins)and to my husband's work (20 mins by bus). Although we are glad we bought a "small" house, we will probably develop our basement for extra space for our two boys as they become teenagers. We also utilize our outdoor spaces (we built a large deck and have a paved area in our back garden that is designed for a future outdoor dining area). We are also building a larger shed for use as a combination shed/wood working hobby area/garden potting center.

So buying a small house does not limit you for future needs such as space for future children. You can expand the space in a small house by developing the basement, the back yard and having storage areas in sheds, under the deck and under the porch in front. And if you still don't have enough space, you can eventually move to a larger house when you have paid off the first one. This is what my dad did. He rented out the first house and he moved us to the new larger house when we were teenagers.

If you are buying a smaller house it is important that the space works for you. For example, before we bought our new house we walked through the different house models that were at the construction stage to see whether we could live with the smaller spaces (i.e. empty houses). One house model was rejected because we felt that the house was just too narrow to support 2 adults and 2 kids. Another house model was chosen but we now think we should have also walked around the same model in a show room form to see if the house was a good fit for us with furniture in it (i.e. a full house). If we had done this type of walk through we would have realized that the space allocated for dining was too small and we would have asked our builder to bump out the dining area a bit more so we could have had more walk about space. We also would have asked the builder to put in a bathroom in the basement but not to develop the rest of the basement: it is a real pain to get bathroom components into a house after the house is completed.

With an older house, you don't have the option to modify the house but you should make several visits and see if you are comfy with the interior and exterior space. Then walk through the neighborhood and check if there is an excellent school in the community (many of our new communities don't have a school). A good school is a magnet for future buyers. Then contact your police department and check crime rates for the area; if we had done that we would have learned our neighborhood has a high crime rate. Finally, investigate future roadway planning with your city planning department and make several visits at different times of the day/night to see what the traffic patterns are. You would be surprised how difficult it is to live in a community with racing cars, heavy traffic flow and noisy neighbors. So other factors besides the size of a house are important.

If I had to do it again, I'd still buy the smaller house but I'd probably increase the size of the main floor. But this is Canada and we don't have any tax advantages to having a larger mortgage. If I were living in the U.S., I'd still buy smaller and pay off the house ASAP. I don't think the tax advantages of a larger mortgage are that great and paying interest on a mortgage for longer than you have to is just plain stupid. But that's just my opinion.

There is nothing wrong with buying a smaller home. It probably will save you a lot of money. If you can afford the larger house now however, and you think you will end up buying a larger house in less than 5 years anyway, go ahead and purchase the larger home now. In other words, don't buy a "starter home".

First off, home prices generally increase in the long-run but for a few years at a time they can go down. Owning a house for only a few years exposes you to this risk. Also, staying in one place for a long time is a much better financial strategy than moving often because you don't have to pay thousands of dollars in sales commissions, real estate transfer taxes, closing costs, moving expenses, etc. very often. By buying a starter house and living in it only a few years you could easily end up walking away from the sale of your home withhout any cash.

In the Metro Detroit area for example, most homes have lower market values than they did 4 years ago. And that is before you consider all of the expenses I listed above. From what I read, the U.S. housing market in general, although not as bad as Detroit, is expected to be flat for at least another year so my second piece of advice is don't feel rushed into making a decision.

It depends, do they have children or not? Are they planning on having children? This makes a big difference.

I would buy in the school district they hope to live in. I would also buy my permenant home if this is a permenant job. I do not like to move, I would buy a bigger house which I would love for 30 years and not a "starter" home which I would move in 5-7 years. The hassle.

We have our second house, and it's perfect. We bought knowing we'd have one maybe 2 kids here and it's a 3 bd townhouse. But we're younger and we moved up from a 1 bd condo. Next step is final home, in which we'll finalize how many kids, the right school district and layout of house.

I do not want to be spending my life remodelling a house, moving because it's not right. I want to live comfortably, and if costs a bit more to do so, then so be it. If I make enough to save for retirement, college, and other stuff and have a nice house that's a priority to me.

To me I'd rather live in a nice home 365 days a year and vacation less, than vacation 7 days indulgently. One extra $3k/week vacation buys a nicer home.

I agree with Kevin. Also, consider buying a home that you can afford with only YOUR salary should something unfortunate happen to your husband, like permanent disability from a car accident.

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