Well, back when I wrote the post about using our home equity to invest and income split, I was only partially joking when I said that our house was like a castle. I actually originally put a picture of our house as the feature photo for that post, but then chickened out. You can now see it in the above photo.
Why did I chicken out? Because our house is one of my dirty little secrets.
I wasn’t comfortable sharing it yet. That actually parallels how my wife and I behave regarding our home in real life. We are shy about having people over to the house, unless they already know us well.
If you casually interacted with us, you may actually never guess that we are wealthy. I ride my bike when able. When not practical to bike, I drive a Subaru Impreza – the base model – and I rarely wash it. I also wear some of the same shirts that I got in high school, university, or from various sporting or charity events that I’ve participated in. My wife has a better appearance when we go out in public, but she looks good whatever she is wearing. Yep, she edits these posts.
We try to practice stealth wealth like ninjas. However, once someone sees our house, we are definitely out of the shadows.
A large house is generally not frugal or simple.
Similarly, here I am blogging about personal finance. Much of personal finance blogging is around the virtues of frugality, simplicity, and living within your means. If people saw my house to form their first impression of me, then they may judge me as doing none of those things. Mr. Money Mustache would probably give me a face punch.
On the other hand, Passive Income MD has a cash burn rate more my speed. Physicians generally have high incomes. So, “living within your means” can be different for doctors or other high income professionals. Further, with the time consumed developing a power career, the need to “buy time” in other aspects of their lives also increases.
Regardless, one of the most common pieces of advice from physician finance bloggers is to not buy “too much house or too soon“. I agree with that, and I think that my housing odyssey helps to illustrate the point from a slightly different angle.
Hopefully, you can benefit from the lessons in my tale. This post is a bit longer than my usual, but it is lighter on financial technicalities and heavier on voyeurism. Who doesn’t like that?
So, how did we get here?
We did a number of things well early on that put us in a strong financial position. I moonlighted extensively during my sub-specialty training, and we continued to live like a resident despite the income bump. That didn’t change when I landed a faculty position. We had bought a fixer-upper starter home that I put sweat equity into. Within a few years, we had our mortgage almost trashed, our other debts paid off, and had been socking away large sums of money.
I had my dream job, it was secure and only getting better. We had no intentions of moving cities or jobs. The only thing that my wife and I did not like about my job was that it tied us to living in, or near, a big city. So, we started to think about getting a cottage to escape urban/suburban life.
We quickly decided against a cottage because there was nothing “wildernessy” enough for our tastes within striking distance. There was no way that we’d be driving 3-4h each way on weekends, or taking weeks off to make enough usage of a cottage to justify it. So, we decided to think about how we could have some of the attractions of a cottage in our home.
We wanted to avoid the common more than one house doctor trap. However, with our location criteria basically meaning acreage on the edge of the city, compounded by our picky house tastes, it was no big surprise that we couldn’t easily find anything that met our list of demands.
But dammit, we are rich, we have the money to get what we want. We’ve worked hard for years and lived frugally to get here. We deserve it.
Those words are all true, but they are also dangerous thinking. We had worked hard. Our incomes were stable, and mine was growing rapidly. We had delayed gratification to not only build our careers, but to pay off our loans, save, and put ourselves ahead of the curve financially.
However, there must be balance and we had generated a pent up demand to “misbehave” from “being good”. It is like the potential energy stored in a coiled spring. We had been coiling that spring without much release for 15 years. There would be consequences.
Partial release of the spring.
A property came up for sale that met our criteria. It was 24 acres on the edge of the city, close to a bike path going into the city, rolling hills, forest, and close to a highway but not on it. We snapped it up.
We were able to make a 50% down payment without touching our investments. However, our investment portfolio would also sit largely unloved for the next three years as we funneled cash into our real estate. This started in 2007. So, it actually turned out to be a stroke of dumb luck that we didn’t keep feeding money into the global financial market meltdown.
The property had a small hovel on it which was rented out. We continued that arrangement for a couple of years while we paid down the mortgage and started making our building plans. This also served to re-coil the spring.
Sproing – Total release of the spring.
We managed to find a custom design/build company whose work fit our tastes. The project manager and I had some pretty frank discussions about my expectations around quality and craftsmanship. He was, of course, fully on board with that, since building is usually a balance between cost and quality. This would push up our costs and their profits, but I would get what I wanted.
I rationalized this to myself, having learned the hard way, that it is better to pay a bit more now for a job to be done well, than to pay more than double to have a shoddy job redone later. That is especially true when you’re talking major structural features of a house.
Once the spring is released, it is hard to stop it. Spending begets more spending.
Building a house is complicated. We spent a year planning our house with the builder in detail. Despite that, there are bound to be things that you have not considered, or that you may change your mind on as you see the house take shape. This happened as we went along, and the result was invariably more expensive.
When we started the build, we sold our first house, paid off the mortgage on the new property, and moved into the dilapidated shack there. The mortgage on the new build was released in installments as it hit milestones of completion. Due to permit delays, the birthing of our house protracted itself from the planned human gestational duration – to that of an elephant.
On the upside, we did not have to make any mortgage payments until completion of the house. This meant that we were mortgage-free again for 18 months. The cash flow into our bank account was enormous. Psychologically, this made it all the easier when faced with deciding about upgrades.
Plus, as we put more money into the house, we didn’t want to ruin the whole effect by skimping out on one thing. Or one more thing. Or one more thing.
Where did we end up when the spring had fully unsprung?
Well, we ended up with a really nice house that checked off all of our wants.
The main floor and upper floor add up to about 5500 square feet plus the basement of 2500 square feet. That is a huge amount of space. Something we had dreamed about, but had no practical experience with. However, you truly can grow into just about any space that you have. Kind of like how a fish or plant gets bigger if in a bigger container.
All of the Rain Man fans out there will now go, “Hey, that is only 8000 square feet, not 10000. Definitely not 10000. I’m an excellent driver”.
That’s right. I am an excellent driver too, and we also have a 2500 square foot storage building and workshop for my tractor, lawn equipment, and a giant motorhome.
To build a basic barn in the country is relatively cheap. Further, when you have 24 acres, having ample horsepower saves both time and money. Hence, a building to keep your serious-not-fun-at-all-tools-with-a-purpose out of the elements and prolong their lifespan is worthwhile.
Perhaps, this would fit with being frugal according to Physician on FIRE’s post on frugality and minimalism, and the fact that I have only one pole barn also means that I am also a minimalist according to his parents. I’ll take the validation where I can get it.
Did we overspend on our house?
My wife and I were already careful with our money entering into this endeavor. Being a financial geek already, I had looked at a number of measures through-out the process. They all gave us the green light:
Our mortgage was equal to 1.5X our gross income. This was less than the standard 2X your income recommendation. It was also less then the age adjusted recommendation, and certainly much less than the generous guidelines you’d find on the sites of businesses that make their money off of giving you a bigger mortgage.
Our house did not make up too much of our net worth. While many Canadians consider their home their best investment, it probably is not. At least not on its own. Home ownership, as a mono-strategy, is not a wise diversified plan. Yes, you do need a place to live, but you can’t eat your house (unless it is a gingerbread house which would be pretty cool until it rains). As you age, you need progressively more liquid financial assets to fund your impending retirement. I like Garth Turner’s Rule of 90: “Take 90. Deduct your age. The remainder represents the [maximum] percentage of your household net worth that you should ideally have allocated to residential real estate.” We were 35 years old at the time, and our home equity made up about 60% of our net worth then. Now, at age 42, it makes up about 30% of our net worth. We’re golden.
We did consider landscaping costs. Generally, you should budget about 5-10% of the cost of a new build towards landscaping. This may seem like a lot, but my experience has shown it to be almost dead on. We hired people for the tough and important parts like building retaining walls, patios, and ensuring proper drainage. My tractor and I handled much of the unskilled manual labour.
We considered property taxes. These are huge in our area.
We budgeted for maintenance. You should plan on 2% of the house value annually. There is a steady grind of small things, but intermittently large expensive items. So, this cost of ownership comes in fits and spurts. We have been well below this so far, but our house is only 7 years old, and I know it is coming.
Our monthly housing costs comprise about 15% of our gross income. The CMHC guideline is to not exceed 32%. I do find the validity of these comparisons to gross income break down when you are dealing with high income professionals. There is an interplay between the fact our tax load is exponentially higher than the average person against the fact that we also have more disposable income or potential fat to trim in a crisis. Importantly, our housing costs don’t stop us from spending on important things.
Benefits of our large country estate:
- We all have projects on the go. Whether of LEGO, wood, or paper – we now have enough space that we all can work on them simultaneously. More importantly, we can also leave them and come back later without cleaning up in between or facing the Wrath of Mom.
- Our house isn’t cluttered with stuff. It is not for a lack of really cool stuff – we just have more places to put it.
- Our home is very conducive to having physically active lifestyles. We can work-out in our home gym and have a full-sized karate dojo in the basement. Our family can go skiing out of the back door in winter and bike the rest of the year.
We previously had lived in more normal-sized homes and really appreciated these benefits of a large country home. However, that inexperience also left us unprepared for some of the disadvantages of owning an over-the-top mansion.
Disadvantages of our monster home
- A large home is an open display of wealth which can change how people relate to you or their expectations of you. There will always be people like that, and “it is their problem not yours” – just be prepared for it.
- Having the extra space helps our house to be less cluttered. However, it can also make cleaning mentally overwhelming if there are multiple messes in multiple rooms. I have no problems with our friends and family seeing that our house is “lived in” (I am barely housebroken), but it bothers my wife. We have a Roomba. However, it is lazy and usually hits quitting time half-way across our living room.
When there is maintenance to be done, it is bigger. There is a financial cost to that. However, it is the time and hassle cost that bothers us the most. Since many of the systems in the house are more complex or unusual, it can take a while to find someone that has the knowledge or tools to deal with them.
- There are also some things that the frugal part of me just can’t let go of and hire someone to do. That means, there is extra consumption of my time by some tasks. Many of those jobs involve me using lots of horsepower (which I like), but that also comes at the expense of buying and maintaining the equipment.
- Some trades people also see our house and try to jack the price for a job if we are not careful. They probably figure that we can afford it and that they need the money. I get that, but I don’t like it.
- We worry that our kids may get a skewed view of what normal housing looks like. They may develop unrealistic expectations that could result in unhappiness when unrealized and/or in difficulty prying them out of the nest to fly on their own.
“Don’t buy too much house” is excellent advice for high income professionals.
I hope that my story helps flesh this advice out a bit more from some different angles. The reason that this is excellent advice is not just the financial aspect.
We actually did the “financial part” right in many ways:
- By attending to our finances early on, we had more freedom to make our “dream home” a reality later.
- Renting until we could easily afford to buy and were likely to stay in the area longer term.
- Not overspending by a variety of measures.
- Keeping enough space in our budget to cover landscaping, maintenance, taxes, saving for retirement, and funding other important parts of our lifestyle.
Even though we could “afford it”, we still bought “too much house”.
We are very happy with the benefits of our location. However, we would have been equally happy with a smaller house on our lot where we could have many of the same benefits with only minor adjustments. In fact, we would probably be more happy with a simpler house that would not have the downsides that I described above.
There is a diminishing return on spending more past a point, as nicely articulated by fellow physician blogger, The Happy Philosopher. If he were to make one of his happiness diagrams of our house, it would look like this.
Unfortunately, another downside of having built a huge fancy semi-rural home is that the price range and uniqueness will also mean that we are selling into a very limited buyer pool. When we do eventually decide to sell, it will not likely be a quick sale. We may be lucky to get out of it what we put into it when inflation, realtor fees, etc. are taken into account. Luxury home ownership has higher barriers to both entry and exit.
Those buying in a high demand urban area may face different issues.
The combination of buying outside of a high cost of living area, our strong financial position, our pent-up demand, and our inexperience with being wealthy facilitated our buying “too much house”.
For those looking in a high cost of living city, like Toronto or Vancouver, getting too large of a house may not be a problem. For our price range, we would have been looking at something like the house shown here. Seriously.
Feel free to share your experiences with the ups and downs of buying or building a home in the comments section below. The more perspectives, the better…