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What are the Costs of Physician Home Ownership?

[By Staff Writers]

Home ownership for the physician or other medical professional can be a very rewarding experience that gives the owner a real sense of security, especially when the home is free and clear of a mortgage.  Home ownership can also be very expensive, and is generally the largest expense of a household; sans the physician’s medical practice itself. And, there are many costs to home ownership. 

First, to acquire a home, the physician home owner must make a down payment and pay closing costs on the mortgage. The down payment is usually a minimum of 5% of the purchase price, although some mortgage programs allow as little as 3% down or even nothing with interest-only deals available. The closing costs can run as high as 3% with no buy-down on the interest rate. 

Second, the physician home owner must service the mortgage with the usual monthly payments of principal and interest. This is usually the largest expense associated with home ownership. 

Third, the physician home owner must pay all of the utilities associated with the property. The mandatory utilities are water/sewer/garbage, electricity and/or gas, and local telephone. These expenses can be substantial. Water/sewer/garbage services can total over $150 per month. Electricity and gas bills usually total a minimum of $250 per month for an average-sized four-bedroom, three-bath home. 

Fourth, the physician home owner must pay property taxes, a substantial expense. As an example, property taxes average approximately 1-2% of fair market value computed on appraised value rather than the fair market value. This translates into thousands of dollars per year. 

Fifth, the physician home owner must maintain the home. These expenses include small and large home repairs and maintenance, landscaping, gardening, and remodeling. Large home repairs can include replacing a roof, painting the interior and exterior, replacing carpeting, and repairing water damage. Small home repairs and maintenance often include repairing leaky faucets, damaged flooring, broken windows, and walls that children thought would make a great coloring board. 

Sixth, the physician home owner must insure the home for property damage and liability damage related to the home. This expense varies widely but will be a minimum of several hundred dollars per year. 

The following is an example of the monthly costs of home ownership for a new doctor who owns a house worth $200,000 and has a $160,000 mortgage with an 8% rate and a 30-year term. So, a lower rate today looks even better, right? 

  • Mortgage payment: $1,174       
  • Property taxes: $166     
  • Utilities: $450
  • Insurance: $30
  • Maintenance: $300

Total $2,120

These numbers do not include large repair and maintenance expenses. When these expenses occur, they are usually paid for in a lump sum, rather than being amortized over the years of their useful life. The lump-sum cost does not include the amount of earnings lost on the money used for the expenditure.

In order to amortize these items, the physician home owner would have to borrow the money to pay for them, but this would result in additional interest expense.  

Drs. Home

There are also exit costs to home ownership. When a doctor wants to sell a home, he or she must pay a sales commission of approximately 6% and an excise tax that varies state to state. Of course, FSBO is also a sales option. 

Q: What is the biggest impediment to a home loan down payment?

A: A student loan and/or an existing automobile loan.

Q: What is the biggest impediment to a practice start-up loan; office down payment, or medical group buy-in situation?

A: A home loan; school loan and/or automobile loan.

Note, the vicious consumer debt-cycle which differentiates wants from needs!

Rents on the Upswing for 2008

On the other hand, apartment asking-rents posted their biggest increase of 2007 in the third quarter, jumping 4.2% from a year ago, to an average of $1,015 per unit, according to industry sources. And vacancy, which had edged up slightly earlier in the year because of apartment construction, tightened up in the last quarter to an average of 5.6% from 5.7% the same time a year ago. Thus, the outlook is rosy for landlords in 2008, but not necessarily the same for homeowners.

Conclusion

Now, how does the above traditional philosophy seem in light of the recent mortgage debt debacle? 

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

2 Responses

  1. And now … Trends in Healthcare Affordability

    Health Reform Monitoring Survey recently released a brief examining trends in healthcare affordability. Here are some key findings from the report:

    • The share of adults with problems paying medical bills declined from 22% in 2013 to 17.3% in 2015.
    • Financial difficulty decreased in Medicaid expansion states (5.1%) and nonexpansion states (4.2%).
    • 25% of uninsured adults reported problems paying medical bills, compared with 15.1% of insured adults.
    • Nearly a third (30.7%) of adults in fair/poor health had medical bill problems vs. 14.9% of other adults.
    • 24.2% of low-income adults (below 138% FPL) had medical bill issues vs. 14.4% of higher income adults.
    • Almost three-quarters of adults with problems paying medical bills reported forgoing health care due to cost.

    Source: Health Reform Monitoring Survey, May 21, 2015

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  2. Tax Rules When Selling Your Home

    How the gains from the sale of a primary residence are taxed has changed in recent years. If you have recently sold your home, or are considering doing so, you may want to be aware of these new rules.

    Home Sale

    If you owned and lived in your home for two of the last five years before the sale, then up to $250,000 of profit may be exempt from federal income taxes. If you are married and file a joint return, then it doubles to $500,000.

    To qualify for this exemption, you cannot have excluded the gain on the sale of another home within two years to this sale. Please consult a professional with tax expertise regarding your individual situation.

    This profit would be excluded from your taxable income. In fact, the sale may not need to be reported unless you receive a Form 1099-S or do not meet the above requirements.

    If you sold your home at a loss, unfortunately, you can’t deduct the loss.

    There Are Exceptions

    Even if you do not meet the above requirements, you may qualify for this exclusion:

    • If you receive the house in a divorce settlement
    • If you are able to count short-term absences as time lived in the house
    • If a surviving spouse who has not remarried can count the time that the deceased spouse lived in the house.

    The five-year test period can also be suspended for up to ten years in cases where any spouse has served on “qualified official extended duty” as a member of the military, foreign service, or federal intelligence agencies.

    Even if you don’t pass the five-year rule test, a reduced exclusion may be available if you have a change in employment or health, or because of unforeseen circumstances, such as divorce or multiple births from a single pregnancy. Please speak with a professional with tax expertise regarding your situation.

    Jason Dyken MD MBA

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